Marketplace Whiteboard: How credit cards become asset-backed bonds

[Joanne98]

Mortgages aren't the only financial instruments that get turned into securities. Marketplace Senior Editor Paddy Hirsch explains how companies make money by buying credit card debt and bundling it.

VIDEO AT LINK

http://marketplace.publicradio.org/videos/whiteboard/securitization.shtml

[geckosfeet]

1. Thanks for the link to that page!! When I have time I am going to watch them all!

[Pale Blue Dot]

2. This is off-topic, Joanne, but I wanted to say thank you for posting all of these articles.

Is it getting just as frustrating for you as it is for me that people still aren't facing reality?

[Joanne98]

4. That's Finnfan. I know I'm getting frustrated. People have to start paying attention.

It's not that hard to figure out. I'm telling everyone who will listen.

[Hugin]

3. I'm sure the RICO... Uh, *coff* FICO scores play into this heavily.

Just as the BBB vs AAA rated tranches were gamed, I can't see how the same thing wasn't done with
FICO... Only, in this case it was people being used instead of bonds and mortgages.

[Shishio]

5. Something seems really wrong about that.

I will have to think over this a while. But initially it would seem to me that their gig is up since the economy is taking a nose dive, so there would be a lot less foaming from the top.

I think i'm just kinda miffed by this practice because it seems like profiting from others misfortune.

[HamdenRice]

6. I helped design some of my former firm's first credit card receivable securities

This was over ten years ago, and I've been out of the financial sector for a long time, and was in the non-profit sector ever after. But when my former firm got into securitization in a big way, I was assigned to design a "credit card receivable asset backed security."

They are generally much more complex than mortgage backed securities. I was pretty amazed that they worked at all, because they didn't seem to make sense in terms of the Bankruptcy Code because the card company had an obligation to "take back" non-performing credit card accounts, which screwed up the "true sale" requirements. Although I've been out of the loop for a while, I would guess the "take back" requirements are really fucking with the card companies and banks as the economy tanks and people are defaulting and being late on card payments, going bankrupt etc. I'd be really curious to see how things evolved after I left. I read recently that basically no one can sell any of these securities at this point.

One of the (many) dirty little secrets of the entire exotic security creation business is that the complexity arises because everyone is allowed to copy everyone else's work, which means that the documents that create the securities get every more complex. There is no copyright on a contract, and contracts have to be disclosed to the public through the SEC. So if you get assigned to create, say, a credit card receivable security, you just go to the SEC website, download some other company's documents, and start tinkering away. If their document got blessed by the SEC and IRS, then you can assume yours will probably get blessed to. The documents just grow and grow as companies keep building on each other's examples. I had the distinct impression that no one quite understood what the documents actually said.