I would imagine they really knew what was going on... It would seem to me the cover up was to their advantage to enable HUGE salaries and HUGE bonuses for as long as possible; does anyone ever give this reason??
Lying is an instrinsic part of the industry. You'd better believe they were being paid to lie ... still are, as a matter of fact. Bear Stearns Managers Acquitted of Fraud Charges
Don't fool yourselves into just blaming the Wankers here. Read Liars Poker and note that Salomon started this thing back in the 80s. And that everyone else joined. Politicians congratulated themselves for making ownership affordable. And thus more Americans responsible invested house owners. Americans congratulated themselves for getting aboard the house owning money-go-round. Just read the pre crash "it will never happen" arguments here (and how angry they got with people who suggested otherwise - i got told that as a non-American I didn't know what I was talking about in some unkind words ) And the bankers did their bit for the nation smoothing out the political and national will. And clipped the ticket joyfully along the way. The issue is addiction to debt not greedy bwankers. The bwankers just behaved like drug dealers with heroin addicts or shop keepers in a Gold Rush town.