> This meant that the actual risk was ignored ...
The thing about the Wired article you quoted is: it's a nice story.
But: it doesn't begin to explain this event.
I think the only thing that comes close to explaining that part of the story is the age old issue of greed and fraud. This is best exemplified by thae fall of Lehman. When the flow of mortgages wasn't large enough to satisfy the urge to sell MBS, they went out and *invented it* -- by rewarding all the pieces of the mortgage food chain: the brokers, the developers, the originators like Countrywide, the ratings agencies, and ultimately homeowners. They wanted it so much they broke every rule in the book. None of them had ever heard of Li, and none of them "ignored" the risks involved. They just simply *took* the risk. And when the music stopped, shortly after they started borrowing money *unsecured* (when have we ever seen that before? A *bank* selling *unsecured* bonds!?), they were stuck with an entire pipeline of mortgage sludge that they had invented. Plus likely 8-10x *more* of commercial real estate financing.
Good riddence, I say. But don't let them off the hook by saying they were bedazzled by math.
/jordan