The nuance here, though, was that the CDOs and similar instruments were sold in a tranched fashion, and the super-senior tranche was made to look as if it was very low risk, as normal for tranches instruments.
But when your entire series of tranches all consists of trash, then which tranche you were in didn't really matter.
CDO and CDO2 instruments hid this distinction really well, and unfortunately the ratings agencies bought into it and sold crap as AAA securities.
There were a lot of factors that contributed to the 2008 crisis: adverse selection leading to low quality portfolios, mispriced assets, high leverage which magnified losses, lower-quality securities being held by investors who couldn't really afford to bear the losses on them, etc. But the fundamental concept of tranching is not actually that bad, even though every time people read about it they think it's the exact same as 2008. Banks have been tranching debt since long before 2008 and they have been tranching debt ever since. Not just mortgages either, but all kinds of debt.
It's very hard to understand something when your salary depends on you not understanding something.
They just kept the music going, more ratings issued was more money for them. Paid by the bank creating the security, what could go wrong
What if this winds up being the case for the trillions dumped into AI in hopes of future revenues?
https://www.reuters.com/business/oracle-corp-goes-high-stake...
> Cloud computing giant Oracle Corp is on the cusp of a junk-grade credit rating and its shares have tanked as the artificial intelligence hyperscaler becomes the fall guy of investors' concerns over the sector's debt-fuelled spending binge.
The specific problem of the 2008 financial crisis was that the banks were going out of their way to obfuscate the source of their CDOs so that, even when it was clear in 2007 that the subprime mortgage market was unraveling, you couldn't look at your instruments and figure out whether or not you were affected. The problem wasn't the CDO, it was the obfuscation. And as far as I'm aware, the current debt offerings aren't being obfuscated--if you want to avoid the data center debt because you think it's junk, just avoid the stuff being touted as data center debt.
yes, i specificly remember when Lehman went under the banks stopped trusting each other's ability to assess their own exposure. The banks stopped lending to other banks and that's when Paulson got on his knees (literally, i think there's a picture of him on his knees in front of Nancy Pelosi) asking congress for cash to guarantee loans. The side effects started squirting out everywhere i think even Mcdonald's was hours away from bankruptcy because the corporate paper market suddenly ceased to exist. Also, money market returns turned negative briefly, that's like a negative interest rate on a traditional savings account bad. It was bizarro world for maybe 72hrs.
The movies don't really do justice to just how upside down and nonsensical the financial world became. It was a knife's edge for 2 or 3 days.
My fear is that this is all going to turn into one big front-running exercise where those connected with the Trump crime family are warned to get out first, banks that swear allegiance are bailed out next, and the rest of us get to hold the bag.
Are these companies worth their incredibly high valuations?
Yeah... maybe think on that a bit in this context.