CDOs, AAA tranches, the Great Crash and all that.
The general view is that this entire system failed and failed badly, that all the AAA tranches of the CDOs fell over and that securitisation as even an idea is a bad thing.
My own supposition is that it’s a bit different. And so I’d like to ask those who actually know (Paul B, you being a quant in these sorts of markets, maybe you know?).
I get the impression that most to near all of the AAA tranches of all but the very last of the deals put together are still paying out as they should do. The equity tranches did take all the losses and go horribly bust. But the slice and dice approach did in fact work: most to near all of the AAA tranches turned out to actually be AAA, even in the middle of the worst housing bust ever.
They all dropped in value, horribly, during the crash, causing all that pain to the banks holding them on leveraged terms (and thereby near wiping out their capital etc) but that’s a different problem from the idea that the AAA tranches themselves actually failed as bonds.
These two views are obviously not compatible. So which is the correct one?