I just can’t wrap my mind around this.
In: 8
I loan you $100 million dollars and expect to be paid back $125 million in 5 years. You’re a big commercial bank so you own thousands of mortgages for people’s homes. As collateral for this big loan I’m giving you, you put up some of the mortgages, so that if you fail to pay me back your loan, you give up the mortgages and I get to keep them. So this loan is “backed” by mortgages.
So now (after giving you $100 million) I’ve got an IOU that says you owe me $125 million or a thousand mortgages. If I wanted to, I can sell this IOU to whoever wants to buy it from me. So instead of owing me, you’ll owe *them* $125 million or a thousand mortgages. This little IOU is a security, it’s a tradeable financial product that can be bought or sold.
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