securitization, special-purpose entities, SPEs, financial markets
Banking and Finance | Law
In Re: Defining Securitization, Professor Jonathan Lipson attempts to define a “true” securitization transaction, ultimately characterizing it as “a purchase of primary payment rights by a special purpose entity that (1) legally isolates such payment rights from a bankruptcy (or similar insolvency) estate of the originator, and (2) results, directly or indirectly, in the issuance of securities whose value is determined by the payment rights so purchased.” There is much to admire in Lipson’s attempt but also much to question.
Let me start with the admiration. Lipson’s article is by far the most systematic and thoughtful analysis of what securitization should mean. Importantly, he describes what he sees as the “essential elements of a securitization, its inputs (payment rights), structure (bankruptcy-proof legal isolation), and outputs (securities).”
Dividing securitization into inputs, structure, and outputs is rhetorically, if not also conceptually, sensible. Indeed, in teaching courses about securitization I often have referred to the left-hand side of the structure--which Lipson more felicitously calls the inputs--and the right-hand side of the structure--which Lipson (again more felicitously) calls the outputs. To the extent such terminology is intuitively descriptive, it advances understanding. In future courses, I intend to refer to inputs and outputs. I would, however, make one change to Lipson’s use of the term “structure” to describe the portion of a securitization transaction between the inputs and the outputs. Because “structure” intuitively means an entire structure--which, in the case of securitization, would also include the inputs and outputs--I suggest using the term “intermediate structure” instead. Thus, I will refer to a securitization transaction’s inputs, intermediate structure, and outputs.
Even with that change, I still have several concerns with Professor Lipson’s definition of securitization. This Article will next discuss those concerns, showing that the definition is overly restrictive and potentially inaccurate
Steven L. Schwarcz, What is Securitization? And for What Purpose?, 85 Southern California Law Review 1283-1299 (2012).