Comment by bushido
3 days ago
> The problem with mortgage backed securities is that nobody has the time to inspect the credit worthiness of each mortgage in a MBS
Credit worthiness of each mortgage wasn't the issue with mortgage-backed securities. It was that low value mortgage-backed securities were repackaged into a basket with a mix of securities and given a higher credit rating than what Subprime would have gotten on their own.
This repackaging is absolutely going to happen again with GPUs. If there are GPUs of different generations within the same security, it's already happened.
> low value mortgage-backed securities were repackaged into a basket with a mix of securities and given a higher credit rating than what Subprime would have gotten on their own
This is fine. Tranching is fine. It works today, it worked in 2008 and it's based on the same mathematics as portfolio theory. (A physical representation would be a dam. You can turn volatile rivers into predictable flows if you hold a bunch in reserve and then let a small amount off the top.)
Nobody knew that for certain, however, and that was a problem if you needed cash today but verifying the underlying mortgages would take months of work. (Some AAA-rated CDOs defaulted though they all paid out in the end. There has never been a AAA-rated CLO default since like the 1990s.)