[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?

[NeutronBoy]

No, that's the role of the ratings agency who rates the assets.

[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"?

[tedunangst]

That is the nature of the principal agent problem.