A Light-Hearted Look At Securitization

Over the past few years, everything has been securitized. All kinds of mortgages, car loans and credit card debt was being sliced and diced, packaged and sold around the world to investors eager to leverage and increase their returns.

So, how does securitization work?

For a light-hearted look at the subject, one reader sent in the following story to demonstrate the awesome power of the securitization process:

Young Bob moved to the Mid-West and bought a Donkey from a farmer for $100.00. The farmer agreed to deliver the Donkey the next day.

The next day he drove up and said, “Sorry son, but I have some bad news, the donkey died.”

Bob replied, “Well, then just give me my money back.” The farmer said, “Can’t do that. I went and spent it already.” Bob said, “Ok, then, just bring me the dead donkey.”

The farmer asked, “What you going to do with him?” Bob said, “I’m going to raffle him off.”

The farmer said, “You can’t raffle off a dead donkey!” Bob said, “Sure I can. Watch me. I just won’t tell anybody he’s dead.”

A month later, the farmer met up with Bob and asked, “What happened with that dead donkey?” Bob said, “I raffled him off. I sold 500 tickets at two dollars a piece and made a profit of $998.00.”

The farmer said, “Didn’t anyone complain?” Bob said, “Just the guy who won. So I gave him his $2 back.”

Bob now works for Goldman Sachs.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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