It is. Buying a non-dividend-yielding stock is a bet that the price of that stock will go up, while selling a share is a bet that the price will go down. (yes, that's simplified) Doing all that research is like counting cards - you have a lot better information than the average investor, but you can't know for certain whether you should hit or stand on that 16, just what the best play is. So the GP's argument is that banks didn't actually know the securities would go south, but they knew it was more likely than the buyers thought.
The information that the originating banks had that many investors didn't was that the loans were lower quality than mortgage loans had been in the past. So the investors were making their pricing calculations based on historical default data, which would obviously underestimate the default risk, causing them to think that the securities were worth a higher price than they would be if priced with a more realistic default rate in mind. And it wasn't a small difference. It was like a 10x difference in the default rate, which would have made lower tranches nearly worthless and really cut into the value of higher tranches.
Let's use a car analogy. I want to sell my (hypothetical) 2005 Prius, and you're interested. You take a look at the car and it appears to be in good shape, so you're willing to pay roughly the Blue Book value for it. However, I know that the car is actually in need of serious maintenance costing thousands of dollars, and will probably break down on you before it's gone 10 miles. Obviously, I just withheld crucial information and sold you a lemon, with major penalties. Now, had you known it was in need of maintenance and offered a lower price knowing that (because you're a mechanic or something), then that's a different story.
It is. Buying a non-dividend-yielding stock is a bet that the price of that stock will go up, while selling a share is a bet that the price will go down. (yes, that's simplified) Doing all that research is like counting cards - you have a lot better information than the average investor, but you can't know for certain whether you should hit or stand on that 16, just what the best play is. So the GP's argument is that banks didn't actually know the securities would go south, but they knew it was more likely than the buyers thought.
The information that the originating banks had that many investors didn't was that the loans were lower quality than mortgage loans had been in the past. So the investors were making their pricing calculations based on historical default data, which would obviously underestimate the default risk, causing them to think that the securities were worth a higher price than they would be if priced with a more realistic default rate in mind. And it wasn't a small difference. It was like a 10x difference in the default rate, which would have made lower tranches nearly worthless and really cut into the value of higher tranches.
Let's use a car analogy. I want to sell my (hypothetical) 2005 Prius, and you're interested. You take a look at the car and it appears to be in good shape, so you're willing to pay roughly the Blue Book value for it. However, I know that the car is actually in need of serious maintenance costing thousands of dollars, and will probably break down on you before it's gone 10 miles. Obviously, I just withheld crucial information and sold you a lemon, with major penalties. Now, had you known it was in need of maintenance and offered a lower price knowing that (because you're a mechanic or something), then that's a different story.