Bailout, round 4

Another component of the problem:

Junk mortgage originators, not necessarily fraudulent, pool loans that have either zero or very minimal down payments.

The loans are carved into tranches and compliant rating agencies rate the tranches at AA or higher. These tranches are more attractive to banks and produce more paper income than the bank originating a safer mortgage by itself.

The credit agencies profit from higher fees, the banks have to keep less capital on hand to offset what should have been lower graded securities, and everyone profits from regulatory arbitrage. Certainly not the only reason for the continuing credit issues, but a useful example of how poorly crafted regulations and spotty enforcement lead to actual problems.