QUOTE(Hipocrite @ Tue 31st March 2009, 6:03am)
It's all the fault of people who were using bad models to price the risk of collateralized instruments. Slicing something into 5 parts doesn't change the risk characteristic of the recombined thing, so the expected loss of the 5 parts has to equal the whole. ABS CDO models failed this sanity check.
I'd certainly agree that this was a major factor - in fact, I remember Unrepentant Vandal saying the main problem was "quants," which actually amounts to the same thing you're saying here. But to say it's "all" the fault of such people is simply wrong. In effect, you'd be exonerating all sorts of guilty parties, in the banking and housing industries, the consumer-lending industry, the media, the Bush Administration... all sorts of stock swindlers (yes, including NSS proponents), and I'm sure countless others that one could name.
But again, you're right about the fact that those responsible for the obfuscation and overvaluation of collateral (and thus the underestimation of risk) were right up there, at or near the top. Of course, if I were a
real conspiracy theorist, I might go so far as to suggest that all of this was hidden, synchronized, and media-manipulated so as to increase the likelihood of a "crash" - rather than a gradual backing off from investor over-reliance on consumer and mortgage debt, which presumably would have been far less damaging to the overall economy. And who really benefits most from a crash...?
Luckily, I'm not much of a conspiracy theorist. Most days, anyway!