I guess the legal industry/profession isn’t “rife with information asymmetry” and lawyers therefore can’t exploit it.

There wasn’t too much regulation. There was “gamed” regulation or inappropriate regulation. There was neither too much or too little in the way or regulation. What there was is bad regulation.

There is an Econtalk from back in 2009 with Charles Calomiris that I have found very interesting. Calomiris lists all kinds of regulations. Making claims that some was bad and some even good. What I have taken away from that is a list of causes or impediments to good outcomes that I have assigned my own weights to. My weights are much different than I suspect Calomiris would assign.

And this happened because…..there was too MUCH regulation in the origination??? Just wondering.

Just as important, I think, was that when you start to get into CDO’s of CDO’s of CDO’s, figuring out what you’re actually buying and what you’re likely to collect in principal/interest and then putting a price on it is so convoluted a process that the ratings become virtually meaningless, whatever they happen to be. There are too many moving parts and too many estimates piled on estimates.

Of course, from the issuers’ perspective, that’s a feature, not a bug. The opacity creates an information asymmetry, which translates as ‘profit opportunity.’ You just need to find yourself some ‘dumb money,’ as they say, and that was seemingly no difficult task 6-8 years ago.

From what I recall from Gretchen Morgenstern’s book Reckless Endangerment and Lewis’s The Big Short, the AAA and AA MBSs were securities built of mortgages with layers based on various types of risk: that we all know. And those MBSs were then subsequently sliced and diced into “offspring” types of securities called CDOs (collateralized debt obligations) that were also sold separately to investors. But, and this is a key point, those CDOs retained the AAA and AA ratings of the “parent” MBSs. They were not re-rated, notwithstanding that their composition may have looked nothing like the original. And there could be even more subsequent “offspring” CDOs sliced and diced on down the line, finer and finer. But they all kept the AAA and AA ratings, regardless of the mortgages that they actually contained.
(I think that’s how it went — but it’s very possible that I’ve gotten some of that wrong.)
As Lewis shows us, those investors who figured out what was going on (Michael Burry for one, Lewis’s main cool character) took a look inside the MBSs and CDOs and didn’t like what was there relative to the developing real estate market environment, and bet on their failure.
Readers, please correct me if/where I went off the rails with my recollections and/or understanding.

So what happened? Were the failure rates so astoundingly high that the top tranches failed anyway? Or, was the problem that securitization worked for the top tranches, but left behind bottom tranches that were toxic, unsaleable, and piled up on balance sheets?