We all know what happened during the lead up to the 2008 financial crisis. Banks bundled millions of subprime mortgages into mortgage-backed securities. What you may not know is that these mortgage-backed securities were then stratified into layers with the best mortgages in the ‘top’ layers and the worst in the ‘bottom.’ Typically, the top layers of the securities would receive AAA, the highest possible rating. Lower layers would receive lower ratings and some were rated as junk. In retrospect, giving any of these subprime mortgages AAA ratings seems pretty foolish, but it gets even worse.

Unbelievably, banks would then strip out the junk mortgages, put them all together in a new pile consisting just of the junk, layer them into the best of the junk and the worst of the junk and submit this new junk pile to the ratings agencies. The rating agencies knew very well what was going on, yet the junk piles were rated in almost exactly the same way as the original pile with the top layers of junk getting AAA ratings!!! According to S&P, AAA means that “An obligor has extremely strong capacity to meet its financial commitments.” FRAUD! Because these mortgage-backed securities received AAA ratings, they were included in the sorts of investments made by pension funds, mutual funds, state health & welfare funds etc… and that were priced accordingly as "safe investments."

The AAA ratings for these mortgage backed bonds meant that they were included on balance sheets with virtually no detail, so that investors had no idea of their exposure to these risky assets. These investments were treated essentially the same as U.S. Treasuries, as far as balance sheets go. So balance sheets were loaded with stratified toxic junk, given a rating agency stamp of approval and pedaled to the entire world as safe as U.S. Treasuries! Also, the high ratings gave loan originators a huge incentive to give mortgages to absolutely anyone that they could get in the door of their bank. After all, no matter how worthless the loan, it would end up being rated like a U.S. Treasury Bond. In their insatiable greed, and to perpetuate and substantiate this scheme to defraud, inflated property appraisals became the standard operating procedure. These inflated appraisals have caused the greatest harm to the borrowers and to the economy in general.