Securitisation, including synthetic risk transfer, lets banks slice loan portfolios into ABS that often yield more than similarly rated securities. AAA-rated senior ABS can add 5‑25 bps; BB-rated mezzanine can add ~50 bps.

The extra yield partly reflects regulatory capital relief for originators, but also hidden risks. Tranching creates equity, mezzanine and senior layers; ratings assume underlying loan ratings are perfect, yet market spreads show Oracle and Space X trade like junk despite BBB ratings, making them attractive for ABS pools.

ABS embeds leverage: a $30 mn equity tranche can lose the entire investment from five 60 % defaults, a loss 33 times larger than a pro‑rata holder. Investors also face correlation, recovery‑rate and rating‑migration risk; in 2008 many AAA ABS were downgraded, turning mark‑to‑market losses into cash losses for collateralised holders such as AIG Financial Products.

In theory securitisation allocates risk efficiently, but in practice investors lack the tools to price these dangers, and the next crisis will teach them costly lessons.