Securitization allows banks to repackage and resell debt, famously explained by actress Margot Robbie in a bubble bath in the film “The Big Short.”
The European Union wants to breathe new life into a financial practice most commonly associated with causing the 2008 financial crisis as it tries to jump-start banks’ lending to the economy.
On Tuesday, the European Commission will publish a package of legislation aiming to revive the industry of “securitization,” after strict postcrisis laws almost stamped out the use of the practice in the bloc.
Securitization is the practice where banks repackage and resell debt, famously explained by actress Margot Robbie in a bubble bath in the film “The Big Short.” The engineering allows banks to move some assets off their balance sheets, giving them more space to extend new loans.
Securitization is a tool and only part of why the markets collapsed. The reduction of the problem to securitization fails to recognize the bad loans and ineffective ratings given to collateralized securities, and the hidden tranches not disclosed to investors.
If your mortgage/loan market isn’t fraudulent then you don’t have underlying assets with impossibly high risk. If the ratings agencies properly rate securities then investors know what the risk is. And if the government regulates the issuance of these securities through prospectuses (which they do now) then investors will know what’s in them.
Yeah, I thought the big problem was mixing good and bad morrgages together to make the securities look like a higher quality mixed with somewhat unrestrained lending. So you had securities with high ratings containing junk mortgages passed around as a financial asset. When mortgages started to default, all those “high quality” assets began to sour.
Essentially securities are just an asset vehicle and have no intrinsic issues, it was how mortgage securities were being packaged that was an issue.
Bad mortgages, bad ratings agencies, and definitely bad issuers.
The markets are still fraudulent. The fines are really just a cost of doing business.
If, if, if lol
Makes more sense to control the factors that play into the investment risk through regulation instead of shutting down a useful tool for investors.
Or you can just say edgy bullshit.
It wasn’t edgy bullshit? I agree with you. I’m just saying there are a lot of “ifs” we have to depend on here. And given less than 20 years ago nations across the world did not give a shit and we saw literally all of those ifs not happening, I feel like my dig at regulatory agencies is very much warranted
Didn’t read like that to me initially but if that’s what you meant by it then my bad.
No “if” about it, that’s what I meant!
Why/how is it a useful tool?
It also assumes that businesses won’t do anything they think they can get away with if they think it will make a buck. Given just how many times that has happened, saying regulators will catch any attempts to sidestep those rules is fairly optimistic, in my opinion.
It’s the opposite. Regulation assumes business will do anything they think they can get away with if it will make a buck. A lack of regulation assumes companies won’t do those things.
People think “regulators” allowed this to happen, but actually as “regulators” are agencies established by the government that act upon law. At the time of the 2008 financial crash there were limited or few laws (i.e. regulations) on derivatives. It’s law makers that refused to act.
It seems people are largely unaware of the myriad of regulatory changes that came after 2008 and bernie that applied to derivatives and customer/investor protection in general.
The same set of factors that created 2008 is no longer applicable as the environment has changed. There will surely be new regulatory weaknesses that need to be addressed
Everyone should meet someone that worked in the mortgage industry pre 2008. The number of things that were not only allowed, but perfectly legal were absurd.
A lack of regulations can mean “anything goes,” as in unregulated, or “nothing of this sort is acceptable,” as in illegal. Checking if the illegal thing has been done is often easier than checking if the regulated thing has been done correctly, so making things that are easily abused illegal makes sense if the consequences of breaking those regulations, such as a global depression, are too great.
Financial regulations are written in law, and thus illegal to violate.
I see you’re focusing on semantics, and not the issues raised, which i can only assume is because you have no valid response to the issues and not the wording.
It’s not semantics when what you’re saying doesn’t make sense and is contradictory to reality.
Actually, I am not sure what issue you’re even raising because of how poorly you communicated.
I thought about not responding at all, tbh, but then thought that it’s clear you think there is a some sort of material difference between regulation and law.
pointedly incorrect. and thats my point that checking the illegal thing is the same thing as checking the regulated thing. but you assert there is some difference.
their point is unambiguous to me. it is that it is more complex to check if something was done according to a regulation, compared to checking if it was done at all.
Then allow me to rephrase. Checking if the forbidden thing has been done is often easier than checking if the thing which is allowed, but with many caveats and conditions, has been done correctly.
Thanks for rephrasing. The thing is with regulation when there’s a caveat/condition it’s forbidden not just a correctness check. I think the underlying sentiment is correct, a blanket ban on something is surely easier to enforce than a nuanced approach.
But that’s my whole point since the first post. A blanket ban on securitization just locks away the whole tool when really we should just work to implement effective regulation.
The real problem is that law and subsequent regulation lags behind innovation. Like AI or crypto would be an example. So back in 2008 there was a lot of lag on securitization as an innovation. Subsequent to the crisis, in 2025 market reg is well established on securitization products and derivatives.
That’s kinda like saying that the water in the ocean is part of why fish are able to swim.
No that’s a bad analogy because no one is arguing the water should be taken away because of a misguided understanding that it’s inherently dangerous.
The actual analogy is “People have died in water, so no one should swim anymore”
But that’s obviously absurd. You hire life guards, teach people to swim, get a life vest, life savers, etc
No, it’s like saying fire extinguishers are bad because someone replaced the real ones with gag ones in a building that burned down.