The loan packaging and insurance was a symptom of the underlying problem that drove the 2008 crisis: transatlantic transactions that worked to evade regulations to control systematic risk.
This process started, if you had to pick a place, with a US bank issuing a mortgage. The cash part eventually wound its way to various short-term "risk-free" assets, one of which being short-term asset-backed loans to European financial institutions. The mortgage asset got packaged up and sold on to the broader capital markets, of which European financial institutions participated. So, the US banking system basically created a market in which European financial institutions could buy mortgage-backed paper, financing the purchase at good short-term rates generated by the cash created by issuing the backing mortgages.
Of course, banking regulators know that just letting banks go hog-wild creating asset-liability pairs is going to end up badly, so this is where the regulatory arbitrage comes in. Under US banking regulations, banks had limits to the assets on their books. There's a strong incentive to offload them into the capital markets - the banks realize an immediate profit, and clear out valuable space on their balance sheet. European banks, on the other hand, had a more complex leverage limits that took into account the perceived riskiness of various assets that they owned, with AAA-rated assets giving the highest leverage limits.
So that, in a nutshell, is what happened in the run-up to 2008. Banks generate more profits when they create more risk, so there's regulatory limits on risks. US banks evaded those risk limits by selling the risk on to the capital markets, and US regulators assumed that this process was systematically safe. EU banks evaded those risk limits by blindly levering up to buy whatever AAA-rated dollar-denominated assets the US capital markets handed to them, and EU regulators assumed that high leverage on AAA-rated assets was systematically safe. Neither regulatory regime had a good holistic view of the financial asset vortex brewing in the Atlantic.
Anyhow, my overall point is "so that they could be sold to suckers" doesn't really tell the entire story. The asset packaging was done in order to take as much risk as possible under US and EU banking regulations, taking advantage of transatlantic differences in regulatory regimes.
Thanks for a much more detailed account of the crisis. Yes, I simplified in my post, but your more complex story still doesn't read to me as "people were being incompetent"; I see in it a tale of a complex system getting exploited in several different places at the same time, and shaking itself apart in the process.
Entirely tangential: the first time I saw your handle here several years ago, I initially misread it as "trust vectoring" (don't know why, I knew of the term "thrust vectoring" before). Ever since, this phrase stuck with me, and I feel it applies to the 2008 crisis.
I think that still is more or less a polite way of saying that American banks found suckers in Düsseldorf and Frankfurt to sell to. Sometimes in multiple steps: First sell to Deutsche Bank, they sell to suckers in Düsseldorf.
There was also plenty of domestic mortgage over-expansion; Anglo-Irish blew up by lending to far too many speculative property projects. The book on this is excellent.
I remember talking to people involved in those kind of projects at the time and even they noted that Anglo-Irish never seemed to turn down an opportunity to lend money.
Don't forget the part where the ratings agencies systematically failed to accurately assess the riskiness of the MBSs because they didn't want to piss off their customers (the banks / their mortgage issuance wings).
This process started, if you had to pick a place, with a US bank issuing a mortgage. The cash part eventually wound its way to various short-term "risk-free" assets, one of which being short-term asset-backed loans to European financial institutions. The mortgage asset got packaged up and sold on to the broader capital markets, of which European financial institutions participated. So, the US banking system basically created a market in which European financial institutions could buy mortgage-backed paper, financing the purchase at good short-term rates generated by the cash created by issuing the backing mortgages.
Of course, banking regulators know that just letting banks go hog-wild creating asset-liability pairs is going to end up badly, so this is where the regulatory arbitrage comes in. Under US banking regulations, banks had limits to the assets on their books. There's a strong incentive to offload them into the capital markets - the banks realize an immediate profit, and clear out valuable space on their balance sheet. European banks, on the other hand, had a more complex leverage limits that took into account the perceived riskiness of various assets that they owned, with AAA-rated assets giving the highest leverage limits.
So that, in a nutshell, is what happened in the run-up to 2008. Banks generate more profits when they create more risk, so there's regulatory limits on risks. US banks evaded those risk limits by selling the risk on to the capital markets, and US regulators assumed that this process was systematically safe. EU banks evaded those risk limits by blindly levering up to buy whatever AAA-rated dollar-denominated assets the US capital markets handed to them, and EU regulators assumed that high leverage on AAA-rated assets was systematically safe. Neither regulatory regime had a good holistic view of the financial asset vortex brewing in the Atlantic.
Anyhow, my overall point is "so that they could be sold to suckers" doesn't really tell the entire story. The asset packaging was done in order to take as much risk as possible under US and EU banking regulations, taking advantage of transatlantic differences in regulatory regimes.