I have been thinking about how to explain this without writing a term paper, but seriously this issue was nearly unavoidable since the stock market crashed in 2001.
CDO's are the BEST way to gain quick capital for big companies. What made them even worse, the highest payout came from the lowest credit graded CMO's. For instance, while someone with low credit will most likely default before someone with better credit, they will still be paying double what the property is actually worth. This should have been regulated from the get go.
Subprime loans only existed because these higher level institutions were willing to pay for them because of the high returns. Regulation needed to be increased as SOON as we saw the housing market being the backbone of our economy. CDO's were the highest issued bonds by value and were based on an unregulated security, which no one knew the real value of. It was stupid and this was going to happen as soon as the economy slowed down since people would no longer be investing in houses as heavily. I don't know if many people will understand all this lingo, but this could have been avoided if new regulations were applied in the 90's.
