Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

By the magic of independent probabilities, the worse the quality of the debt that entered into the tranching and pooling process, the more dramatic the effect. Substantial portions of undocumented, low-rated, high-yield debt emerged as AAA. In any boom, irresponsible, near criminal or outright fraudulent behavior is to be expected. But the mortgage securitization mechanism systematically produced this race to the bottom in mortgage lending quality. It was the difference between the high yield of the underlying securities included in the collateral pool and the low interest that was paid to the investors who bought the AAA-rated asset-backed securities that generated the profit. From 2004, fully half the subprime mortgages being fed into the system had incomplete or zero documentation, and 30 percent were interest-only loans to people who had no prospect of making basic repayment.52