> problem in 2008 is correlated risk — basically, the difference between rolling once per mortgage (uncorrelated defaults) or just once that impacts all the mortgages (correlated defaults)
It was ignoring solvency != liquidity. Most of the structured mortgage products paid out fine. You really can skim cream off crap through payment prioritisation. But that was not clear ex ante. If you’re leveraged or in dire straits, that a security will pay as promised over the coming decade is little comfort when it’s going at a dime on the dollar.
It was ignoring solvency != liquidity. Most of the structured mortgage products paid out fine. You really can skim cream off crap through payment prioritisation. But that was not clear ex ante. If you’re leveraged or in dire straits, that a security will pay as promised over the coming decade is little comfort when it’s going at a dime on the dollar.