Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy

by Cathy O'Neil

And so in the 1980s, investment bankers started to buy thousands of mortgages and package them into securities—a kind of bond, which is to say an instrument that pays regular dividends, often at quarterly intervals. A few of the home owners would default, of course. But most people would stay afloat and keep paying their mortgages, generating a smooth and predictable flow of revenue. In time, these bonds grew into an entire industry, a pillar of the capital markets. Experts grouped the mortgages into different classes, or tranches. Some were considered rock solid. Others carried more risk—and higher interest rates. Investors had reason to feel confident because the credit-rating agencies, Standard & Poor’s, Moody’s, and Fitch, had studied the securities and scored them for risk. They considered them sensible investments. But consider the opacity. Investors remained blind to the quality of the mortgages in the securities. Their only glimpse of what lurked inside came from analyst ratings. And these analysts collected fees from the very companies whose products they were rating. Mortgage-backed securities, needless to say, were an ideal platform for fraud.