We have seen that investors of all types – even the most sophisticated – did not always know or understand what they were investing in. Their frantic search for yield led many to presume that others knew what they were doing and that risk had been priced appropriately. These investors substituted the judgments of credit-rating agencies and others for their own due diligence.
This opened the door to abuses in the creation of increasingly complex and opaque structured products with embedded leverage, and in the origination of loans intended for redistribution.