Legal Interpretation of Asset Securitization

Author: Peng Bing
Publisher:
Publish Date: 2001-11-01
Features: As a form of financing, asset securitization has experienced rapid development since its emergence in the United States in the 1970s. The mortgage-backed securities market in the U.S. has become the second-largest securities market after U.S. Treasury bonds. In Europe and Asia, asset securitization is also being used increasingly widely. This book provides a legal analysis of asset securitization, attempting to explain the reasons behind its vigorous vitality and the negative effects it may have, while also proposing suggestions to avoid these negative effects. The book begins with an introduction to the background of asset securitization in the preface: asset securitization is first and foremost a form of financing; then, in Chapter, it conducts a preliminary study on the legal issues in the definition and general process of asset securitization. Chapter 2 is the focus of this book. This chapter first examines the legal analysis of asset securitization by several representative American legal scholars, including the "alchemy" theory, the information cost reduction theory, the theory of promoting division of labor, and the theory of bankruptcy isolation. Through research, comparison, and analysis, this book argues that the bankruptcy isolation theory is more persuasive in explaining asset securitization. Therefore, the book subsequently conducts a detailed study of the impact of the U.S. bankruptcy system on secured claims to test this theory. The primary means of achieving bankruptcy isolation is the risk isolation mechanism, which mainly involves asset transfers and the construction of Special Purpose Vehicles (SPVs). In the following chapters, we examine the legal issues related to asset transfers and the construction of SPVs in the United States, respectively. Asset transfers in the U.S. primarily involve issues such as fraudulent transfers, recharacterization, and true sale. Among these, the legal application of recharacterization is somewhat chaotic (Chapter 3). Constructing an SPV that is distant from bankruptcy is crucial for the success of asset securitization, with the main issue being the substance combination principle under the U.S. Bankruptcy Code. However, no matter how far an SPV is from bankruptcy, it cannot guarantee that it will never go bankrupt (Chapter 4). With the widespread use of asset securitization in the United States, the risk isolation mechanism has also faced challenges in practice. Chapter 4 examines two failed asset securitization cases to illustrate the problems in the risk isolation mechanism. One major issue is the uncertainty in the legal recharacterization of asset transfers, and the book proposes a new suggestion for this (Chapter 5). Chapter 6 primarily studies the negative impacts of asset securitization on society, mainly manifested in harming the interests of unsecured creditors of originators and the tort system. Using the economic methods to address externalities, the book attempts to propose a suggestion: internalizing the externality of asset securitization by appropriately expanding the fiduciary duties of directors of originator companies. Chapter 7 applies the research findings of this book. By applying the bankruptcy isolation theory, the book argues that the theoretical foundation for asset securitization in China can avoid the defects in China's security interest system. The book then conducts a detailed study on the feasibility of applying the risk isolation mechanism in China and its potential impact on Chinese society. The conclusion is that due to the uncertainty in Chinese law, the success of the risk isolation mechanism for asset securitization in China also remains highly uncertain. Finally, there is a brief conclusion.