The 2011 Diane Sanger Memorial Lecture. Protecting Investors in Securitization Transactions: Does Dodd-Frank Help, or Hurt?

AuthorSteven L. Schwarcz
PositionStanley A. Star Professor of Law & Business, Duke University School of Law; Founding and Co-Academic Director, Duke Global Capital Markets Center
Pages591-603
The 2011 Diane Sanger Memorial Lecture
Protecting Investors in Securitization Transactions:
Does Dodd–Frank Help, or Hurt?
Steven L. Schwarcz
Securitization has been called into question because of its role in
the recent financial crisis. I examine the potential flaws in the
securitization process and compare how the Dodd–Frank Act treats
them. Although Dodd–Frank addresses one of the flaws, it
underregulates or fails to regulate other flaws. It also overregulates
by addressing aspects of securitization that are not flawed.
INTRODUCTION
Securitization has been criticized because of its role in the
recent financial crisis. Securitization refers to a category of
financing transactions in which companies sell rights to payment
under mortgage loans, accounts receivable, lease rentals, and other
types of income-producing financial assets to a trust or other
special-purpose vehicle (an “SPV,” sometimes interchangeably
called a special-purpose entity or SPE). The goal is to separate
these assets from the risks generally associated with the
company—usually called the “originator” to distinguish it from the
SPV. The originator then can use these assets, hel d by the SPV, to
raise funds in the capital markets at a lower cost than if it had
borrowed the funds.
Securitization accomplishes this cost saving for two reasons.
First, by raising funds without having to borrow from a bank or
other financial intermediary, the originator avoids the intermediary’s
profit mark-up. This approach, called “disintermediation,” is similar
to buying wholesale (rather than retail).
Second, the interest rate payable on the securities issued by an
SPV is ordinarily lower than the interest rate payable on corporate
securities issued directly by the originator. This interest-rate
Copyright 2012, by STEVEN L. SCHWARCZ.
Stanley A. Star Professor of Law & Business, D uke University Sc hool of
Law; Founding and Co-Academic Director, Duke Global Capital Markets Center.
E-mail: schwarcz@law.duke.edu. I thank Ed De Sear for helpful comments on a
draft of this lecture and Jason Pearl for valuable research assistance.
This lecture was originally given on March 28, 2011, at Georgetown
University Law Center. Publication of this expanded and footnoted version of
The 2011 Diane Sanger Memorial Lecture is with permission of the Securities
and Exchange Commission Historical Society’s virtual museum and archive at
www.sechistorical.org.

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT