Clayton Holdings is a company that analyzed mortgage pools for rating agencies such as Moody's and Standard and Poor's and many of the big Wall Street banks that bundled these mortgages into securities that were then resold. A former president of Clayton testified last week before the Financial Crisis Inquiry Commission, a bipartisan, Congressionally appointed panel that is charged with investigating and reporting on the causes of the worldwide financial meltdown.
D. Keith Johnson told investigators that Clayton reported to banks and rating agencies that "vast numbers of loans were being packaged as securities even though they failed to meet underwriting standards." Rather than insist that these bad mortgages be bought back by the mortgage originators and replaced with more reliable ones, the banks squeezed originators such as Countrywide and Fremont financial to discount the mortgages which the originators did, happy to not have the burden of such bad mortgages returned to them. In turn, the big banks with the willing cooperation of their co-conspirators in the rating agencies, peddled these already failing mortgages as AAA bonds that were gobbled up by investors who were probably equal parts greedy and naive.
The Clayton story gives us some insight into how the widespread practice of making bad loans grew from a real estate crisis to a world financial crisis.