Jim Barksdale once said, “Gentlemen, there’s only two ways I know of to make money: bundling and unbundling.”
Unbundling means separating functions like how streaming services broke different content into Netflix, Disney+, Peacock, etc. And bundling is putting them back together in an easily accessible User Interface, like Roku or AppleTV.
This is true in a lot of fields, including finance. This made me think of other ways to simplify how to look at finance. Finance can also make money in intermediation and disintermediation. This is a fancy way of saying adding middlemen and taking out middlemen.
If you remove a middleman, the client will pay you for saving money. If you can convince the client that you can add value, you can insert yourself as a middleman, at least until a competitor convinces the client that you're unnecessary.
Another way to look at finance is as either securization or leverage.
Leverage is borrowing against an asset.
Securitization is taking raw cashflows and turning them into regular, predictable cashflows.
The point of leverage is to get assymetric returns. You're using other people's money to make an investment. The people you're borrowing from get paid a smaller amount and take less risk.
Securization makes leverage easier because lenders are more likely to lend their money if the returns are more consistent. Securization also helps with regulations because regulators understand predictable cashflows better.
Securization is also preferred for risk management - parties with different risk profiles can buy different types of risk. Securitized products can customize duration, volatility, etc.
Securitization also helps with trading because it makes the cashflows more legible.