I am writing this in February and worried that it’s already going to be a crash that’s taken place by the time this goes up. I hope the crash doesn’t happen, but there’s good arguments to be made that we are headed for a bust in credit cards.
Anyway, if you don’t know about securitization, Wikipedia has a pretty extensive article. Basically, tho, it works like this.
Somebody owes me 100,000 at 5% interest, right? If they take 30 years to pay that back, I am going to make several times over my initial principle for the life of the loan, right?
OK, but, I have another option. I can sell you the right the first, say, fifth of all the revenue that comes in on that loan for the life of that loan. Say, you give me $25,000 now for the right to that revenue.
Now, I have $25K, cash in hand, now, and you have an investment that should get a nice return on that that $25K over the next thirty years.
If I sell all my revenue off in several slices, I could maybe even get all my principal back up front, some nice fees for setting up the deal and some more fees for making sure the money gets to my investors over time.
Sweet deal for everyone. Unless the guy who owes me the $100K stops paying.
They are selling off the revenue from credit cards.
Do you think there is any chance that lots of people will stop paying those?
Hmm? I wonder.
Panel 2. A meeting room. TV is in front of a chart labelled "Collateral Free," talking to several people in suits.
TV. As you can see, I project strong revenue growth in securitized credit card products in the near term.
Panel 3. An image of some donuts and coffee and other meeting fare.
BizWoman: The only people who don't have credit cards are poor people. We already nearly wrecked the company once overlending there.
BizGuy1: We aren't lending. We're just selling the cards' revenue.
BizWoman: I know, I know, but it's a market destined to tank. I give it ten months.
BizGuy2: The question is, how do these funds enhance Midvale?
BizGuy1: Of course, of course.
BizWoman: I don't think there will be a market for much longer.
TV: Well, give it some synergies, then.