If you know they are bad and are intending to make money out of destroying your client and the client is relying on a rating agency that is prepared to give it a AAA in order to get more business from you - then I think someone is being a bit naughty somewhere.
There's no such thing as "knowing" they are bad. Everyone has an opinion, and the price people are willing to pay reflects that. For example, Lehman stock trades now. It has a price. I can sell it to you and feel perfectly fine about it, even if I think it's the biggest piece of crap in the world and I can't wait to sell it. I may end up wrong, because my opinion is just one of many, many.
Lots of money is made by others by disagreeing with people who absolutely "know" something.
Going to have to agree with you here. Why does a share of Google cost more than a share of Illegal Online Pharmacy, Inc? Because the market has decided that Google is going to work out better than Illegal Online Pharmacy. The market could be wrong; that's not a crime, that's just losing at poker.
> There's no such thing as "knowing" they are bad.
So they put billions of dollars on that bet after doing a lot of research and yet they didn't really know anything? Or are you trying to convince me that the stock market is legalized gambling?
It is. Buying a non-dividend-yielding stock is a bet that the price of that stock will go up, while selling a share is a bet that the price will go down. (yes, that's simplified) Doing all that research is like counting cards - you have a lot better information than the average investor, but you can't know for certain whether you should hit or stand on that 16, just what the best play is. So the GP's argument is that banks didn't actually know the securities would go south, but they knew it was more likely than the buyers thought.
The information that the originating banks had that many investors didn't was that the loans were lower quality than mortgage loans had been in the past. So the investors were making their pricing calculations based on historical default data, which would obviously underestimate the default risk, causing them to think that the securities were worth a higher price than they would be if priced with a more realistic default rate in mind. And it wasn't a small difference. It was like a 10x difference in the default rate, which would have made lower tranches nearly worthless and really cut into the value of higher tranches.
Let's use a car analogy. I want to sell my (hypothetical) 2005 Prius, and you're interested. You take a look at the car and it appears to be in good shape, so you're willing to pay roughly the Blue Book value for it. However, I know that the car is actually in need of serious maintenance costing thousands of dollars, and will probably break down on you before it's gone 10 miles. Obviously, I just withheld crucial information and sold you a lemon, with major penalties. Now, had you known it was in need of maintenance and offered a lower price knowing that (because you're a mechanic or something), then that's a different story.
