1. The incentives were just so aligned that I think a lot of people might have had their private misgivings, but held their nose and went ahead.

Apart from the AAA rating, government bonds also had a very low risk rating in the Basel accords (Basel I, and Basel II that just came into effect during the global financial crisis 2008).

Basically, the Basel accords specify a minimum capital adequacy ratio, that is a certain minimum capital level to support given risk weighted assets. (Capital in the bank context basically refers to equity - i.e. funding that can absorb losses without the bank going bankrupt due to debt obligations they cannot fulfil.)

Now, the risk weight for government bonds is zero! (in Basel II, they had to be AA or AAA, and it gets complicated quick, but basically...) So you can load up on them without having to increase your equity cushion.

2. This allowed banks to increase their Return on Equity, which influenced bankers' pay.

3. Furthermore, I think they were all implicitly banking on either bailouts (directed at individual banks) or a version of "The EU would never allow a member government to go bust".

So, I think everyone was in it to an extent (while formally "correct" and "safe"), cashing out merrily, and hoping for the best.

Another great book on this, by the way, is The Bankers' New Clothes: What's Wrong with Banking and What to Do about It by Anat Admati and Martin Hellwig.

(Funny side note: I searched "bankers new clothes" on Amazon to get the author names right, and got a page with dress shirts and briefcases.... :-)

In Basel 2 indeed government bonds need indeed to have a rating of AA (AA- IIRC) or higher to be considered completely risk-free. However Greece never reached an AA rating, it was A in 2008.

Probably both. I still remember a full-time ad in The Economist around 2006-2007 by a German Landesbank, where they were promoting themselves as the coolest of things when it came to banking and managing clients' money. Not 2 years passed and that same Landesbank was by then in very serious trouble because it had invested heavily in US mortgage derivates, I think there was also talk of its general manager doing prison time. He probably didn't.

AFAIK the only guy who did jail time for crashing the world's economy and wiping out retirement savings of millions of people was a guy who copied some utility code to dropbox when he quit Goldman Sachs.

Sergey Aleynikov spent a year in prison for copying some code over. Fabrice Tourre (self-proclaimed "Fabulous Fab", a nickname that ought to be mine! :) was indicted by the SEC for his role in selling dodgy mortgage backed CDOs.

https://en.wikipedia.org/wiki/Sergey_Aleynikov

https://en.wikipedia.org/wiki/Goldman_Sachs#Abacus_mortgage-...

> "The whole building is about to collapse anytime now," Tourre wrote to his girlfriend in 2007, the SEC charged. "Only potential survivor, the fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!"

https://www.usatoday.com/story/money/business/2013/08/01/gol...

Yanis describes in The Weak Suffer What They Must? that the situation was very simliar to the subprime crisis in the states. Giving a lot of risky loans that then could be split and re-packaged.