Securitization Doesn’t work

That is, only 18% of U.S. securitization – primarily auto loans and credit card debt – are free from government guarantees! Even at the peak of private-sector securitization in mid-2007 – before the financial crisis grew intense – the government-backed share exceeded 60%.

To put these numbers into perspective, we can look at another part of the U.S. financial system: insured bank deposits. You may be surprised to learn that (again, as of end-March 2014) only $6,094 billion out of $9,922 billion in bank deposits are insured. That is, 61% of bank deposits are government backed (see chart below) versus 82% of securitizations.

This is from here via Arnold Kling.

You can interpret this to mean that securitization does not ‘work’ in the sense that both buyer and seller are better off for having done the deal, else why need the guarantee? You might argue that the market would exist without the guarantee but who can say. If investors are so interested in these payment streams why not just invest on a bank?

I see securitization as inviting investors with very little domain knowledge to take massive risks in a mature market. Is that a good idea? Professional investors know financial markets are always looking for (and finding) suckers. If you want them to do something new, they need a deal they can’t refuse. Why would you give a new entrant such a deal over existing players?

A great question. Without a good answer, securitization is a bad idea.

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