The Rotten Foundations of Securitization - David Gray Carlson
I. INTRODUCTION
A bankruptcy trustee is supposed to maximize debtor assets for the benefit of unsecured creditors. Often this task is achieved at the expense of the secured creditors. If a bankruptcy trustee can obtain control over collateral, the trustee might be able to use it without paying rent or interest to the lender. According to the U.S. Supreme Court, only oversecured creditors are worthy of postpetition interest.' Undersecured creditors are not.2 To be sure, the lender is entitled to adequate protection for the collateral contributed to debtor rehabilitation,3 but lenders are skeptical of this right and certainly hostile to the idea that, for the duration of the bankruptcy proceeding, the lender, if undersecured, is unable to earn income on its investment.4
In the 1980s, disdain of bankruptcy jurisdiction led financial
markets to generate a multibillion dollar practice neologized as
"securitization."5 The goal of securitization is for a debtor, called
an "originator," to sell accounts, chattel paper, general intangi-
bles, or instruments to a bankruptcy-remote corporation (sometimes
called a "special purpose vehicle" or SPV) set up for the
sole purpose of buying this property.6 The SPV raises funds by
selling debt or perhaps equity participations in the financial
markets.7 The only obligation of the SPV is the debt or equity
obligations the SPV issued to raise funds.8 The assets are precisely
what the SPV has bought from the originator-usually
heavily guaranteed by the originator's promise to buy back or
replace bad accounts.9 The form of the transfer from the originator
to the SPV-a sale-is supposed to prove that no bankruptcy
court can ever claim jurisdiction over the assets again.10
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