| Please explain how they were "hiding" the risk. They mixed mortgages which were extremely unlikely to be repaid into packages with enough AAA rated mortgages so that they would meet the credit-rating agencies policy of rating mixed packages as AAA if a certain proportion were AAA. However, these bonds would be valueless if any of the securities that made them up defaulted. They sold the packaged bonds a AAA-rated securities without disclosing the likelihood that they would default. Yes, this was stupid of the ratings agencies Yes, the buyers should not have bought things they didn't completely understand. But GS deliberately obfuscated the nature of what they were selling. Risk is unknown ex ante. That isn't entirely true. On this example specifically, it's pretty easy to see that if a household can just afford mortgage payments at a discounted rate it is pretty likely they won't be able to afford it when the discounted rate expires. |
There is no such thing as a AAA mortgage. AAA is a rating for bonds and other fixed income securities.
However, these bonds would be valueless if any of the securities that made them up defaulted.
This is not how a CDO works.
They sold the packaged bonds a AAA-rated securities without disclosing the likelihood that they would default.
Why don't you show us the CDO prospectus you allege doesn't do this? Once you produce it, I'll show you the exact (mandatory) table where it's done.
https://en.wikipedia.org/wiki/Collateralized_debt_obligation
Your comment is the financial equivalent of "The NSA is hacking my pixels in order to break the rot13 encryption." The words kind of suggest computing/finance, but anyone who knows what the words mean recognizes that the content is nonsense.