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The Rise of a Giant: Securitization and the Global Financial Crisis

2012; Wiley; Volume: 49; Issue: 4 Linguagem: Inglês

10.1111/j.1744-1714.2012.01143.x

1744-1714

Dov Solomon,

Corporate Law and Human Rights

American Business Law JournalVolume 49, Issue 4 p. 859-890 Original Article The Rise of a Giant: Securitization and the Global Financial Crisis Dov Solomon, Dov SolomonSearch for more papers by this author Dov Solomon, Dov SolomonSearch for more papers by this author First published: 20 November 2012 https://doi.org/10.1111/j.1744-1714.2012.01143.xCitations: 10 I would like to thank Odelia Minnes, Yaad Rotem, and the participants in the National Business Law Scholars Conference and the Midwestern Law and Economics Association Annual Meeting for helpful comments and discussions. Read the full textAboutPDF ToolsExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Footnotes 1 Edward M. Iacobucci & Ralph A. Winter, Asset Securitization and Asymmetric Information, 34 J. Legal Stud. 161, 162 (2005); Lynn M. LoPucki, The Death of Liability, 106 Yale L.J. 1, 24 (1996); Thomas E. Plank, Bankruptcy Professionals, Debtor Dominance, and the Future of Bankruptcy: A Review and a Rhapsody on a Theme, 18 Bankr. Dev. J. 337, 362 (2002) (book review). 2These assets usually originate in loans or property or services supplied to the originator's customers. See Kenneth C. Kettering, Securitization and Its Discontents, 29 Cardozo L. Rev. 1553, 1564 (2008); Steven L. Schwarcz, The Alchemy of Asset Securitization, 1 Stan. J.L. Bus. & Fin. 133, 135 n.7 (1994). 3 Comm. on Bankr. & Corporate Reorganization of the Ass'n of the Bar of the City of N.Y., Structured Financing Techniques, 50 Bus. Law. 527, 529–30 (1995) [hereinafter Structured Financing Techniques]; Robert Stark, Viewing the LTV Steel ABS Opinion in its Proper Context, 27 J. Corp. L. 211, 213 (2002); Schwarcz, supra note 2, at 135–36. 4For an empirical study that shows the savings securitization yields in financial costs, see James A. Rosenthal & Juan M. Ocampo, Analyzing the Economic Benefits of Securitized Credit, J. Applied Corp. Fin., Fall 1988, at 32 (finding that securitization produces financing cost savings of 1.3% per annum). See also Lowell Bryan, The Risks, Potential, and Promise of Securitization, in A Primer on Securitization 171, 174 ( Leon T. Kendall & Michael J. Fishman eds., 1996). 5 Hugh Beale et al., The Law of Personal Property Security 242 (2007); 1 Tamar Frankel, Securitization—Structured Financing, Financial Assets Pools, and Asset-Backed Securities 133– 134 (1991); Robert Dean Ellis, Securitization Vehicles, Fiduciary Duties, and Bondholders' Rights, 24 J. Corp. L. 295, 302 (1999); Christopher W. Frost, Asset Securitization and Corporate Risk Allocation, 72 Tul. L. Rev. 101, 105 (1997); Lois R. Lupica, Asset Securitization: The Unsecured Creditor's Perspective, 76 Tex. L. Rev. 595, 613–14 (1998); Minh Van Ngo, Getting the Question Right on Floating Liens and Securitized Assets, 19 Yale J. on Reg. 85, 153–54 (2002); Structured Financing Techniques, supra note 3, at 529–31; Gregory R. Salathe, Note, Reducing Health Care Costs Through Hospital Accounts Receivable Securitization, 80 Va. L. Rev. 549, 554–55 (1994). 6The SPV is sometimes referred to in the law and economics literature as a special purpose company or special purpose entity. See Ellis, supra note 5, at 299 ("[T]he borrower or issuer is often an intermediary entity, such as a wholly owned or completely separate 'orphan' corporate subsidiary, often referred to as a 'Special Purpose Corporation' or 'SPC' (although a limited partnership, limited liability company, or trust could easily serve this function, in which case the term 'Special Purpose Vehicle' or SPV would be employed)."); Bond Mkt. Ass'n et al., Special Purpose Entities (SPEs) and the Securitization Markets 1 n.1 (2002), available at http://www.isda.org/speeches/pdf/SPV-Discussion-Piece-Final-Feb01.pdf (noting that the terms SPV and SPE can be used interchangeably). 7 Kettering, supra note 2, at 1564–65; Fidelis Oditah, Great Britain, in Asset-Backed Securitization in Europe 99, 102 ( Theodor Baums & Eddy Wymeersch eds., 1996); Schwarcz, supra note 2, at 135–36; Stark, supra note 3, at 215–16; Structured Financing Techniques, supra note 3, at 554; A. Brent Truitt & Bennett J. Murphy, Bankruptcy Issues in Securitizations, in Securitizations: Legal and Regulatory Issues § 2.03 ( Patrick D. Dolan & C. Van Leer Davis eds., 2000 & Supp. 2006). 8See Iacobucci & Winter, supra note 1, at 164. 9 Joseph C. Shenker & Anthony J. Colletta, Asset Securitization: Evolution, Current Issues and New Frontiers, 69 Tex. L. Rev. 1369, 1376 (1991). 102 Frankel, supra note 5, at 91–98; id. at 76–84 (Supp. 1999); Stark, supra note 3, at 214. 11 Neil D. Baron, The Role of Rating Agencies in the Securitization Process, in A Primer on Securitization, supra note 4, at 81, 84–88. 12Entities that typically enjoy strong financial stability, such as banks or insurance companies, serve as credit enhancers in securitization transactions. The guarantee or insurance assists in decreasing the risk of the investment in the ABSs. See Schwarcz, supra note 2, at 139– 140. 13The duties of the trustee in the securitization transaction are outlined in the trust agreement. For further discussion, see generally Susan S. Steves Keiser, The Role of the Trustee in Securitization Transactions, in Securitization: Asset-Backed and Mortgage-Backed Securities, at ch. 8 ( Ronald S. Borod ed., 1991 & Supp. 2004). 14 Structured Financing Techniques, supra note 3, at 529. 15 Shenker & Colletta, supra note 9, at 1383–88. For a historical overview of the development of the mortgage-backed securities market in the United States, see John J. McConnell & Stephen A. Buser, The Origins and Evolution of the Market for Mortgage-Backed Securities, 3 Ann. Rev. Fin. Econ. 173 (2011). 161 Frankel, supra note 5, at 8, 37–38; id. at 9–12, 18–19 (Supp. 1999); Iacobucci & Winter, supra note 1, at 161–62; Lupica, supra note 5, at 602–03; Shenker & Colletta, supra note 9, at 1380; Structured Financing Techniques, supra note 3, at 538–39; Yuliya A. Dvorak, Comment, Transplanting Asset Securitization: Is the Grass Green Enough on the Other Side?, 38 Hous. L. Rev. 541, 546–47 (2001). 17 Adam Grant, Note, Ziggy Stardust Reborn: A Proposed Modification of the Bowie Bond, 22 Cardozo L. Rev. 1291, 1291–95 (2001); Teresa N. Kerr, Comment, Bowie Bonding in the Music Biz: Will Music Royalty Securitization Be the Key to the Gold for Music Industry Participants?, 7 UCLA Ent. L. Rev. 367, 367 (2000). 18See LoPucki, supra note 1, at 25; Lois R. Lupica, Circumvention of the Bankruptcy Process: The Statutory Institutionalization of Securitization, 33 Conn. L. Rev. 199, 208 (2000); Shenker & Colletta, supra note 9, at 1397. 19 Bd. of Governors of Fed. Reserve Sys., Flow of Funds Accounts of the United States: Annual Flows and Outstandings 2005–2010, at 73 tbl.L.126 ll. 5, 9 & 10 (2012), available at http://www.federalreserve.gov/releases/z1/Current/annuals/a2005-2010.pdf. This figure does not include $804.2 billion in U.S. Treasury securities, collateralized mortgage obligations backed by government agencies and government-sponsored enterprises, and other loans and advances. Id. ll. 2–4. 20The Board of Governors of the Federal Reserve System began to report figures on assets held by issuers of ABSs in 1983. The amount of mortgages and trade credit at the end of 1984 stood at $12.5 billion. Bd. of Governors of Fed. Reserve Sys., Flow of Funds Accounts of the United States: Annual Flows and Outstandings 1975–1984, at 73 tbl.L.126 ll. 5 & 10 (2012), available at http://www.federalreserve.gov/releases/z1/Current/annuals/a1975-1984.pdf. This figure does not include $8.8 billion in collateralized mortgage obligations backed by government agencies and government-sponsored enterprises that were held by these issuers at the end of that year. Id. l. 3. 21 Am. Securitization Forum et al., Restoring Confidence in the Securitization Markets 38, ex. 18 (2008), available at http://www.afme.eu/WorkArea//DownloadAsset.aspx?id=5449. 22On securitization as a primary factor in the 2008 financial crisis, see generally Kurt Eggert, The Great Collapse: How Securitization Caused the Subprime Meltdown, 41 Conn. L. Rev. 1257 (2009) (arguing that one of the primary causes of the subprime meltdown and the resulting economic collapse was the structure of securitization as applied to subprime and other nonprime residential loans, along with the resecuritization of the resulting mortgage-backed securities); Timothy F. Geithner, Fin. Stability Oversight Counsel, Macroeconomic Effects of Risk Retention Requirements 10– 14 (2011), available at http://www.treasury.gov/initiatives/wsr/Documents/Section%20946%20Risk%20Retention%20Study%20%20(FINAL).pdf (describing the significant role that securitization played in the recent financial crisis); Gary B. Gorton & Andrew Metrick, Securitization, in The Handbook of the economics of Finance ( George Constantinides et al. eds., forthcoming 2012), available at http://ssrn.com/abstract=1909887 (claiming that securitized bonds—even those unrelated to subprime mortgages—were at the center of the recent financial crisis); John D. Martin, A Primer on the Role of Securitization in the Credit Market Crisis of 2007, in Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future 199 ( Robert W. Kolb ed., 2010) (analyzing the role of securitization in the financial crisis of 2007–2008). 23 Jonathan C. Lipson, Secrets and Liens: The End of Notice in Commercial Finance Law, 21 Emory Bankr. Dev. J. 421, 468–69 (2005); Schwarcz, supra note 2, at 135; Jeffrey E. Bjork, Comment, Seeking Predictability in Bankruptcy: An Alternative to Judicial Recharacterization in Structured Financing, 14 Bankr. Dev. J. 119, 127–28 (1997). 24 Ellis, supra note 5, at 305 n.58. 25 Kettering, supra note 2, at 1681–87; Lupica, supra note 5, at 641–43; Thomas E. Plank, Sense and Sensibility in Securitization: A Prudent Legal Structure and a Fanciful Critique, 30 Cardozo L. Rev. 617, 632–40 (2008); Steven L. Schwarcz, The Limits of Lawyering: Legal Opinions in Structured Finance, 84 Tex. L. Rev. 1, 5–6 (2005); Tribar Opinion Comm., Special Report by the Tribar Opinion Committee: Opinions in the Bankruptcy Context: Rating Agency, Structured Financing, and Chapter 11 Transactions, 46 Bus. Law. 717, 727–29 (1991). 26 Lois R. Lupica, Revised Article 9, The Proposed Bankruptcy Code Amendments and Securitizing Debtors and Their Creditors, 7 Fordham J. Corp. & Fin. L. 321, 331 (2002). Lupica explains the difficulty faced by lawyers in preparing a legal opinion that deems a particular securitization transaction to be a true sale: "Because definitively concluding a particular asset transfer is a true sale is so difficult, lawyers have historically been reluctant, and in some instances unwilling, to offer unqualified legal opinions to that effect." Id. 2711 U.S.C. § 541 (2006). Some entities, however, are not subject to the Bankruptcy Code. See, e.g., id. §§ 101(41), 109(a) (providing that only a "person," defined as an individual, partnership or corporation, may be a debtor in bankruptcy and excluding governmental units from the definition of "person" with some exceptions); id. § 109(b) (providing that a financial institution or insurance company may not be a "debtor" under the Bankruptcy Code); id. § 109(c) (providing that a municipality, but not the federal government or a state, may be a debtor in limited circumstances). 28Id. § 541(a)(1). 29Id. § 541(a). 30See Grant Gilmore & David Gray Carlson, Gilmore and Carlson on Secured Lending—Claims in Bankruptcy 856 (2d ed. 2000). A debtor's residual right in collateralized property has tangible expression when the property is of greater value than the debt secured by it. In such a case, the debtor will be entitled to the surplus amount in excess of the secured debt, which will be yielded during the collateral realization process. 31274 B.R. 278 (Bankr. N.D. Ohio 2001). 32Id. at 285. 33Id. at 279. The parties to the proceedings reached an agreement before the court began its deliberations on whether to grant a final order. See Stark, supra note 3, at 223. For an analysis of the court's decision and the conclusions that can be drawn from it, see id. at 219– 229. 34In re LTV Steel, 274 B.R. at 285 (citing United States v. Whiting Pools, Inc., 462 U.S. 198, 204 (1983)). 35See Kenneth Ayotte & Stav Gaon, Asset-Backed Securities: Costs and Benefits of Bankruptcy Remoteness, 24 Rev. Fin. Stud. 1299 (2011) (finding that, following the interim order in LTV Steel, Chapter 11-eligible originators experienced a statistically and economically significant increase in their ABS issuance spreads relative to Chapter 11-ineligible originators, such as depository institutions, and thus arguing that "bankruptcy remoteness" is valuable to ABS investors in a way that is observable in prices). 36 Bankruptcy Abuse Prevention & Consumer Protection Act of 2001, S. 220, 107th Cong. § 912 (2001), H.R. 333, 107th Cong. § 912 (2001). 37Id. The Bankruptcy Code's fraudulent transfer provision authorizes the bankruptcy trustee to avoid transfers of assets that are undertaken with actual intent to hinder, delay, or defraud creditors and transactions that provide the debtor with less than "reasonably equivalent value." 11 U.S.C. § 548(a)(1) (2006). However, because the transferor of financial assets in securitization transactions is normally paid reasonably equivalent value for the assets, it is rare that such transfers are avoided. See Beale et al., supra note 5, at 244; Frost, supra note 5, at 114–15; LoPucki, supra note 1, at 27; Peter V. Pantaleo et al., Rethinking the Role of Recourse in the Sale of Financial Assets, 52 Bus. Law. 159, 185 (1996); Steven L. Schwarcz, The Impact of Bankruptcy Reform on "True Sale" Determination in Securitization Transactions, 7 Fordham J. Corp. & Fin. L. 353, 359 (2002). 38 Bankruptcy Abuse Prevention & Consumer Protection Act of 2001, § 912(2)(f)(5). 39Id. § 912(2)(f)(1). 40 Jonathan C. Lipson, Enron, Asset Securitization and Bankruptcy Reform: Dead or Dormant?, 11 J. Bankr. L. & Prac. 101, 101 (2002). Enron, at the time the seventh largest corporation in the United States, unexpectedly collapsed following the revelation of its accounting fraud, which was intended to misrepresent profits and hide losses. The company's sudden crash led to its scores of employees losing their place of work. In addition, the company's stocks plummeted, and shareholder confidence in the capital market was severely shaken. With the goal of restoring investor confidence, the Sarbanes-Oxley Act of 2002 set new stringent reporting requirements for corporate financial reports. Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745 (codified in scattered sections of 11, 15, 18, 28, 29 U.S.C.). 41See In re Enron Corp. Sec., Derivative & ERISA Litigation, 235 F. Supp. 2d 549, 610 (S.D. Tex. 2002). 42See Edward J. Janger, The Death of Secured Lending, 25 Cardozo L. Rev. 1759, 1771, 1773 (2004). For an approach that looks at the substantive differences between Enron's manipulative use of SPVs and their conventional use in the securitization market, see Steven L. Schwarcz, Enron and the Use and Abuse of Special Purpose Entities in Corporate Structures, 70 U. Cin. L. Rev. 1309, 1314–18 (2002). 43Letter from Allan Axelrod et al., law school deans and professors, to Senator Patrick Leahy & Congressman F. James Sensenbrenner (Jan. 23, 2002), reprinted in Law School Deans, Professors Ask Congress to Reconsider Securitization Provision, Am Bankr. Inst. J., Mar. 2002, at 6. 44 Lipson, supra note 40, at 109–10; Stephen J. Lubben, Beyond True Sales: Securitization and Chapter 11, 1 N.Y.U. J.L. & Bus. 89, 101 (2004). 45See Lipson, supra note 40, at 113. 46See Kettering, supra note 2, at 1652–53. 47995 F.2d 948 (10th Cir. 1993). 48Id. at 957. Article 9's provisions are applied to sales of accounts under section 9-109(a)(3) of the revised version of the U.C.C. U.C.C. § 9-109(a)(3) (1999) (replacing version formerly at U.C.C. § 9-102(1)(b)). 4911 U.S.C. § 541(a)(1) (2006). 50See Octagon Gas, 995 F.2d at 955. 51See, e.g., Douglas G. Baird, Security Interests Reconsidered, 80 Va. L. Rev. 2249, 2267 n.42 (1994); Lupica, supra note 5, at 656 n.301; Thomas E. Plank, Sacred Cows and Workhorses: The Sale of Accounts and Chattel Paper Under the U.C.C. and the Effects of Violating a Fundamental Drafting Principle, 26 Conn. L. Rev. 397, 453–61 (1994); Thomas E. Plank, When a Sale of Accounts Is Not a Sale: A Critique of Octagon Gas, 48 Consumer Fin. L.Q. Rep. 45 (1994) [hereinafter Plank, Critique]. In contrast to the prevailing stance on this issue, Professor Carlson has expressed support for the Octagon Gas decision. See David Gray Carlson, The Rotten Foundations of Securitization, 39 Wm. & Mary L. Rev. 1055 (1998). 52See, e.g., Plank, Critique, supra note 51, at 48–49. 53Compare U.C.C. § 9-608(a)(4) (1999), with U.C.C. § 9-608(b) (1999). See also Major's Furniture Mart v. Castle Credit Corp., 602 F.2d 538, 542 (3d Cir. 1979) (determining surplus entitlement by classifying a transaction as a sale of accounts or a secured transaction). 54See, e.g., 1 Frankel, supra note 5, at 133–36 (Supp. 1999); Structured Financing Techniques, supra note 3, at 541 n.42. 55 Bjork, supra note 23, at 143. 56The revised version of the U.C.C. was adopted uniformly by all U.S. states and entered into force in most of them on July 1, 2001. See U.C.C. § 9-701. Four states enacted nonuniform versions of section 9-701, resulting in effective dates of October 1, 2001 (Connecticut) and January 1, 2002 (Alabama, Florida, and Mississippi). See Permanent Editorial Bd. for the Unif. Com. Code, PEB Report: Article 9 Perfection Choice of Law Analysis Where Revised Article 9 Is Not in Effect in All States by July 1, 2001, at 2 (2001), available at http://www.uniformlaws.org/Shared/peb601part1.pdf. 57U.C.C. § 9-318(a) (1999). 58Id. official cmt. 2. 59 Asset-Backed Securities Facilitation Act, Del. Code Ann. tit. 6, §§ 2701A–2703A (2003); see also Jeffrey M. Carbino & William H. Schorling, Delaware's Asset-Backed Securities Facilitation Act: Will the Act Prevent the Recharacterization of a Sale of Receivables in a Seller's Bankruptcy?, 6 Del. L. Rev. 367 (2003) (analyzing the viability of Delaware's Asset-Backed Securities Facilitation Act in the face of a challenge in bankruptcy). 60 Ala. Code §§ 35-10A-1 to -2 (2001). 61 S.D. Codified Laws §§ 54-1-9 to -10 (2003). 62 N.C. Gen. Stat. §§ 53-425 to -426 (2002). 63 Ohio Rev. Code Ann. § 1109.75 (LexisNexis 2003). 64 Tex Bus. & Com. Code Ann. § 9.109(e) (West 2004). For a discussion of this provision, see Eugene F. Cowell III, Texas Article 9 Amendments Provide "True Sale" Safe Harbor, 115 Banking L.J. 699 (1998). 65 La. Rev. Stat. Ann. § 10:9-109(e) (2003). The introductory remarks to section 9-109(e), which Louisiana adopted, stressed that the section was drafted in response to the case law that had destabilized the securitization market. See id. official rev. cmt. o ("[T]his provision rejects the widely criticized holding in Octagon Gas Systems …."); see also James A. Stuckey, Louisiana's Non-Uniform Variations in U.C.C. Chapter 9, 62 La. L. Rev. 793, 824 (2002) (stating same). 66See, e.g., Bear v. Coben (In re Golden Plan of California, Inc.), 829 F.2d 705, 709 (9th Cir. 1986); Major's Furniture Mart v. Castle Credit Corp., 602 F.2d 538, 542 (3d Cir. 1979); Ables v. Major Funding Corp. (In re Major Funding Corp.), 82 B.R. 443, 448 (Bankr. S.D. Tex. 1987); see also Grant Gilmore, Security Interests in Personal Property 1230 (1965) (claiming that a right of recourse should lead to a transaction being characterized as a secured transaction). 67E.g., 11 U.S.C. § 101(32)(A) (2006) ("The term 'insolvent' means …[a] financial condition such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation …."). 68A secured creditor is a creditor that has been given a security interest in the debtor's assets. U.C.C. § 9-102(a)(72) (1999) (definition of "secured party"). 6911 U.S.C. § 362(a) (2006). Although a secured creditor has the right to have the stay lifted if its security interest is not adequately protected, such adequate protection has not been construed to require that the secured creditor be paid interest by way of compensation for the long delay in realization that the stay itself imposes on the secured creditor. See id. § 362(d)(1); United Sav. Ass'n v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 370–72 (1988). 70 Edward J. Janger, The Costs of Liquidity Enhancement: Transparency Cost, Risk Alteration, and Coordination Problems, 4 Brook. J. Corp. Fin. & Com. L. 39, 47 (2009); Lois R. Lupica, Revised Article 9, Securitization Transactions and the Bankruptcy Dynamic, 9 Am. Bankr. Inst. L. Rev. 287, 313–14 (2001). 71But see Plank, supra note 25, at 629 (arguing that the continued ownership of receivables is not essential to an originator's business and thus not necessary for implementing a reorganization process). 72See 11 U.S.C. §§ 363(c)(2), 363(e) (2006). Adequate protection could be provided to a secured creditor by granting it a replacement lien on some illiquid substitute assets or even by doing nothing at all if there is a sufficient equity cushion in the collateral. See id. § 361. 73Unsecured creditors are supposed to be paid more of their claims in Chapter 11 reorganization cases than Chapter 7 liquidation cases. See Lynn M. LoPucki, A General Theory of the Dynamics of the State Remedies/Bankruptcy System, 1982 Wis. L. Rev. 311, 311 (presenting empirical research findings that, in eighty percent of liquidation cases, no money was left to pay the unsecured creditors' claims at the end of the procedure, while for the remaining twenty percent of the cases, unsecured creditors were paid on average 4.5% of their claims; in contrast, in reorganization cases, unsecured creditors receive approximately thirty percent of the money they are owed). Compare Lynn M. LoPucki & William C. Whitford, Bargaining over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. Pa. L. Rev. 125, 142 (1990) (stating that in reorganization of large publicly held corporations the average return is fifty percent), with Michelle J. White, Bankruptcy, Liquidation, and Reorganization, in Handbook of Modern Finance, at E7-1, E7-34 ( Dennis E Logue ed., 3d ed. 1994) (stating that the average return in liquidation of small firms is around four percent). 74 Kettering, supra note 2, at 1575; Lubben, supra note 44, at 97–100; Steven L. Schwarcz, Collapsing Corporate Structures: Resolving the Tension Between Form and Substance, 60 Bus. Law. 109, 138 (2004). 75A securitization transaction is a financing transaction with the purpose of raising credit for the originator. The originator has an interest in maximizing the consideration received in the deal and therefore should refuse any cash payment that is less than the fair value of the securitized assets. 76The consideration paid in the transaction incorporates a discount rate that reflects the time value of the money and the risk that the receivables will not be paid in full; it is therefore lower than the nominal value of the securitized assets. However, it is the assets' real value, and not their nominal value, that is relevant for assessing their worth. Prior to the securitization transaction, too, when the securitized assets are still included among the originator's assets, their real value incorporates a discount rate that reflects the time value of the money and the risk of the receivables not being paid in full. When the originator's creditors assessed, before the securitization transaction, the worth of the assets from which they could collect their debts, they took into account the real, and not nominal, value. Thus, the conversion of the receivables into liquid cash should not harm the originator's creditors because the consideration in the securitization transaction, in including a discount rate, reflects the real value of the securitized assets. See Steven L. Schwarcz, Securitization Post-Enron, 25 Cardozo L. Rev. 1539, 1555–56 (2004). 77 Schwarcz, supra note 2, at 146. 78The securitization transaction leads to the insulation of the securitized assets from the risks entailed in the originator's overall business activity, so that the cost of raising credit derives solely from the value of the assets and not from the company's general credit rating. See supra references in notes 4–5. 79For a similar claim regarding the decrease in monitoring cost resulting from the use of secured credit, which is beneficial to unsecured creditors as well, see Thomas H. Jackson & Anthony T. Kronman, Secured Financing and Priorities Among Creditors, 88 Yale L.J. 1143, 1149–58 (1979) (claiming that a security agreement allows secured and unsecured creditors to reduce their total monitoring cost, making each better off than it would be if both had an equal pro rata claim to the debtor's property). 80 Lupica, supra note 5, at 609–10; see also Jo Anne Bradner, The Secondary Mortgage Market and State Regulation of Real Estate Financing, 36 Emory L.J. 971, 982 (1987) (making this point in the context of mortgage securitization). 81See Schwarcz, supra note 76, at 1560–62. Defaulting on debtor's obligations brings on insolvency. For the "cash-flow" or "equitable" solvency test, see J.B. Heaton, Solvency Tests, 62 Bus. Law. 983, 988–89 (2007) (referring to the cash-flow or equitable solvency test, which determines whether the debtor has generally ceased to pay debts in the ordinary course of business and is unable to pay them as they become due). 82See, e.g., Schwarcz, supra note 37, at 363 n.50; cf. Schwarcz, supra note 76, at 1563–65 (claiming that originators' creditors regard securitization transaction to be beneficial to them, based on both empirical data that show that the prices of public bonds issued by originators rose immediately after the companies announced the securitization transaction, as well as the fact that the negative-pledge covenants creditors include in the loan agreements to protect their interests usually restrict the borrowing company's ability to incur secured debt but not to enter into securitization transactions). 83For a general discussion of agency problems generated by the corporate form, see Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976). My analysis here focuses on the agency problem generated between the company's shareholders and its creditors. 84See William A. Klein & John C. Coffee, Jr., Business Organization and Finance: Legal and Economic Principles 256- 259 ( 7th ed. 2000);