Re: Defining Securitization

Abstract

This Article fills a gap in commercial finance law. Despite the fact that “securitization” has become enormously important to capital markets — and is sometimes blamed for the credit crisis — we have no agreed understanding of the term. Various regulators and commentators have generated a wide range of definitions, but many are vague or omit crucial elements. Perhaps most surprising, the Dodd-Frank financial services reform — the most aggressive attempt yet to regulate securitization — does not define it at all. How can we regulate something without a shared conception of what it is?

This Article assesses data on the performance and function of securitizations to develop a normative definition of the term based on its essential elements (its inputs, structure, and outputs) and its legitimate social and economic functions, namely providing a more effective means of connecting buyers and sellers of capital than traditional methods of financing, such as bank lending or issuing shares of stock.

The definition offered here distinguishes “true” securitizations from other transactions, such as collateralized debt obligations and Enron’s structured financings, which may satisfy current legal definitions of a securitization, but which in fact lack one or more essential elements, and which therefore fail to perform the important social and economic functions captured by the normative definition advanced here.

The Article concludes by summarizing the benefits of a better definition of securitization.

Keywords: securitization, structured finance, commercial finance, credit crisis, Dodd-Frank, credit

JEL Classification: G10, G33