What is “Securitisation” and why is it relevant to lawyers and bankers?

Question

I have a bit of an idea of what it includes and some of its features, but if someone asked me what it meant I’d have no answer for them.

*Edit
Much appreciated guys. This was very helpful!

In: Economics

Answer 1

Imagine you have a piggy bank, but instead of filling it with coins, you fill it with promises from your friends that they’ll give you some of their allowance money. Each promise is based on the fact they get an allowance every week, so you’re pretty sure you’ll get some money from them. Now, imagine you have a lot of these promises, but you want to buy a big toy now, and you don’t want to wait to collect all that allowance money over time.

Here’s what you do: You take all these promises, put them together in a big box, and then you tell other people, “Hey, if you give me money for the big toy I want now, I’ll share the allowance money from these promises with you over time.” People who give you money are now partly owning the promises in your box. This process of putting all the promises together and getting money from others by promising them a share of the future allowances is kind of like what “securitization” is.

Now, why do lawyers and bankers care so much about this?

Lawyers: They’re like the rule-keepers or referees. When you’re putting all these promises in a box and then telling people they can get some of the allowance money, there are a lot of rules to follow. These rules make sure everything is fair and that no one is lying about the promises they have. Lawyers help write the rules for the box of promises (the contracts) and make sure that when people trade money for promises, everyone is doing it right and fairly.

Bankers: They’re like the experts in knowing which promises are good to put in the box and how to find people who want to buy into it. They help collect the promises, figure out how much money they’re probably going to make, and then find people who want to share in those promises. They’re interested because they can make money from setting up the box of promises and from managing the money that comes in and out.