it's a wonderful life revisited 2008

Excerpts from the article "The Rise and Fall of Finance and the End of the Society of Organizations" cited from the death of the corporation? on orgtheory.net:

The traditional model of banking is fairly simple: Banks gather deposits from savers, who are paid interest, and lend it to borrowers, who pay it back at a higher rate of interest.

In the movie It’s a Wonderful Life, banker George Bailey explains this model to his anxious depositors, who are causing a run on the bank: “No, but you . . . you’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house . . . right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?”

The best-known form of securitization is mortgage- backed bonds, in which hundreds or thousands of mortgage loans are pooled together and then divided into bonds that, by the law of large numbers, have more predictable and “safer” returns. This practice allows banks to free up funds for additional lending and generally lowers the cost of taking out a mortgage. Rather than relying on a local bank and its depositors to fund their home purchase, buyers can access funds from dispersed investors around the world via mortgage-backed securities.

A modern-day George Bailey might have a more difficult time explaining contemporary banking: “No, but you . . . you’re thinking of this place all wrong, as if I held your mortgage on my balance sheet. I sold your mortgage to Countrywide 10 minutes after we closed the deal, and they sold it along with 3,000 other mortgages to Merrill Lynch, which divided it into bonds that were bought by a Cayman Islands LLC, which bundled them together with other mortgage-backed bonds into a collateralized debt obligation that Citigroup sold to a Norwegian pension fund. Now what are you going to do? Stop making your payments and force those Norwegian retirees to go back to work?”