Unbundling is usually a good idea. It gives the consumer a choice between price and quality. For instance, if you go to a store to buy apples would you prefer them in a single box at a single price or would you favour separate boxes with different prices for categories I, II and III? If you have an average size budget, can pick them on your own and are one of the first customers in the store you would certainly prefer them bundled because you could pick the top quality and pay the average price. On the contrary, if you were in a low or high budget and arrived later you would prefer them unbundled in three different boxes. The vendor would face the same dilemma when buying from the farmer.
In general, since most buyers cannot be the first to arrive at the shop, the unbundled solution is better for both buyers and sellers. Yet, one must question if this principle is valid in the case of perishable or dangerous products (e.g. risky financial products like sub-prime mortgages or auto loans).
Judging from the recent rebound in securitization it seems that the answer is yes. That is, the buyers (investors) prefer to pick between various categories of risk instead of buying a single security sold by the vendors (banks). However, an eventual resumption to pre-2008 levels might create a number of potential perils.
First, buyers (investors) may be poorly diversified due to a temptation to buy from the low priced fruit boxes (i.e. high yield tranches).
Second, because financial products are more difficult to classify than fruit, buyers (investors) need the opinion of outside experts (rating agencies) which, being procured and paid by the vendors (banks), are prone to taint their ratings.
Third, vendors (banks) can select perishable fruits to sell on outside stalls (sell loans to special purpose vehicles) and save store space (save on capital) that can be used to serve more profitable clients (provide more loans). Yet these extra profits tempt vendors (banks) to aggressively promote the sale of perishable fruits (lower quality loans).
Fourth, to meet this increase in demand vendors (banks) widen their supply network to lower quality farmers (loan originators).
Finally, and most importantly, vendors (banks) give up on buying unbundled fruit (loans) from farmers (loan originators) and the less scrupulous suppliers will begin mixing up rotten fruit (subprime borrowers) in the containers (loan portfolios).
Individually considered each one of these risks may not be enough to offset the benefits of the outside sale of unbundled fruits (securitized issues). However, in aggregate the risks may be compounded to the point of creating systemic risk. The greatest danger is that banks give up their key function of screening creditworthy borrowers to become commission-driven businesses.
So, just as planning regulations limit the portion of walkways that can be taken by outside stalls, banking supervisors should establish limits on how much debt banks can offload through securitization.
Such limits would not constitute market restricting policies. Instead, if designed properly, they would be an important market-perfecting tool for the development of market capitalism in the financial sector.