Collateral Worthiness in The Hierarchy of Finance in a Capitalist Economy

This is part two of an ongoing premium series. Find the introduction to the series here and part one here. 

Since the last piece on the IOU was an “instrument” piece, this piece will be a “criteria” piece. 

Before getting to the criteria we’re dealing with today, it's worth saying a little bit more about what “criteria” means (in this context.) This  series has a tripartite structure because finance—at the most abstract level—is tripartite. Each of these three parts have to be understood in their own terms. An entity issues a financial instrument—or could issue a financial instrument—in order to access financing. Various potential financiers assess whether that financial instrument is worth purchasing and at what monetary price. This “assessment” is based on various potential criteria. Finally, both the issuer of the instrument and the purchaser (or “acceptor”) of the instrument have to have some kind of organizational form and what that organizational form is influences the hierarchy of finance. Hence why this series is divided up by instrument, criteria and organizational form.  

Which brings us to Collateral worthiness. Collateral worthiness may seem like a strange place to begin—wouldn’t credit worthiness be the more obvious place to start? Indeed it is, but I prefer to start with collateral worthiness because (believe it or not!) I think it's a simpler concept. As we’ll discuss in the next “criteria” piece, all sorts of complicated judgments and motivations go into the assessment of “credit worthiness”. By comparison, collateral is simpler. In basic terms, “collateral worthiness” is the assessment of the qualities of some kind of property (be it financial, real estate, furniture, or even sneakers) to be handed over to the lender for the duration of a loan. The “risk” of lack of repayment is in turn supposed to be covered by the “value” of the pledged property.