Re: Debt = Bad
"As to who to blame, you can blame the clever boys and girls making the CDOs; I prefer to blame the credit agencies who gave them these CDOs triple A ratings in the first place."
There are actually three "moving parts" in the fuck up. CDOs and credit agencies are two of them. The other are the mortgage providers.
Now, normally you can only get a mortgage if you have enough dependable income or assets. The issuer will only get their money back if you pay it back, or they can sell the property. Selling property you're kicking people out of may well result in not getting as much as you could (see assorted tales of people wrecking stuff). In some countries the bank can still pursue you for the remaining debt, but the US you can just walk away from an underwater mortgage (as I understand it).
But since the lenders could resell the loan almost immediately, for a chunk of commission. How much you earned was based on how many mortgages you could sell. So NINJA* mortgages would get issued with the client deciding how much they wanted, and the normal sanity checks abandoned.
Then these shitty mortgages were bundled into CDOs. But they were not correctly classified as shitty, they got given "generic retail mortgage" status, which assumes that they were responsibly made loans.
Now, there isn't actually wrong with CDOs, even synthetic CDOs. You take a mix of various debts, put them in one big pot, and then pay off the debt in tranches. So the first tranche gets paid first, and might get AA+ rating and 2% return. The next tranche would be A+ and 3%, and so on. It is one of the few ways to take a bunch of risky assets and make a (smaller) less risky asset.
The selection of assets to go into the mix and pricing the tranches is where the dark arts come in. There are plenty of correctly priced CDOs, but they don't offer AA+ rated securities with >5% return. Anyone seeing that should really look at what goes into the mix.
Now this alone wouldn't be enough to cause a crisis. For each dollar that is not repaid, there is one dollar of loss.
Enter the synthetic CDO. This is a CDO constructed entirely from tranches of other CDOs. And not the good tranches either. But you can magically feed in B and C grade assets, and get some more AA+ assets to sell.
But now if the original debt is not paid, each dollar not repaid causes at least two dollars of downstream failure. Considering you could buy CDOs which were 3-4 steps away from the actual borrower it gets even worse.
So the people issuing the loans didn't care about their quality, as long as they got their commission. The people making the CDOs didn't care, as long as they got their commission. And the credit gagencies wanted to keep getting paid to mark junk as gold.
CDos are just tools. But they can be used to hide things, and they were. But there were other people involved in the deception.
We had to make (theoretical) CDOs, one of the questions was how many NINJA/junk loans can you put in while still managing to pay back all your B+ and above tranches, assuming it ran through the financial crisis.
"As to who to blame, you can blame the clever boys and girls making the CDOs"
They do deserve the blame for the failed ones. They definitely knew how much shit was in the beef. There were people making ones designed to fail. And there were also many who built perfectly good ones, but those ones also suck up the better quality of assets. They would also make it as hard as possible for the credit agencies to actually know what went in to the mix.
* No income, no job, no assets