| > knew that a ton of debt was garbage The GFC was not a crisis of credit or trash assets. It was one of liquidity and hidden interconnections. (In America.) If you look at how those supposedly-toxic CDOs actually paid out, including the CDOs squared and synthetics and whatnot, the ones rated AAA, the ratings agencies were--by and large--on the money [1]. The AAA tranches paid out AAA cash streams. The problem was market participants took this to mean they'd behave like other AAA assets in all capacities. Including liquidity. That was a bad assumption. When people are scared, they'll trade for Treasuries. Not the thing that by all reason should pay out like a Treasury, and in fact, with the benefit of hindsight, did. To the extent there was high hooliganery afoot, it was around e.g. CDSs written by non-bank actors, e.g. AIG. Which was a result of the liquidity problem described above. [1] There is an obvious asterisk here in the endogeneity of the bailouts and these assets' performance. But given the pattern holds across borders and industries, irrespective of bailout intensity, the hypothesis that tranching works carries more weight. |