Sense and Sensibility in Securitization: A Prudent Legal Structure and a Fanciful Critique

Abstract:     
This article responds to a recent critique that the securitization of receivables is a legally shaky financial product that survives only because it is too big to fail. This critique argues that securitization's success in avoiding the costs that the Bankruptcy Code imposes on secured credit, including a bankruptcy trustee's ability to use the cash collateral from the receivables, is a type of fraud that hinders or delays the creditors of the originators of receivables. The critique, however, fails. The cases cited for the author's fraud analysis do not support its thesis. Further, the critique fails to demonstrate that securitization's avoidance of the "Bankruptcy Tax" on secured credit harms the creditors of an originator. The critique also does not refute the strong doctrinal foundation of securitization that combines the form and substance of two long recognized legal devices-(1) a true sale of property to a buyer (2) that is a separate legal entity.

Keywords: securitization, secured credit, bankruptcy, fraudulent transfer, substantive consolidation

JEL Classifications: K11, K29, K39

Accepted Paper Series