He writes in reference to the holding of AAA mortgage traunches by banks

In other words, it was not “too big to fail moral hazard and it also was not venal corporate incentives.  It was possibly some regulatory arbitrage but also just plain, flat stupidity and complacency

He bases this on a paper by Erel et al, that I am sure is highly sophisticated but I have not read.

I based my conclusion on raw concurrent observation and the powerful but widely ignored fact that if you ask people why they are doing something usually they will tell you.

In the run-up to the crisis there was a lot of concern by those who follow the financial industry about the structured debt situation. If nothing the issuance of many largely synthetic CDOs was new territory. To say nothing of the Lucas Critique problem that was at the core of this entire enterprise.

If you asked people in favor of the idea they would say: we think it will work. We think the computer models will hold. We think CDS will function just as well as a traditional sell model.

There was no reason to think they didn’t believe what they were saying.