Securitization Post-Enron

Abstract

This article has two objectives: To explain the threats to securitization in the post-Enron economic and regulatory climate, and to explore, more normatively, whether the threats are justified.

Because securitization uses special-purpose vehicles and facilitates off-balance sheet financing, it has been tainted by Enron's abuses, which relied heavily on special-purpose entities and off-balance sheet financing. There are, however, very fundamental differences between Enron's deals and securitization transactions. Securitization is normally used by companies to obtain lower-cost financing through removal of intermediaries between the company and the ultimate source of funds, the capital markets. This is markedly different from Enron's use of special-purpose vehicles for mere balance-sheet manipulation. Even where securitization is used to keep debt off a company's balance sheet, it unambiguously transfers risk from the company to third parties.

Perhaps the most fundamental difference, however, turns on conflicts of interest. The complexities of the Enron deals, and perhaps of certain securitization transactions, make it difficult for corporate directors and shareholders under existing corporate-law procedures to knowledgeably approve the deals. In the face of complexity, they also must rely on the business judgment of the managers that structure the deals - a reliance that may be misplaced where, as in Enron, those managers have significant conflicts of interest. In contrast, management in securitization transactions have been free of material conflicts. The absence of material conflicts may well explain why actual securitization transactions have not raised any of the excesses found in Enron or other corporate scandals.

The absence of excesses does not, however, mean that securitization is desirable. I therefore next examine whether securitization is efficient and fair, and conclude it is both. Securitization enables companies to obtain low-cost capital market financing, and provides liquidity for otherwise viable companies that need but cannot otherwise obtain financing. And it does this without prejudicing any third-parties, such as unsecured creditors. Moreover, the availability of securitization as a financing option actually facilitates bankruptcy rehabilitation policy.