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The theoritical benefit of securitization is to sell the exact type of risk to whoever wants that risk. For example - say you take part in a peer to peer lendi
by nrao123 11y ago
The theoritical benefit of securitization is to sell the exact type of risk to whoever wants that risk.
For example - say you take part in a peer to peer lending market and give a loan to 100 people. You go through a life changing event (e.g. have a kid) and suddenly want to reduce the risk of lending to 100 people over the internet and prefer to put it in government bonds. What do you do now?
You can resell your loans to another party who will take on the risk and the resulting coupon payments from those 100 borrowers. That is in simplistic terms the process of securitization.
However- this process became badly mauled in the 2004 to 2008 period when rating agencies (S&P, Moody's etc) didn't do a good enough job of rating the credit worthiness of these borrowers and then buyers who took on the risk of buying the loans of the borrowers based on the judgement of these rating agencies got hammered. I am simplifying what was the issue of 2004-2008 crisis. But this is just to give you a very quick idea.
- Scoundreller 11y ago> rating agencies (S&P, Moody's etc) didn't do a good enough job of rating the credit worthiness of these borrowers and then buyers who took on the risk of buying the loans of the borrowers based on the judgement of these rating agencies got hammered. I'd argue the real issue was ratings agencies giving the securitized debts AAA ratings when in fact the holdings were toxic. When things went sour, the risk premia just weren't there to cover the impact.
- nrao123 11y agoYes - I think we are roughly saying the same thing. Misjudged ratings on 1) Underlying borrowers 2) Securitized tranches (e.g. Credit rating of Z tranches and lower tranches) 3) Re-securitized tranches (e.g.CDOs)
- rorykoehler 11y agoI don't understand how it is legal to sell the securities bundled without also having to reveal the specs/details of each individual loan?
- kasey_junk 11y agoThe specs/details were available. No one in the process was incentivized to look into it though (except for the folks who were shorting these CDOs, who did and made a bundle). The sellers were obviously trying to offload them, the buyers were happy to be told they were no risk securities and the ratings agencies' customers were the sellers. That the ratings agencies still exist after that meltdown is the single biggest mind blowing thing that happened after the crisis in my mind.
- rorykoehler 11y agoThat is pretty unbelievable. Definitely puts a different spin on it. Caveat emptor I guess. I find it unlikely that what happened wasn't at least partially orchestrated.
- Abraln 11y agoNever attribute to malice that which can be adequately explained by stupidity. A few lazy/greedy people in the wrong place who don't think long term can do a lot of unintentional damage.
- rorykoehler 11y agoIt isn't what happened that makes me think this rather what happened after.