What Caused the Housing Bust (5)

Rated AAA

After the equity tranche, typically one or two more risk levels offered higher yields at a lower-than-AAA rating.

After those few, thin slices, the vast majority of the RMBS –

usually 92% of the loan package – would be rated AAA.

With an AAA rating, banks, brokerage firms, and insurance companies could own these mortgages –

even the exotic mortgages with changing interest rates or no down payments.

With the magic of financial engineering and by ordering the perceived risk, financial firms from all over the world could fill their balance sheets with higher-yielding mortgage debt that would pass muster with the regulators charged with making sure they held only the safest assets in reserve.




By Porter Stansberry