Reply #6: without knowing the structure, in particular the reserve levels, it's ludicrous to criticize this

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if no matter how sick the UNDERLYING asset is, it's often possible to create a very secure investment out of it simply by making the reserve large enough.

a security that pays $1,000,000 but is backed by $1,000,000,000 of collateral is incredibly secure, even if the collateral is highly suspect for the simply reason that even if 99% of the collateral is completely wiped out, you still have 10 times the amount you need to repay the investor.


now, if there reserves are set at the same levels as they typically were prior to the credit crunch, then yes, AAA would be ridiculous. but ratings are based on historical averages and stress factors. as we all know, the historical averages have gotten way worse, and i suspect the stress factors have gotten bigger as well. so i'm quite sure that the reserves are substantially larger than the reserves would have been pre-crisis.

exactly what those levels are is the key question.