Securitization Recycles Risk Through Ratings

Modern structured‑finance design lets lower‑quality loans be repackaged into ostensibly higher‑grade tranches by relying on ratings and tranche seniority. That recycling creates perverse incentives for originators and reduces transparency, concentrating tail risk in opaque layers like CDOs and CDO‑squared. — If true, this implies regulators should focus less on individual loans and more on the mechanics by which ratings and tranche‑repackaging redistribute and hide credit risk across the financial system.