The ratings were issued by companies that had been given a monopoly by govt. Securitized mortgages were a creation of govt.
The idea that you're missing is regulatory capture combined with govt encouraging transactions that didn't make economic sense otherwise. (One of the underappreciated consequences of RC is that it amplifies "private" bad behavior and shuts out good behavior.)
That's not fair. The major ratings agencies were unregulated, all were founded privately, and were only designated NRSRO's after they had captured the market. Meanwhile, companies can apply to be designated NRSRO's, and many companies have been so designated.
The government didn't corrupt Moody's. Commerce did. The government supplied no oversight, and Moody's sold its ratings to the highest bidder.
"govt encouraging transactions that didn't make economic sense otherwise"
More like the companies selling mortgages were desperate to get the loans off their balance sheets so that they could release the capital for new mortgages. As they didn't keep the mortgages for very long the level of risk they were accepting was low so they didn't do much checking on whether people could actually pay or not - they really didn't care.
I remember comparing my experiences of first getting a mortgage 20+ years ago where it was a difficult thing to do with how younger colleagues described things immediately before 2008 and things were totally different - they were giving mortgages to pretty much anyone who asked not because the government made them (I'm not in the US) but because it made them a lot of money!
> More like the companies selling mortgages were desperate to get the loans off their balance sheets so that they could release the capital for new mortgages.
Selling them to GSEs. You do know what the "G" stands for, right?
And speaking of the GSEs, they lied about how many of the loans in their portfolio were subprime. As a result, no one knew that those loans were as common as they were, which threw off everyone's risk calculation.