> SA wrote:
>> *everyone* knew these investments would go bust if house prices fell.
> But this isn't the risk. The risk is the likelihood that they will fall. As a bubble develops it becomes practically certain that they will. Moreover, in the case of many CDOs this wasn't the only risk. The lending practices to which securitization led created other significant risks.
> If "everybody" had known of these risks, bets (CDSs) would not have been readily available that treated them as negligible.
Just to be clear on what I'm saying:
(a) everyone knew that *if* national house prices fell, CDOs wouldn't pay off (b) the consensus was that the risk of outright negative house price appreciation on a national basis was negligible (c) that is why CDS prices were implying a negligible risk of default on CDOs (until prices started falling in 2006, at which point CDS prices started rising)