[Zuider]

That is true, but there are similarities. The American lenders went beyond simple 'reckless lending' by disguising the subprime loans as healthy assets. This is similar to what the Irish bankers did when they created fictitious assets to give the false impression that the banks were not financially in trouble.

[mikeyouse]

The rule of law is important -- which criminal law specifically applies to ratings agencies giving incorrect ratings to CMOs?

[wolf550e]

There has to be criminal fraud somewhere in the process of taking very bad mortgages, transforming them into AAA securities and selling them to pension funds.

[asuffield]

I do not believe this statement to be correct: it seems entirely possible for this to be done via reckless incompetence, rather than criminal fraud. All it takes is for somebody to calculate the risk incorrectly and everybody else to fail to check their calculations.

It may involve criminal fraud, but it is also possible that it does not.

[tedunangst]

The pension funds had the prospectus, and on top of that a list of all the bundled mortgages. If they had wanted to look deeper beyond the AAA rating, they could have, but they were lazy and greedy too.

[wolf550e]

There are very profitable things that are illegal to do when selling vegetables in a street market, like fudging the scale. But you say there is no such protection against bad actors when selling billions in securities. Ok, in this Libertarian system where everything except physical violence is legal, why do people still deal with institutions that obviously deal in bad faith?

Were there any lies in the prospectus? Are Chinese companies selling asbestos with "asbestos-free" certificates doing anything wrong?

[tedunangst]

You're a pension fund manager. Your job isn't very exciting because you're rather limited in the assets you're allowed to invest in. Each month you get to wake up and decide whether you want to buy more US securities or more GE bonds. Not a lot of room to distinguish yourself in this environment.

One day Mr. Lehman knocks on your door and announces he has a new "AAA" security for sale that pays twice the market rate. Hot diggity! You're god damned right I'm interested, I'll take everything you've got.

Now, as any fund manager who's been on the job even a week knows, you also know that if the rate goes up, so does the risk. There's no possible way that these "AAA" securities are as safe as the AAA securities you're used to dealing with. Not your problem, though. You're knocking it out of the park and your fund still has the exact AAA/AA/A asset ratio that your promised your pensioners.

Same story at AIG. As long as they were collecting premiums, nobody thought to ask why people were buying up all this insurance on "default-proof" securities. Oh, wait, somebody did, but they were told to shut up because free money.

Of course, after the music stops, out come the crocodile tears. "Oh, woe is me, I never could have guessed there was anything unusual happening here."

But yes, let's blame the MBS packagers for making exactly the product the buyers wanted. If anybody was defrauded, it was the pensioners whose manager shut his eyes as tightly as possible and the AIG stockholders who were not informed of the risk AIG was carrying.

[aianus]

Do the pension fund managers not have a fiduciary responsibility to actually investigate the mortgages in the CDO?

Could they not be prosecuted along those lines?

[wolf550e]

Even if no one committed fraud (which I don't buy), you agree people were stupid a greedy. Did those people at least lose money? Because ordinary people were badly hurt, and the people responsible appear largely unharmed. Is that the nature of "elites"?