I see your point, however...<p>1) It&#x27;s worth reiterating that there was a huge housing bubble and a massive devaluation.  You say 4% losses is terrible for AAA rated securities (which is true), but you could also say it&#x27;s pretty amazing for subprime mortgages during a massive housing bubble popping.  It&#x27;s like building a levee that&#x27;s meant to stand up to all but the most massive floods, and then having a massive flood; the fact that the levee failed it not <i>itself</i> proof that it wasn&#x27;t engineered correctly.<p>2) The point I was originally trying to make and got sidetracked from is that if (and seems likely to me) there was an extremely widespread systematic belief that there was no housing bubble and that a coordinated, nationwide drop in housing prices was effectively impossible, then you would see the exact outcomes we saw without the corruption or &quot;corrosion&quot; you posit.<p>In short, you&#x27;re suggesting that people knew the loans were going to go bad, and put high grades on it knowing there was a real risk of default.  I would put it to you that actually no one inside the system believed the loans were going to go bad, and the high grades were put on it in the incorrect belief that there was no real risk of default.<p>There&#x27;s been a lot of research on this subject, but to me the most compelling is research showing that &quot;insiders&quot; did not diversify away from the crap they were selling.  See facts 9 and 10 from this paper[1] for example, which notes that Lehman, for example, was using internal models which estimated the odds of a bursting bubble at 5%, whereas they assigned 30% odds to scenarios that assumed absolutely impossible and historically unprecedented house price growth.  Bear Stearns executives invested heavily in their own bank&#x27;s funds which in turn were invested in MBS.  Similarly, many loan originators got into trouble not because they bundled the loans up and sold them on (as their risk models required them to do), but because they kept too many of them, thinking they were great investments.  If Lehman and Bear Stearns and Bank of America were the suckers, who was doing the exploiting?  (And the biggest winners were people like John Paulson, who had no clue how the mortgage market worked, and had never traded mortgages before.)<p>From where I stand, there is a compelling, coherent story of people being idiots, but the cynical, blatant corruption seems missing.  If your model says there&#x27;s a 5% chance of housing prices dropping, then your model is wrong, but your conclusion about the risk of impairment of AAA tranches makes a lot of sense.  So the next question is, well, did you really <i>believe</i> that there was a 5% chance of housing prices dropping?  And the people involved bet their careers and personal fortunes on that, so...apparently they did?<p>Edit: I highly recommend the entire paper, and in particular you may find &quot;fact 12&quot; of interest, as it gets into the weeds on how the ratings were actually calculated, why the ratings on MBSs ended up being mostly accurate, why the ratings on CDOs ended up being completely wrong, and why there was a difference.<p>[1]: <a href="https:&#x2F;&#x2F;www.bostonfed.org&#x2F;economic&#x2F;ppdp&#x2F;2012&#x2F;ppdp1202.pdf" rel="nofollow">https:&#x2F;&#x2F;www.bostonfed.org&#x2F;economic&#x2F;ppdp&#x2F;2012&#x2F;ppdp1202.pdf</a>