Politicians continue to criticize the banks for not lending money. But what they fail to understand (or don’t want the average person to understand), is that “Real” banks do not lend money. Real banks securitize. And with most securitization markets still slow, or dead, is it any wonder lending has slowed?

As many bankers long ago realized, pure lending is a boring, and a very limited business. Quite, simply you make money on the interest spread, and the size of the loan has to be related in a very strict way to the underlying business. For example, it’s simply not possible to lend one entity billions and billions of dollars, if the company has a mere $10 million in sales. In other words, traditional lending is constrained by growth in the production economy. It’s hard to get outrageously rich by lending money in the traditional way. There are strict physical and mathematical boundaries.

Enter securitization.

The Holy Grail of Securitization and the Potential Unlimited Wealth it Creates

If a bank securitizes a loan, however, then it can create an unlimited amount of capital off of even a tiny loan.

Since the loan is now security, like any other, it can fluctuate and therefore many people will be enticed into trading the security. This generates trading fees, and commissions. Even better, you can hire all sorts of smart people to develop valuation models for these imaginary securities, assigning them basically any price you choose and thereby generating astronomical asset management fees, and capital gains off of the securities you trade.

More importantly, with the magic of securitization, you can create an almost infinite amount of securities. There’s a security that represents the loan, there’s a security which represents the security which represents the loan, there’s a security which represents a bunch of similar securities, there’s insurance on the security, and so on ad infinitum. An infinite amount of securities adds more trading fees, commissions, asset management fees, capital gains, legal fees, etc.

In sum, with securitization the only limit on capital formation is your imagination. The underlying growth or size of the production economy, which the security was originally supposed to represent, bears no relationship to the size and growth of all the securities that are created. There are no physical or mathematical barriers to growth.

Securitization is therefore the path to outrageous wealth. It’s the holy grail of finance and the entire economy that lives off of finance, e.g. law firms, real estate, etc.

Is it any wonder that banks are not lending?

Without a sustainable revival in all security markets, lending will not resume in a meaningful way.