Securitization, the risk business

Securitization is the process were you turn debt into securities(instruments such as bonds, options, shares ect)

How can this work?

The banks rather than lending cash based soley on their deposits, bundle up the mortage debt they are issuing into packages and sell them to other investors. In this way they can take the mortage debt off their books, and in this way they are able to lend more money and bigger mortages without being limited by their size.

Securitzation promised to spread the risk of the debts around the financial system to those more willing to take it. The problem was, however, a problem called disintermediation, or in plain english, by eliminating the realtionship between borrower and lender, there is a greater likelihood that  whoever who buy a package of debts will not appreciate the true risk they are taking on.

This disconnection was one of the main causes of the financial crisis of the 2000s.