> SA writes:
>
>> nobody believes a AAA rating makes something risk-free.
>
> In a world where every market participant took the time to think at
> all, you'd be on to something.
These are all good points. But it misses the forest for the trees. Financial markets always have some high-information investors and some low-information investors. And information always leaks and spreads. Everyone on Wall Street sees the world as smart money vs. dumb money and there is a constant background hum of anxiety: "Am I the dumb money?" That's why Wall Street pays a lot of money for information - everything from high-priced newsletters and boutique analysis to subscriptions to Barron's and WSJ.
The theory that "risk was hidden" is based on the idea that the only way anyone could have understood the risk of these investments was to read a 1400-page report or to have a Ph.D. in math. And people make arguments like yours: lots of investors would buy anything with a AAA rating. This is true as far as it goes. But it ignores the larger point that was "hidden" in plain sight: *everyone* knew these investments would go bust if house prices fell. You really didn't need to read a 1400-page report to understand that. You could probably read it in the WSJ for $200 a year.
I would summarize my entire argument this way. Suppose you or I traveled back in time to 2005 and got a job writing for the WSJ. We pitch our editor on a story that says (a) housing is hugely overvalued and (b) the major banks will all go bankrupt when house prices collapse. Knowing what we know now, it would be easy to get all the necessary data, quotes, interviews, etc., for a first-rate piece of investigative business journalism.
Three questions: (a) would the story get printed? (b) if it got printed would it make any difference? (c) if the story was spiked, could we turn it into a private analyst report and sell it for $10,000 to every investment firm in the country? Would anyone care about our report? Would it make any difference?
If the answers to these questions are "no," then you can't say the cause of the bubble was the hiding of risk.
SA