Could ‘burrito loans’ trigger the next financial crash?

Could stoners craving their midnight munchies – say, a pizza or a burrito – be behind the next global financial meltdown? That’s the punchline to a joke currently doing the rounds on social media, best expressed as the ‘Collateralised Burrito Obligations’ meme. But what if there is some truth behind the joke?

This meme satirises the financial industry’s ability to hide bad debt from business partners, auditors and regulators. It was a similar form of bad debt – mostly unsecured loans for people with poor credit ratings, repackaged as a new financial product – that caused the 2008 global financial crisis (GFC). As the joke implies, fast-food financing might be the new financial equivalent of a dodgy home loan.

This story kicks off in October 2022, when food-delivery app Deliveroo signed a deal with ‘buy now, pay later’ company Klarna. In March this year, DoorDash, one of Deliveroo’s rivals, signed a similar deal with Klarna. Both Deliveroo and DoorDash offer instant gratification: food delivered to your door at any hour, often just a matter of minutes after clicking a few buttons on your phone.

Klarna and similar companies, like Afterpay, fulfil the instant-gratification itch, too. They allow customers to buy things they wouldn’t otherwise be able to afford, or at least don’t want to pay for immediately, by letting them pay in installments, weeks apart, or by deferring the full payment. For those with poor impulse control, Klarna and Deliveroo might sound like a dream team, but the financial dangers ought to be obvious.

Something else is happening, too. We now know that consumer debt accumulated through such services is being ‘securitised’, or turned into its own financial product. In October, Klarna confirmed that it had offloaded ‘most’ of its UK ‘buy now, pay later’ debt to hedge fund Elliott Investment Management. Klarna’s shifting of its debt comes after another private-equity group bought up to €40 billion in ‘buy now, pay later’ debt from PayPal. The debt being repackaged here is even trashier than the subprime mortgages swirling around Wall Street in the early 2000s. At least a house or car can be reclaimed by the lender. A burrito or pizza, once eaten, cannot.

So far, this hasn’t proven to be a good business model, even for the original lenders. It was confirmed last week that Klarna’s net losses doubled in the first quarter of the year. According to NBC, Klarna’s consumer-credit losses exceed $130million. This comes amid increasing concern that ‘buy now, pay later’ firms are driving a huge expansion in US consumer debt, which now sits at a record $18 trillion.

In a pivotal scene in The Big Short, which dramatises the 2008 GFC, Ryan Gosling plays a banker who has discovered that the ‘collateralised debt obligations’ (CDOs) held by banks and investment funds were backed by thin air. He wants to ‘short’ the market by creating his own security, which will rise in value if the others fall (which, as a banker who has seen what a CDO comprises, he knows they inevitably will).

Now that takeaway junk food is being bought on credit, and the credit is securitised, the parallels are obvious. ‘We are selling burrito-backed debt to willing buyers at the current fair market price’, explains one joke. Another meme, referencing the Gosling scene in The Big Short, explains:

‘The guacamole, double steak Chipotle burritos loans are your AAA loans. Rock solid. But there’s a bunch of junk-rated McChicken loans packed in here. And if those default at eight per cent, then the entire bond fails.’

Now, another crisis on the scale of 2008 is certainly unlikely. Unlike the loans that triggered the GFC, the debts accrued by Klarna are private and on a significantly smaller scale than the mortgage market. But what the ‘Collateralised Burrito Obligation’ joke reveals is that the financial industry seems to have learnt nothing from past mistakes.

Indeed, we live in a world in which capital markets are as hungry as ever for new opportunities. They love the creation of new financial instruments, backed by new asset classes, which can then be securitised. Recent attempts to engineer new asset classes include carbon trading, crypto coins and non-fungible tokens. Property freeholds have become an asset class, to the misery of leaseholders, as have song catalogues.

One of the more unusual new asset classes is speculative litigation, in which an investor takes a share of the spoils should a lawsuit be successful. This is ‘a fast-growing and compelling alternative asset class, with the market predicted to be worth $25.8 billion by 2030’, according to Hays Mews Capital.

Larry Fink, chief executive of BlackRock, the world’s largest asset manager, has even declared that public infrastructure should be treated as an asset class. Fink, who only last week met UK prime minister Keir Starmer in Downing Street, said his firm will loan governments the money to build essential infrastructure like ports, railways and power stations, bypassing nation states’ self-imposed spending limits and fiscal rules. This is in fact more expensive to the taxpayer than if a central bank raised the capital on bond markets, but it allows governments to carry on spending while crowing piously about their fiscal rectitude. (Ominously, UK business secretary Jonathan Reynolds said last year he hopes a partnership with Fink can ‘change the face of our United Kingdom’.)

The financial system is brilliantly creative at finding ways to make assets out of nothing, as well as new ways to nudge people with poor impulse control into buying what they crave in the moment – whether it is a home or a hamburger. But history tells us that this never ends well.

Andrew Orlowski is a weekly columnist at the Telegraph. Visit his website here. Follow him on X: @AndrewOrlowski.