Apparently there were different tranches with different ratings bundled together.I did not pay much attention, but I thought they bundled a set of subprime mortgages, no prime, then set a coupon based on an optimistic assumption about how the bonds would perform. With high stated payments on the junk, they claimed that the risks of the individual loans were uncorrelated and thus assumed that the high yields would make up for those that defaulted. As long as the coupon was "conservative" enough given the holdings, they argued that the CMO deserved a high credit rating. The rating agencies went along with this and it was never clear to me how closely they looked at the uncorrelated assumption.
This is a lot like 2007 when subprime mortgages were packaged with prime mortgages and given a AAA rating. This time banks are lending to highly rated private credit firms who then lend to junk rated companies. Both cases used intermediaries to disguise the risk.
Statistics: Posted by Harmanic — Wed Oct 15, 2025 7:26 pm — Replies 24 — Views 1283