Asset Securitization: The Unsecured Creditor\u27s Perspective

The Article examines assumptions behind literature that uncritically assumes that securitization transactions are necessarily efficient, finding that these assumptions are unwarranted. The Article is the first to view securitization transactions from an unsecured creditor’s perspective, and concludes that from such a perspective, securitization is not the panacea its proponents claim it to be. The article first defines structured finance and describes the nature of the current market for asset-backed securities. Then, it outlines the benefits that securitization provides to originators and other transaction participants. With that background, it turns to the debate on the efficiency of secured transactions, applies the substance of this debate to structured finance transactions, and then examines the equitable challenges that may be made to avoid securitized asset transfers. The Article sounds a cautionary note concerning how securitization results in a general increase in the availability of credit beyond what may be called for by the common welfare. It also questions the widespread assumption that unsecured creditors have knowingly consented to all possible consequences of the securitization transactions in which they participate. Finally, it demonstrates how the rapid expansion of the securitization market has subjected transaction participants and third parties to mounting uncertainty. The article predicts that further research will support the conclusion that securitization is inefficient. The securitization structure is designed to divert value away from the originator, in the absence of any compensating controls on either the consideration received in exchange for the asset sale, or the debtor’s behavior The originator enjoys the benefits of this distributional inefficiency, at the expense of its unsecured creditors. The article predicts that courts, in the name of equity, will more carefully examine the structure of securitized transactions in connection with their supervision of an originator’s bankruptcy case. When the effects of these transactions are realized, courts and legislatures will take steps to address the distributional inefficiency of these transactions. Given the array of possible widespread and negative consequences of securitization, further exploration of the effects of securitization is urgent. Securitization is an innovation that, like many Wall Street innovations, may have drastically negative consequence