12. The Doomsday Debt Machine
Rebranded as structured finance or structured credit, securitization increasingly involved layers of complex leverage repeatedly using the same debt as collateral. The new alphabet of debt that the process created was self-dealing raised to an art form. Debt now bought more debt, as the same underlying loan was leveraged and re-leveraged in a seemingly endless spiral of borrowing. At each stage, the banks charged fees and earned margins from the money they lent.
Alpha-Debt Soup
Investor demand for securitized debt decreased the cost of loans to the borrower, in turn bringing down investor returns. Bankers were forced constantly to create highly rated bonds with attractive returns, repackaging unsellable, rancid junk ...
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