Thread by @doctorow

@About_Medicine Think of a loan. You ask me for a $10,000 loan to buy a car, and you offer the car as collateral. You pay some upfront processing fees, a downpayment, and a monthly fee. If you default, I can repo the car. That's a normal loan.

@About_Medicine But now I turn around and sell someone else the right to collect your payments from the loan. Say you're paying $200/month, and with interest, you will spend 8 years paying it back. If you miss a payment, you'll get hit with penalties.

@About_Medicine If you default on the loan - miss three payments in a row, say - the car gets repoed. The repo man wants paying, and the car has depreciated, so there's a chance that whoever buys that loan won't see the full amount.

@About_Medicine They make a call - maybe they say that they'll buy that $10,000 loan from me for $11,000, betting that you'll eventually cough up $14,000. They also buy some insurance on that loan to protect against your default, lowering their total expected return to $13,500.

@About_Medicine That's a securitized loan. I - the loan originator - bear no real risk, because as soon as I originate the loan, I package it up as a "security" (a bond) and sell it to someone else who has a chunk of money and wants to get a steady stream of payments.

@About_Medicine In practice, securitized loans are more complicated than this. I might originate 100 loans and package 1% of each into 100 bonds, each of which is entitled to 1% of each borrower's payments.

@About_Medicine These are, theoretically, less risky to buyers, because while YOU might default on your loan, the other 99 people whose loans make up each bond are unlikely to all default, too.

@About_Medicine These bonds can get more complicated still. For example, we might have different kinds of risk and return. Some buyers might buy the right to get paid first every month when the payments come in. Those bonds cost more, but they have steadier returns.

@About_Medicine Other buyers might pay less for a bond that gets paid LAST - that is, they only get paid if ALL the borrowers whose loans are packaged in the bond make their payment that might. It's riskier, but cheaper, so the potential return is higher.

@About_Medicine More complex still: throw in those insurance policies I mentioned (these can be called "swaps"). Bond issuers and traders devise complex equations to balance different kinds of risk and insurance policies to produce "hedged risk" that is - theoretically - unlikely to go bust.

@About_Medicine There are HEAPS of problems with this. First, because loan originators don't have any skin in the game - they offload the loans onto bond-purchasers straightaway - they are incentivized to issue loans that they KNOW won't be paid back.

@About_Medicine Remember, originators make money by collecting fees from borrowers (I loan you $10,000 but the minute you sign the paper, it's actually $10,500 because you owe me $500 in loan-fees) and from investors/bond packagers who buy the loans from them.

@About_Medicine They're incentivized to trick people into borrowing more money than they can afford - to hide all kinds of bullshit in the loan (like low "teaser rates" that blow up to 100X in a couple years) and help fake the paperwork.

@About_Medicine The bond sellers are playing a hideously complex shell-game too: packaging up debt with different levels of "seniority" (who gets paid first) and with different kinds of swaps that pay off at different rates

@About_Medicine What's more, the loans themselves are all too often "correlated" - meaning that the risks that apply to one borrower actually apply to ALL of them (for example, bonds based on retail rents in malls, which all collapse when malls themselves fade)

@About_Medicine And the equations used to calculate the hedges are just...bullshit. They just don't work. Some don't work worse than others, but in practice, they're all garbage. And the only way to find out how bad they are is to wait for a crash and see how badly you're screwed.

@About_Medicine There are other kinds of securitization, not based on loans - for example, Wall Street investors are now the predominant landlord in many states. Giant funds have bought EVERY single-family dwelling that hit the market, paying above-market rates to outbid would-be homeowners

@About_Medicine They package bonds based on the stream of payments from the rents. These bonds also have risks (missed payments, housefires, vacancies), and different grades of investment, and insurance policies - all the places where mischief can hide.

@About_Medicine Bonds' riskiness is rated by "rating agencies" like Standard & Poors. In general, they're hopelessly conflicted - they get paid by the companies whose bonds they rate, and if they give those bonds bad ratings, they lose the business.

@About_Medicine Even so, ratings agencies aren't completely captured, nor are the analysts who make buy/sell recommendations for big investment firms that buy these bonds. So bond issuers do everything they can to show that the payments will come in regularly.

@About_Medicine In the case of Wall Street landlords, that means evicting the shit out of people. 10 years ago, evictions were effectively unheard of in the US. Today, it's completely commonplace (even during covid, when there was a notional eviction moratorium).

@About_Medicine If you're thinking of buying a bond based on rental payments, the fact that tenants who miss a payment can be immediately evicted gives you some confidence that the bond will perform well - there won't be payment interruptions driven by people who get in arrears.

@About_Medicine Other "innovations" that Wall Street landlords make to convince the market to buy their bonds: leaving homes dangerously undermaintained, gouging tenants on hidden fees, taking bribes from cable/ISP companies for the exclusive right to gouge their tenants, etc.

@About_Medicine In many large and mid-sized cities, the capital markets have opened the floodgates for this: it is literally impossible for a normal would-be homeowner to save enough money to get a downpayment that outbids a would-be Wall Street landlord.

@About_Medicine It's effectively the end of home-ownership. The game of musical chairs is over and all the chairs are taken by huge PE and hedge-funds, who plan to charge more for your rent than you would ever have paid for your mortgage.

@About_Medicine You will not have any equity, your home will have exposed live wires, inadequate plumbing and black mold - and if you miss a single payment, you'll be hit with massive fees AND evicted AND your credit will be trashed so you end up in an even worse place next time.

@About_Medicine The profits generated by your rents will go to fund expansion of securitization into other domains - the subprime auto loan market is worth trillions today - and to abolish consumer and tenant protections (everything from the right to sue to the right to rent control).

@About_Medicine Securitization values assets - homes, factories, even copyrights to popular music - only as the source of streams of payments that gradually erode all productive assets and businesses as their value is extracted until they're ruined.

@About_Medicine Securitization is being used to gut emergency rooms, nursing homes, farms - it's the abolition of productive prosperity in favor of catastrophic rent-extraction.