Imagine a country where a fifth of all mortgages are taken out by the shakiest borrowers. About half those loans are written by companies that are almost entirely unregulated. The mortgages, on average, are worth almost 95% of the underlying house. Half of them demand no documentation of the borrower's income. These loans are then bundled and sliced into complicated debt instruments. The risk of these is gauged by credit-rating agencies which are paid by the very firms that created the securities and which make a lot of their money from advising on how to win the best ratings. Many of these structured debt instruments are bought by banks in other countries using off-balance-sheet entities for which they make little capital provision and about which banking supervisors know virtually nothing.
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