15 years on from The Big Short, securitisation is back
The Big Short hit bookshelves 15 years ago, but the era of securitisation it depicts is far from over — in fact, it’s booming, says Tim Focas
Fifteen years ago this month, Michael Lewis’s The Big Short hit bookshelves, exposing how Wall Street’s reckless financial engineering fuelled the 2008 financial crisis. It was a cautionary tale to be later depicted in a star-studded film — except high finance never listens to the Christian Bales or Brad Pitts of this world. Instead, it adapts.
Securitisation, the process of bundling loans into tradeable assets, was at the heart of the 2008 meltdown. Back then, mortgage-backed securities (MBS) and their Frankenstein-like cousins, collateralised debt obligations (CDOs), imploded under the weight of subprime debt. The ensuing collapse wiped trillions of dollars from markets, shattered economies, and led to sweeping reforms. In the years since, securitisation has well and truly diversified. Auto loans, student debt, corporate loans, commercial real estate, even farming equipment and music royalties, are now being packaged into complex financial instruments. The global securitisation market is booming once again — crossing the $11 trillion mark last year.
Stricter lending standards and better risk assessment models mean the same problems that fuelled the subprime crisis aren’t as prevalent, though. Also, unlike in 2008, today’s risk models can be powered by AI, making them more sophisticated. While no model is perfect, these advancements allow for real-time risk assessment and more accurate predictions of borrower behaviour. This added transparency has the potential to make markets safer, reducing the blind speculation that was front and centre of the last crisis.
Additionally, blockchain technology is now emerging as a potential boost to securitisation. By enhancing transparency and streamlining transaction processes, blockchain can mitigate some of the issues that led to the crisis. Smart contracts could enforce lending standards and ensure proper risk disclosures, making it harder for bad actors to hide toxic assets.
The next financial crisis?
But before we pop the champagne, let’s remember that financial crises are rarely caused by exactly the same thing twice. Contrary to the popular cliché, history rarely repeats itself. But it can rhyme. Risk simply morphs, hides and emerges elsewhere. There are still legitimate concerns around instruments such as collateralised loan obligations (CLOs) — bundles of corporate debt, often of questionable quality. Sound familiar? That’s because they’re similar to the corporate cousin of the pre-2008 CDOs. Today, higher interest rates mean these CLOs are under strain. If enough companies start defaulting, the dominoes could fall much like they did in 2008. Despite these echoes of the past, securitisation has become a powerful financial tool that, when used responsibly, can expand access to credit and fuel economic growth. Stricter regulations, improved risk assessment, and tech advancements are shaping a new, more resilient era of structured finance.
Investors are now more attuned to systemic risks, and while greed may always be a factor, the financial industry has more tools than ever to prevent another catastrophe. If Wall Street can balance innovation with caution, securitisation can continue evolving into a safer, more sustainable engine of economic progress for the real economy. Fifteen years after The Big Short, the playbook may not have completely changed, but with the right checks and balances, the next chapter of securitisation doesn’t have to end in crisis. On a contrary, it could be the springboard for much needed economic growth.
Tim Focas is head of capital markets at Aspectus Group