A lot of financial schemes sound like they could be above-board on paper, but in practice degenerate out of control. Securitization is a classic here. It's not

A lot of financial schemes sound like they could be above-board on paper, but in practice degenerate out of control. Securitization is a classic here. It's not that securitization is inherently bad or wrong, but it creates a lot more surface area for incentive misalignment and outright abuse. Consider the United States subprime mortgage crisis of 2008. I'm actually willing to accept that broadening the borrower base had the potential to be a social good. In particular, throughout the 1990s and 2000s, home equity was a very real way for middle-class Americans to accumulate family wealth, and expanding access to that at least had potential for positive impact. But the actual way that the mortgage industry went about it was maximally wrong. Every layer was incentivized to finagle the numbers to work out, despite that the fundamentals never did. Every layer, from the loan officers to the underwriters, all the way on up, were incentivized to look the other way while they took their own cut. Loan officers fudged numbers, underwriters fudged numbers, and so on. At the core of this conflux was the mortgage-backed securities (MBS) machine. A lot of the financial engineering involved may have been valid on paper, with some set of constants. But it was clear, at least in hindsight, that the banks, ratings agencies, and brokers worked together to stack too many bad assumptions on top of each other, until the whole thing burst. We all know how that story ended. Is BNPL, and the securitization thereof, the next big trap? It's too early to say with confidence, but certainly the signs are there. I only hope that, if it's going to blow up, it does so early, before regular people's pensions start buying into BNPL-derived securities.