then resold their loans in bulk to Wall Street banks. The banks, in turn, bundled the loans into high-yielding residential mortgage-backed securities {RMBS} and sold them on to investors around the world, all eager for a few hundredths of a percentage point more return on their capital. Repackaged as collateralized debt obligations {CDOs}, these subprime securities could be transformed from risky loans to flaky borrowers into triple-A rated investment-grade securities.
The process began when lenders packaged and sold their loans en masse to Wall Street banks. These banks subsequently combined the loans into complex financial products known as residential mortgage-backed securities (RMBS), which were then marketed globally to investors seeking higher returns.
As a result, these risky loans were transformed into collateralized debt obligations (CDOs), allowing them to receive high credit ratings despite being tied to borrowers with questionable credit histories. This intricate system not only masked the inherent risks but also appealed to investors eager for yield, highlighting the vulnerabilities within the financial system.