Confused about the transaction at the heart of the current economic crisis? No problem. CFO.com asked a high-school junior to explain securitization. In exchange (in what seemed like a good deal for both parties), we arranged for him to skip his Spanish tutoring session. Here's what he sent us:
Wikipedia calls securitization a “structured finance process in which assets, receivables, or financial instruments are acquired, classified into pools, and offered as collateral for third-party investment. Now, I don’t know the meaning of the majority of the terms used in that sentence, but it certainly seems that if you’re going to acquire assets, receivables, or financial instruments, you might as well classify them into pools, right? Smaller, more eco-friendly bins or Tupperware containers may be more practical and inexpensive, but nothing spells high-end finance better than a full-sized swimming pool devoted entirely to assets, receivables, and financial instruments.
I would advise that the pools not be filled with the water that we’ve come to assume would fill a pool. No one wants a soggy asset. Also, the walls and floors of a pool tend to be made of concrete. Now, I don’t know about you, but I wouldn’t want to throw my instruments — financial or otherwise — eight feet down onto a concrete floor. Instruments are fragile. If they weren’t fragile, they wouldn’t be instruments. They’d be tools.
The problem with securitization, of course, is that classifying your assets, receivables, and financial instruments into pools is inefficient. If you’re going to offer your assets, receivables, and financial instruments as collateral for third-party investment, how do plan on transport it once it’s been offered? Pools go in the ground. You have to dig a gigantic hole to put them in the ground. So, after all that work, you’re just going to dig them back up? Fine, go ahead. I’m sure you could use the exercise.
But think about this. If you somehow manage to get your pools out of the ground, how are you going to transport them? A truck would take up three lanes of traffic. And don’t even consider taking them overseas. There’s no way you’ll be able to fit a pool on a plane. Maybe on a boat, but who uses boats anymore?
Whoever came up with this ridiculous structured finance process should seriously consider switching to a career in “Sea World” architecture.
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