A fundamental insight about finance: Suppose the bank has $250k and you want to buy a house costing that. The bank, by convincing you to take out a mortgage, ends the day *materially* better off than it started, because your promise to repay is worth *a lot* more than $250k.
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This doesn’t *feel* like something that didn’t exist previously now exists, but manufacturing happened regardless. The genius of securitization, and it is genius, is that it is inefficient for a manufacturer of mortgages to own all the mortgages. Toyota doesn’t own all cars.
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“Why inefficient?” Well there are people whose future needs for cash flows are shaped in such a way that they’re happier to tie up more money now in return for predictably receiving a modest rate of interest than the bank is. (Pension funds, insurance companies, etc)
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They want the mortgage more than the bank does, in same way that you want the car more than Toyota does, and so the market “should” arrange for the mortgage to move over to their books and the car to move to your garage.
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This logic is almost certain to hit SaaS companies eventually, by the way. It’s not obvious that Dropbox is the best owner of the stream of cash flows from me to Dropbox.
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Replying to @patio11
I don’t understand this. How would Dropbox sell its cashflow; and how is that different from issuing ordinary stock securities and providing dividends?
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Replying to @vfm9054
You can imagine an instrument which says “Here is a sample of 1,000 FooCorp accounts of the August 2019 vintage. FooCorp will continue servicing these accounts indefinitely, collecting a 20% servicing fee, and remit all other payments on a monthly basis to the holder of this.”
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Replying to @patio11
I’m not trying to be stupid, but why would it be better for FooCorp to get a check now and 20% of their revenue as opposed to just keeping all their revenue, and if they need capital borrowing it? What need would such an instrument fill?
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That’s a reasonable question! The answer is that since the contract has a value under GAAP of zero but a very non-zero economic value and the company produces many more of them every month, borrowing anything like the amount of value created would be impossible conventionally.
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