How Securitization Works

It seems so obvious: of course John Bird and John Fortune should simply appear directly on FT.com. Go watch their latest George Parr interview, it’s fantastic:

GP: You can’t have it both ways. Everybody says that banks have got to be boring. Well, you’ve got to have an incentive to be boring.

There’s also a wonderful explanation of how securitzation works, at about 5:30.

GP: We thought we’d found a way where even if house prices didn’t go on rising forever, we wouldn’t have to worry about it.

Q: This is securitization.

GP: Securitization. You see, the problem about lending money who don’t have a glimmer of a chance of paying it back is that there’s a risk.

Q: That they won’t be able to pay it back?

GP: That’s not a risk, that’s a cast-iron certainty. No, no, the risk is that in some very complicated way the bank will lose money. Now what happens with securitization? You see before securitization, we could see the risk. It was there. We had it. And then, after securitization, what that did was, whooooo. The risk was sort of out there. Somewhere. Nobody knew. Then we looked back, and my god, it was still there after all!

Clever, that.

Comments

[Alan Young:]

Great fun! Thanks for the link.

In the bit you describe, I think they missed a beat: in between the risk disappearing and reappearing, it has to be sold to someone else. Very important— if you miss that step, you go the way of Bear Sterns and Merrill Lynch.

The next bit had me laughing even more: "we need MORE casino banking... because, as I understand it, in a casino the bank always wins."

And how about Lehman's biggest strategic blunder? having a CEO who had never worked for GS!

We couldn't get through this mess without British humor to lighten the load.

Oct 15 01:09 PM

[Moon Kil Woong:]

Don't worry the risk has all been sold to Freddie Mac, Fannie Mae, and the FHA recently. And they in turn sold some to the Treasury and the Federal Reserve. And and... well the Fed doesn't have to report their losses so they can do it again and again because no one cares that the Federal Reserve has a capital to Asset rate about as bad a Bear Stearns even without marking their losses to market because they don't have to and aren't audited. I guess we assume that they can print infinite more amounts of $ and the Treasury can use the taxpayer's credit card to bail them out of their trillions of dollar backstops and bond positions.

Securitization works this way. You pile on all the losses into a bond that won't expire for years (so you can get paid until people realize what a mess it is) backed by derivatives that won't expire for years (so they can spend all the premiums and dissapear into the woodwork) and if you can't sell them to some shmuck in Europe or Asia (fat chance these days) you sell them to the government since they are the biggest shmucks around.

Oct 16 08:38 AM

[Michael Clark:]

Isn't that what Madoff did?


On Oct 16 08:38 AM Moon Kil Woong wrote:

> Don't worry the risk has all been sold to Freddie Mac, Fannie Mae,
> and the FHA recently. And they in turn sold some to the Treasury
> and the Federal Reserve. And and... well the Fed doesn't have to
> report their losses so they can do it again and again because no
> one cares that the Federal Reserve has a capital to Asset rate about
> as bad a Bear Stearns even without marking their losses to market
> because they don't have to and aren't audited. I guess we assume
> that they can print infinite more amounts of $ and the Treasury can
> use the taxpayer's credit card to bail them out of their trillions
> of dollar backstops and bond positions.
>
> Securitization works this way. You pile on all the losses into a
> bond that won't expire for years (so you can get paid until people
> realize what a mess it is) backed by derivatives that won't expire
> for years (so they can spend all the premiums and dissapear into
> the woodwork) and if you can't sell them to some shmuck in Europe
> or Asia (fat chance these days) you sell them to the government since
> they are the biggest shmucks around.

Oct 16 08:55 AM