Hedge funds could make billions from a Fannie Mae and Freddie Mac spin-off

[progree]

6. The two things that stood out for me from the housing bubble

(1) The ones packaging mortgages into the collaterized mortgage obligations (CMOs) and similarly named products bragged that they included a geographically diverse collection of mortgages. They and the financial media reminded us that while certain geographic markets have had liquidity problems in the past, that has never happened on a nationwide scale since the 1930's great depression, and that was way back in ancient hsitory before a whole set of rules and regulations were instituted to make it virtual impossible to happen again. So they were perfectly safe, and hurray to modern financial engineering to safely bring affordable mortgages to everyday hardworking American families rah rah.

Lesson: because something hasn't happened before (or hasn't since the Great Depression), doesn't mean it can't or won't happen again, especially if one keeps pushing the limits further and further.

(2) The issuers of these CMOs paid the rating agencies, like Moody's, to rate their products. That obviously incentivized Moody's etc. to rate them well, otherwise the issuers could take their business to others, like Fitch or S&P, to rate them.

Lesson: no lesson learned AFAIK, this is still the practice. To me this is the most gob-smacked conflict of interest and the greatest weakness in the whole financial crisis and going forward.