Bundled bad loans hid their risks and true value from investors

Evidence

One is that they had developed a new way of profiting from loaning to Jack without depending on Jack’s ability or willingness to repay his loan. The trick was to lend to Jack, then immediately splice his loan into tiny pieces of debt and sell these pieces on – inside multiple, very complex financial ‘products’ – to unsuspecting buyers far away, who would themselves repackage and sell them on to someone else, and so on. This practice lulled Western bankers into a false sense of safety: Jack’s loan was no longer their problem. Even if Jack defaulted, his loan had been cut into so many tiny pieces that no single banker would bear the brunt of it. The risk had been shared and dispersed and thus minimised, they believed. — Yanis Varoufakis, Technofeudalism, 181 (#complicates, via linked claim)

Categorization

• XREF: connects to: Financial crisis instruments circulated far above the value of their underlying assets — Max Haiven, Cultures of Financialization, 64; Banks bundled sub-prime mortgages into tranches and resold them as securities — Max Haiven, Cultures of Financialization, 154; Opaque subprime mortgages spread because banks had to match fly-by-night lenders to survive — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 349 (+8 more)

Broader Connections

• Securitization let bankers profit while dispersing loan default risk to distant buyers. #complicates (0.82) — Yanis Varoufakis, Technofeudalism, 181