How securitization works

By Felix Salmon
October 15, 2009
John Bird and John Fortune should simply appear directly on FT.com. Go watch their latest George Parr interview, it's fantastic:

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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.

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