The 2008 global financial crisis happened in no small part because US banks sold portfolios of debt that they had issued to US consumers to investment bank clients who did not understand the risk in those portfolios, and subsequently discovered that the supposed AAA debt they had acquired was nothing of the sort, and banking balance sheets collapsed as a result all over the world.
The AAA tranches were good. Near none of them failed. That the banks were putting the C – the equity – tranches in their own books financed with massive leverage is what caused the problem. Because slicing and dicing loan pools actually worked – the equity tranches went bust first and protected the synthetic AAA tranches from default even as the underlying mortgages went kablooie.
Spud’s got 2008 wholly and entirely the wrong way around.
Now there’s a surprise, eh?
Maybe not the straightforward early securisations, but quite a few AAA tranches failed in bollocks like CDOs and CDO².
Maybe politicians telling the banking industry who they should be lending money too didn’t help…..
I seem to remember that there had to be a massive bail out of Fannie Mae & Freddie Mac.
Politicians in there wisdom, forced them to relax their lending criteria which moved things along the risk curve. Republicans liked it as it expanded the home – owning classes, Dems liked it as it allowed a lot of minorites to buy houses that they wouldn’t otherwise have been able to afford.
What could possibly go wrong?