Securitization As Satan

"The financial crisis that began in August 2007 had relatively little to do with traditional bank lending…Its prime cause was the rise and fall of ’securitized lending,’ which allowed banks to originate loans but then repackage and sell them out.

- Niall Ferguson, The Ascent Of Money (2008)

I am often asked to point to the root of the current financial and economic crisis. My answer increasingly is the extreme dependence that the American and global financial system grew to have on something known as securitization.

Securitization, in short, is the process of taking future claims on an income stream (like mortgage payments, credit card payments, and car payments), bundling them into a large group (say 4,000 mortgages), turning them into an asset or security (a security is just a written claim of ownership), and then selling them to a third party.

Securitization allows an investor to ‘own’ future principal and interest payments.

Again, securitization is the process of pooling the revenue or cash flow of productive properties and assets and transforming them into new securities, or ownership claims that can be marketed and sold to others...

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Cedric Muhammad

Saturday, February 21, 2009