note that CDOs were used two decades ago during the S&L crisis to unload toxic properties (obfuscating actual value from the buyers).

long-winded, decade old post discussing many of the current problems (including obfuscating CDO-like instruments):
http://www.garlic.com/~lynn/aepay3.htm#riskm

In the past, mortgage originators had a vested interest in maintaining loan quality. getting triple-A rating on toxic CDOs allowed unregulated mortgage originators to immediately unload all the loans they could write, effectively eliminating any motivation for mortgage originators to pay any attention to loan quality.

As a result, there were large number of no documentation, no down payment, 1%-2% intro rate ARMs, possibly interest only payments. These were gobbled up by speculators ... anticipating flipping the property before the rate reset.

On the other side of the triple-A rating, institutions were heavily leveraged buying up all these triple-A rated toxic CDOs (some claim that GSEs were leveraged 80:1 with toxic CDOs, i.e. only had a little over one percent actual capital actually invested).

There was business school article from last spring claiming that possibly 1000 executives are responsible for 80% of the current mess and it would go a long way to fixing the problem if the gov. could figure out a way for them to loose their jobs.

There seems to be a separate problem with financial reporting ... despite SOX. GAO is now doing a database of increasing number of companies "restating" financial numbers ... basically the top executives gets a bonus based on the original numbers ... but don't have to forfeit the bonus after the restatement. Freddie did get fined $400m in 2004 for $10bil inflated statements and the CEO replaced .... but the CEO got to keep tens (hundred?) of millions in bonuses.

Slightly changing the "Peter Pan" theme to never having to grow up and therefor never having to be held responsible, ... I've also made sarcastic references to Winnie-The-Pooh and pooh-bear's comment about being a bear with "no brains at all".

I was going to suggest breaking all up all the CMOs and floating mortgages on an open market
http://thomasbarker.com/content/orphaned-mortgage-article

But that would lead to realistic pricing, which government has decided is "a bad thing".

I suspect Gordon will create something similar for the UK, if only out of desperation.

there have been past references to "rating shopping" ... they would take the toxic CDOs around to different rating agencies, until they found one that would give them the rating they wanted.

last week one of the business TV news shows had a person from one of the rating agencies on to discuss rating changes for companies in trouble. the host spent the show trying to get the person to admit to being responsible for the current problems (having given triple-A ratings to these toxic CDOs).

on the mortgage origination side of the triple-A rated toxic CDOs ... this shows the large ugly speculation pimple/boil in home owner prices (enabled by the use of toxic CDOs and eliminating any motivation to pay attention to mortgage quality)
http://mysite.verizon.net/vodkajim/housingbubble

the large ugly speculation pimple/boil is about half-way deflated back to where it started.