Quote:
Originally Posted by checkthisout
It's not a conspiracy theory. . Selling the security/bond whatever in a speculative manner I.E. it's worth more because it's going to be paying a higher interest rate, is what caused this mess.
Sub-prime loans were sold because they promised a higher interest rate with the risk being insured by your local insurance company (due to leech/bliley which allowed investment banks, your neighborhood bank and insurance companies to interact) because they fetched a higher value and thus instant profit for the dealer I.E. Goldman Sachs.
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The real problem isn't that there were subprime loans out there.
The real problem was not
identifying them as such.
And THAT falls directly on these guys..
Credit Rating Industry
(click here)
The credit rating industry — dominated by Moody’s, Standard & Poor’s and Fitch Ratings — was widely criticized for failing to identify risks in securities backed by subprime mortgages, whose collapse touched off the financial crisis.
The agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company’s ability to raise or borrow money, and at what cost securities will be purchased by banks, mutual funds, state pension funds or local governments.
In a nutshell, if the 'subprime' loans were correctly identified in the first place, then an investor would be able to make an educated choice.
Instead.....they were 'bundled' (mixed) with good loans, rated higher than they should have been and then re-sold based on the riskier loans being the same as the best ones in the bundle.
Some people may have still purchased them hoping for a big payback (as you mentioned, subprime loans carried a lot higher interest rate) but, a lot of them would have been shunned.
In that case, banks would then stop making the loans because they would not have the secondary market to unload them.
Therefore......no domino effect on the banks/financial institutions.
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