Title: ECONOMIC POLICY AND THE CONSTITUTIONALITY OF ASSET

SECURITIZATION.

AUTHOR: MICHAEL C. NWOGUGU, Certified Public Accountant (Maryland, USA);

Certified Management Accountant (ICMA/CMA). Address: P. O. Box 996, Newark, NJ 07101.
Email: mcn2225@aol.com; mcn111@juno.com.

Abstract
Under US laws, all forms of asset securitization are un-constitutional.

Securitization of many types of assets (loans, credit cards, auto receivables, intellectual

property, etc.) has become more prevalent, particularly for financially distressed

companies and companies with low or mid-tier credit ratings.

Keywords:

Securitization; constitutional law; capital markets; economic policy; federalism; risk

management; complexity.

Introduction

Although the analysis in this article is based on the US Constitution, the principles

and theories developed herein are applicable in most common-law countries.1 The
1
See: Voigt J (1997). Positive Constitutional Economics: A Survey. Public Choice, 90(1-4):11-53.
See: Barenboim P (2001). Constitutional Economics And The Bank Of Russia. Fordham Journal
Of Corporate And Financial Law, 7: 159-179.
http://law.fordham.edu/publications/articles/600flspub9473.pdf.
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from Comparative Politics and Comparative Political Economy. Loyola Of Los Angeles Law
Review, 41(2): 628-628. http://llr.lls.edu/docs/41-2whytock.pdf.
See: Cooter R & Ginsburg T (1996). Comparative judicial discretion: An empirical test of
economic models. International Review of Law and Economics, 16: 295-313.
http://works.bepress.com/cgi/viewcontent.cgi?article=1029&context=robert_cooter.
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Adaptation and Development in Commonwealth States. Oxford University Commonwealth Law
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See: Saunders C (2006). The Use and Misuse of Comparative Constitutional Law. Indiana
Journal of Global Legal Studies, 13(1): 37-45.
See: Scheppele K L (2003). Aspirational and Aversive Constitutionalism: The case for Studying
Cross-Constitutional Influence Through Negative Models. International Journal of
Constitutional Law, 1(2): 296-306.
See: Tushnet M (1999). The Possibilities of Comparative Constitutional Law. Yale Law Journal,
108(6): 1225-1235.
See: Jackson V (2008). Constitutional Comparisons: Convergence, Resistance, Engagement.
Harvard Law Review, 119:108-118.
securitization processes and laws/regulations in many countries are based on, and are

similar to US securitization procedures and associated statutes/regulations. Issues

pertaining to general illegality of securitization are addressed in Nwogugu (2008a,b)2.

The existing literature on legal and corporate governance issues pertaining to

securitization is extensive, but has several gaps that have not been addressed at all or

sufficiently:

 Whether securitization is legal and or constitutional.

 The effect of economic factors on the constitutionality of securitization, and vice

versa.

 The effect of behavioral factors on the constitutionality of securitization, and vice

versa.

 The effects of declaring securitization to be illegal/un-constitutional; and the

characteristics of new securitization laws.

In analyzing the legality of securitization, the following criteria are relevant:

 Origins and history of securitization – legislative history, evolution of securitization

processes, and current practices. Carlson (1998) traces the origins and history of

See: Krishnamurthy V (2008). Colonial Cousins: Explaining India and

Canada’s Unwritten Constitutional Principles. Yale Journal Of International Law, 34: 207-217.
http://www.yale.edu/yjil/files_PDFs/vol34/Krishnamurthy.pdf.
See: Verdier P (2008). Transnational Regulatory Networks and Their Limits. Yale Journal Of
International Law, 34: 112-122.

2
See: Nwogugu M. (2008a). Securitization Is Illegal: Some Antitrust, Usury, RICO, And
Tax
Issues.Journal Of International Banking Law & Regulation (2008).
See: Nwogugu M. (2008b). Illegality Of Securitization, Bankruptcy Issues And Theories Of
Securitization. Journal Of International Banking Law & Regulation (2008).
 securitization to direct and specific efforts/collaborations to avoid the effects of US

bankruptcy laws.3

 Types of contracts used in securitization; and the key criteria for enforceability.

 The purposes, wording and scope of applicable laws – state contract laws, state

trusts laws, state corporations laws, the US bankruptcy code, and state/federal

securities laws.

 How the relevant laws are applied in securitization processes – by market

participants, regulators and lawyers that represent investors.

 The people, markets, and entities/organizations that are affected by securitization.

 The usefulness of existing (if any), possible and proposed (if any) deterrence

measures that are designed to reduce fraud/crime/misconduct.

 Transaction costs, compliance costs and monitoring costs.

A. Securitization Constitutes A Violation Of The Commerce Clause Of The US

Constitution 4

See: Schwarcz S. (1999). Rethinking Freedom Of Contract: A Bankruptcy Paradigm. Texas Law
Review, 77: 515-599.

See: Klee K & Butler B (2002). Asset-Backed Securitization, Special Purpose Vehicles And
Other Securitization Issues. Uniform Commercial Code Law Journal, 35(2): 5, 23­67

See: Carlson D (1998). The Rotten Foundations Of Securitization. William & Mary Law Review,
39: 1055-1075.
4
On constitutionality of statutes and processes in general, see the following articles.
See: Chemerinsky E (2005). Constitutional Issues Posed In The Bankruptcy Abuse Prevention
And Consumer Protection Act Of 2005. American Bankruptcy Law Journal, 79: 571-591.
See: Alexander F S (2000). Constitutional Questions About Tax Lien Foreclosures. Government
Finance Review, 16(3):27-32.
See: Povel P(1999). Optimal “Soft” OR ‘Tough” Bankruptcy Procedures. Journal Of Law,
Economics & Organization, 15(3):659-669.
 For purposes of constitutional law analysis, the relevant ‘state-action’5 consists of

any of the following. Given the significant magnitude of securitization transactions in the

US, and its pervasive effect on the overall US economy, the US Congress’s failure to

create a uniform set of federal laws (trusts, contracts, corporations, debtor/creditor laws,

etc.) for securitization and associated collateral constitutes a “state action”. The

government has an affirmative duty to create and enforce laws that govern interstate

activities that have significant economic, legal and psychological effects on its citizens

and institutions. Secondly, the sponsor’s selection of collateral for securitization is a

See: Hirsch W (1994). An Economic Analysis Of The Constitutionality Of State Preference

Laws. International Review Of Law & Economics, 14:299-306.
See: Dunbar W (Feb. 1901). The Constitutionality Of The US Inheritance Tax. Quarterly
Journal Of Economics, 15(2):292-298.
See: Thomas S A (2003). Re-Examining The Constitutionality Of The Remitittur Under The
Seventh Amendment. Ohio State Law Journal, 64(3): 794-994.
See: Huhn W (2004). Assessing The Constitutionality Of Laws That Are Bother Content-Based
And Content Neutral: The Emerging Constitutional Calculus. Indiana Law Journal, 79:801-810.
See: White D B (1939). Unfair Competition: The Constitutionality Of California Unfair Practices
Act. California Law Review, 27(4): 449-458.
5
See: Evans v. Newton, 382 U.S. 296 (1966).
See: Evans v. Abney, 396 US 435 (1970).
See: Burton v. Wilmington, 365 U. S. 715 .
See: Moose Lodge v. Irvis, 407 U.S. 163 (1972).
See: Edmonson v Leesville Concrete, 500 US 614 (1991).
See: Tushnet M (2003). The Issue Of State Action/Horizontal Effect In Comparative
Constitutional Law. International J. Of Constitutional Law, 1(1):79-98.
See: Marsh v. Alabama, 326 U.S. 501 (1946).
See: Screws v. US, 325 U.S. 91 (1945).
See: Ellman S (2001). A Constitutional Confluence: American “State Action” Law, And The
Application Of South Africa’s Socio Economic Rights Guarantees To Private Actors. New York
law School Law Review, 45: 21–75.
See: Gardbaum G (2003). The "Horizontal Effect" of Constitutional Rights. Michigan Law
Review, 102: 387-398.
See: Gardbaum S (2006). Where The (State) Action Is. International Journal Of Constitutional
Law, 4(4):760-779.
See: Currie D (1986). Positive And Negative Constitutional Rights. University Of Chicago Law
Review, 53(3): 864-890.
See: New England Power Co. v. New Hampshire, 455 U. S. 331 (1982).
consumer-protection type governmental regulatory role (the sponsor is a private-actor

that is performing the ‘regulatory role’ of the government by selecting collateral that

supposedly conforms to certain minimum standards of quality). As illustrated by the

global financial crisis of 2008 and 2009 and the responses of governments of various

countries, the government has a significant interest in assuring that investors are provided

adequate minimum protection by controlling/regulating the quality of collateral in

securitization transactions.

In the US, Securitization transactions are typically governed by a combination of

state laws (trust laws, corporations laws, securities laws and contract laws) and federal

securities laws. Securitization involves interstate commerce where the collateral, the

investors, the trustees/board-members and servicing agent are located in different

states/provinces. 6.
6

See: Merrill T (2000). The landscape of constitutional property. Virginia Law Review,
86(5):885-999).
See: Anonymous (1979). Securities Law and the Constitution: State Tender Offer Statutes
Reconsidered. The Yale Law Journal, 88(3): 510-520.
See: Warren M (1997), Federalism And Investor Protection: Constitutional Restraints On
Preemption Of State Remedies For Securities Fraud. Law and Contemporary Problems, 60(3-
4):169-201.
See: Landrum D (2003). Governance of limited liability companies - Contrasting California and
Delaware models. The Real Estate Finance Journal, 19(1);.
See: Larbalestier P (1990). Australian Corporations Act Held to Be Unconstitutional.
International Financial Law Review, 9(4): 11-12;
See: Williams T & Lundeen W (2002). Taxation And The Business Of The Internet, Part II: The
Shaky Ground Of The Commerce Clause. Corporate Business Taxation, 4(3):11-15;
See: Sedler R (1985). The Negative Commerce Clause as a Restriction on State Regulation and
Taxation: An Analysis in Terms of Constitutional Structure. Wayne Law Review, 31:885-895.
See: Dennis v. Higgins, 498 U.S. 439, 447 -450 (1991).
See: Moorman Mfg. Co. v. Bair, 437 U.S. 267, 280 (1978).
See: Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869 (1985).
See: Oregon Waste Systems, Inc. v. Department of Environmental Quality of Oregon, 511 U. S. 93
(1994).
See: Hughes v. Alexandria Scrap Corp., 426 U. S. 794 (1976).
See: Reeves, Inc. v. Stake, 447 U. S. 429 (1980).
See: United Haulers Assn., Inc. v. Oneida-Herkimer Solid Waste Management Authority, 550
U. S. 330 (2007).
 Securitization imposes substantial burdens on interstate commerce in several

ways. Firstly, in securitization, due diligence costs, transaction costs, compliance costs

and processing costs are generally greater for out-of-state collateral, than for in-state

collateral (primarily because of differences in state laws that govern securitization and

debtor/creditor relationships), and hence, current/historical securitization processes/laws

Contrast: Bonaparte v. Tax Court, 104 U. S. 592 (1881).

See: Department of Revenue Of Kentucky et al v. Davis et. ux., (May 19, 2008; No. 06-666; US
Supreme Court).
See: Pike v. Bruce Church, Inc., 397 U. S. 137, 142 (1970).
See: Shaper v. Tracy, 97 Ohio App. 3d 750, 647 N. E. 2d 550 (1994).
See: Bonaparte v. Tax Court, 104 U. S. 592 (1882);
See: New Energy Co. of Ind. v. Limbach, 486 U. S. 269 (1988).
See: Fulton Corp. v. Faulkner, 516 U. S. 325 (1996)
See: Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U. S. 175 (1995);
See: Hughes v. Oklahoma, 441 U. S. 322 (1979);
See: Garcia v. San Antonio Metropolitan Transit Authority, 469 U. S. 528 (1985)
See: Philadelphia v. New Jersey, 437 U. S. 617 (1978),
Compare: United Haulers Assn., Inc. v. Oneida-Herkimer Solid Waste Management Authority,
550 U. S. 330 (2007) (the Pike v. Bruce Church scrutiny).
Compare: Northwest Central Pipeline Corp. v. State Corporation Comm'n of Kansas, 489 U. S.
493 (1989) (the Pike v. Bruce Church scrutiny).
Compare: Minnesota v. Clover Leaf Creamery Co., 449 U. S. 456 (1981) (the Pike v. Bruce
Church scrutiny).
See: Alexandria Scrap, 426 U. S., at 810 (the “market participant’ exception).
See: Reeves, 447 U. S., at 436 (the “market participant’ exception).
See: White v. Massachusetts Council of Construction Employers, Inc., 460 U. S. 204 (1983) (the
“market participant’ exception).
See: Fulton Corporation v. Faulkner, 516 U. S. 325 (struck down higher tax on the stock of
corporations with little or no presence in the State).
See: New Energy Co. of Indiana v. Limbach, 486 U. S. 269 (invalidated tax credit to sellers of
ethanol available only for ethanol produced in the State).
See: Bacchus Imports, Ltd., 468 U. S. 263 (struck down tax exemption that applied only to sales
of certain locally produced liquors).
See: Lewis v. BT Investment Managers, Inc., 447 U. S. 27 (1980) (invalidated prohibition on out-
of-state banks owning in-state businesses that provided investment advisory services).
See: Boston Stock Exchange v. State Tax Commission, 429 U. S. 318 (1977) (struck down higher
tax on sale of securities by nonresidents if the securities were sold in an out-of-state transaction).
See: Dean Milk Co. v. Madison, 340 U. S. 349 (1951).
See: Hunt v. Washington State Apple Advertising Commission, 432 U. S. 333 (1977).
See: Fort Gratiot Sanitary Landfill, Inc. v. Michigan Dept. of Natural Resources, 504 U. S. 353
(1992).
See: C & A Carbone, Inc. v. Clarkstown, 511 U. S. 383 (1994).
impliedly or directly discourages the use of geographically dispersed assets as collateral;

and securitization constitutes a burden on interstate commerce.

Secondly, the geographical location of the servicer significantly affects the

profitability of the securitization process (primarily because of the differences among

state laws that govern securitization), and hence securitization encourages specific

geographical preferences, and burdens interstate commerce.

Thirdly, under the present legal regime, securitization introduces conflicts of laws

problems that arise from non-uniform state laws, and this burdens interstate commerce.

D. Securitization Constitutes A Violation Of The Free-Speech Clause7

See: Philadelphia v. New Jersey, 437 U. S. 617 (1978).

See: Hughes v. Oklahoma, 441 U. S. 322 (1979).
See: Citizens Bank v. Alafabco, Inc., 539 U. S. 52, 58 2003).
See: Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., 439 U. S. 299, 308,
and n. 24 (1978)

On constitutionality of statutes and processes in general, see the following articles.

See: Chemerinsky (2005)(supra).
See: Alexander (2002)(supra).
See: Povel (1999)(supra).
See: Hirsch (1994)(Supra).
See: Cotlar A (Jan. 2003). Say Cheese: The Constitutionality Of State-Mandated Free Airtime On
Public Broadcasting Stations. Federal Communications Law Journal, .
See: Nimmer M B (1958). The Constitutionality Of Official Censorship Of Motion Pictures.
University Of Chicago Law Review, 56(1): 55-65.
See: Dunbar (Feb. 1901)(supra).
See: Thomas (2003)(supra).
See: Huhn (2004)(supra).
See: White (1939)(supra).
See: Cooter R & Rubinfeld D (1989). Economic Analysis of legal Disputes And Their
Resolution. Journal of Economic Literature, 27:1067-1077.
See: Tribe L (1985). Constitutional Calculus: Equal Justice or Economic Efficiency ? Harvard
Law Review, 98:592-602.
See: Myerson R ( 2000). Economic Analysis of Constitutions. University of Chicago Law
Review, 67:925-945.
 Securitization constitutes violations of the Free-Speech Clause of the US

Constitution8. The Free Speech Clause is defined in the cases and documents in the

footnotes.

The relevant ‘state-action’9 consists of: the US Congress’s failure to create a

uniform set of federal laws for securitization given the historically significant magnitude

See: Watson W (1983). The Economics Of Constitution-Making. Law & Contemporary

Problems, 45(4):87-108.
See: Blankart C & Koester G (2007). The Economic Analysis of Constitutions: Fatalism Versus
Vitalism. Economic Journal Watch, 4(2):169-179.
See: Block W & DiLorenzo T (2001). Constitutional Economics And The Calculus of Consent.
Journal of Libertarian Studies, 15(3):37-56.
See: Hermalin B (1995). An Economic Analysis of Takings. Journal of Law, Economics &
Organization, 11(1):64-86.
See: Hirsch W (1990). State Residency Laws: Their Constitutionaility Under The Privileges And
Immunities Clause. Working Paper #591, Department Of Economics, University Of California,
Los Angeles, California, USA. http://www.econ.ucla.edu/workingpapers/wp591.pdf.

See: White (1939) (Supra).

See: Frickey P (July 1996). The Congressional Process And The Constitutionality Of Federal
Legislation To End The Economic War Among The States. The Region – Federal Reserve Bank
of Minneapolis.
See: Michael J (1985). The Constitutionality Of Minnesota’s Business Tax Credits After
Westinghouse Electric Corp. Journal Of State Taxation, 4: 163-167.
See: Zelenak L (1999). Radical Tax Reform, The Constitution And The Conscientious Legislator.
Columbia Law Review, 99(3):833-856.
See: Nakamura M (1990). Freedom Of Economic Activities And The Right To Property. Law
And Contemporary Problems, 53(2):1-12.
See: Van Schalkwyk L (2004). Constitutionality And The Income Tax Act - Revisited. Meditari
Accountancy Research, 12(2): 185-201.

8
See: Reno v. ACLU, 521 U.S. 844 (1997).
See: Buckley v. American Constitutional Law Foundation, 525 U.S. 182 (1999)
9
See: Evans v. Newton, 382 U.S. 296 (1966).
See: Evans v. Abney, 396 US 435 (1970).
See: Burton v. Wilmington, 365 U. S. 715 .
See: Moose Lodge v. Irvis, 407 U.S. 163 (1972).
See: Edmonson v Leesville Concrete, 500 US 614 (1991).
See: Tushnet M (2003). The Issue Of State Action/Horizontal Effect In Comparative
Constitutional Law. International J. Of Constitutional Law, 1(1):79-98.
See: Marsh v. Alabama, 326 U.S. 501 (1946).
See: Screws v. US, 325 U.S. 91 (1945).
See: Ellman (2001)(supra).
of securitization transactions in the US, and its pervasive effect on the overall US

economy. The sponsor’s selection of collateral for securitization is also a “state-action”

because the sponsor is acting in the role of the government and the government has an

interest in facilitating and assuring investor protection by implementing minimum

standards of quality for collateral.

Typically, the sponsor of the securitization transaction and the trustees (or

members of the board of directors) of the Special Purpose Vehicle (‘SPV”), negotiate and

determine the applicable dividend rates (where the trust issues preferred securities or

other equity securities) and interest rates (on bonds issued by the SPV) prior to the

offering, and the established terms are not changed during the life of the ABS. The

sponsor and the intermediary bank typically appoint the SPV’s trustees. The SPV’s

dividend policy and debt policy are established by the sponsor and the intermediary

investment bank; and the SPV is typically organized as a state-law trust, LLP, LLC or a c-

corporation. However, the SPV should establish its own debt policy and dividend policy

which may change over time, depending on the performance of the underlying collateral.

These conditions constitutes violations of the free speech rights of the SPV (and

the SPV trustees), and holders of the SPV’s beneficial interests, for several reasons.

Firstly, corporate Dividend policy and debt policy are constitutionally-protected free

speech and hence cannot be dictated by third-parties 10 – the SPV has protected property interests

See: Gardbaum (2003)(supra).

See: Gardbaum (2006)(supra).
See: Currie D (1986). Positive And Negative Constitutional Rights. University Of Chicago Law
Review, 53(3): 864-890.
See: Goldberg J (2005). The Constitutional Status Of Tort Law: Due Process And The Right To A
Law For The Redress Of Wrongs. Yale Law Journal, 115:524-534.
10
See: City Of Boerne v. Flores, 521 US 507 (1997);
See: Bartnicki v. Vopper, 532 US 514 (2001);
See: National Endowment Of The Arts v. Finley, 524 US 569 (1998);
in determining and implementing its dividend policy and debt policy. The property interests

arises from custom, state corporations/trusts laws, state contract laws, state constitutional laws

and expectations. Corporate Dividend Policy and Debt Policy are forms of speech and

communication to capital markets and investors. Numerous empirical finance studies have

identified information content in dividend policy. Dividend policy and debt policy involve

recurring decisions and announcements. Dividend policy and debt policy represent expressions

of the SPV’s/entity’s condition and prospects, and typically dont violate any civil or criminal

laws, and don’t harm other parties.

There is the required “compulsion” by the sponsor and the intermediary bank –

they elect/select the trustees, and the trustees don’t get any compensation and the

securitization transaction will not be executed unless the trustees agree with the sponsor

and the intermediary bank. There is actual and implied compulsion because the sponsor

retains substantial and almost complete control of the SPV before the securities offering,

See: Rosenberger v. University Of Virginia, 515 US 819 (1995);

See: Rust v. Sullivan, 5001 US 173 (1991);
See: 44 Liquormart, 517 U.S. 484 (1996).
See: Buckley v. Valeo, 424 U.S. 1 (1976);
See: First National Bank Of Boston v. Belotti, 435 US 765 (1978).
See: Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990).
See: FEC v. Masssachussetts Citizens For Life Inc., 479 U.S. 238 (1986).
See: Buckley v. American Constitutional Law Foundation, 525 U.S. 182 (1999).
See: Nixon v. Shrink Missouri Government PAC, 528 U.S. 377 (2000);
See: Pacific Gas & Electric v. Public Utilities Commission, 475 US 1 (1986);
See: Lorillard Tobacco v. Reilly, 533 U.S. 525 (2001);
See: Nike Inc. v. Kasky, 539 U.S. 654 (2003);
See: BASF Corp v. Peterson, 544 U.S. 1012 (2005).
See: Virginia Board of Pharmacy v. Virginia Citizen’s Consumer Council Inc., 425 US 748
(1976).
See: Greenwood D (1998), Essential Speech: Why Corporate Speech Is Not Free, Iowa Law
Review, 83: 995-1010.
See: Reno v. ACLU, 521 U.S. 844 (1997).
See: Buckley v. American Constitutional Law Foundation, 525 U.S. 182 (1999)
See: Ely J (2004). Property Rights And Free Speech: Allies Or Enemies. Social Philosophy And
Policy, 21(2): 177-194.
during which the sponsor effectively compels the SPV to adopt specific dividend policies

and debt policies.

C. Securitization Constitutes A Violation Of The Right-To- Contract Clause Of The US

Constitution, And Hence, Is Illegal 11

11
On constitutionality of statutes and processes in general, see the following articles.
See: Chemerinsky (2005)(supra).
See: Alexander (2002)(supra).
See: Povel (1999)(supra).
See: Alexander (2002)(supra).
See: Hirsch (1994)(supra).
See: Cotlar (Jan. 2003)(supra).
See: Nimmer (1958)(supra).
See: Dunbar (Feb. 1901)(supra).
See: Thomas (2003)(supra).
See: Huhn (2004)(supra).
See: White (1939)(supra).
 For purposes of constitutional law analysis, the relevant ‘state-action’12 consists of

any of the following. The US Congress’s failure to create a uniform set of laws for

securitization (given securitization’s profound effects on the US economy) constitutes a

“state-action”.

The sponsor’s selection of collateral for securitization is essentially a

governmental regulatory role, and hence constitutes a “state action”. The adverse events

in the sub-prime mortgage markets and ABS markets in the US during 2007 and 2008

confirm that the government has a significant interest in controlling and regulating the

quality of collateral in securitization transactions.

The sponsor’s act of specifying/controlling the terms of the ABS offering

constitutes a “state-action”, because by doing so, the sponsor is essentially acting in the

regulatory capacity of the government.

12
See: Evans v. Newton, (supra).
See: Evans v. Abney(supra).
See: Burton v. Wilmington (supra).
See: Moose Lodge v. Irvis(supra).
See: Edmonson v Leesville Concrete(supra).
See: Tushnet M (2003). The Issue Of State Action/Horizontal Effect In Comparative
Constitutional Law. International Journal Of Constitutional Law, 1(1):79-98.
See: Marsh v. Alabama, (supra).
See: Screws v. US (supra).
See: Ellman (2001) (supra).
See: Gardbaum (2003) (supra).
See: Gardbaum (2006) (supra).
See: Currie (1986) (supra).
See: Goldberg (2005)(supra).
See: Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819).
See: United States Trust Co. v. New Jersey, 431 U.S. 1 (1977).
See: Energy Reserves Group v. Kansas Power & Light 459 U.S. 400 (1983).
See: W. B. Worthen Co. v. Thomas, 292 U.S. 426 (1934)(proceeds of life insurance policies)
See: Edwards v. Kearzey, 96 U. S. 595.
See: Bank of Minden v. Clement, 256 U. S. 126.
See: Home Building & Loan Assn. v. Blaisdell, 290 US 398 (1934)(foreclosure and right of
redemption).
 The failure (omission) of certain industry participants such as the National

Association Of Securities Dealers, some securities exchanges and the US Securities &

Exchange Commission to enact specific laws that govern the ABS terms constitutes a

“state action”. These entities are either the government or are acting in the same

regulatory role as the government.

Securitization constitutes a deprivation of the SPV’s, and the SPV shareholders’ and the

SPV trustees’ constitutionally protected right to contract 13 for several reasons. Firstly, the

sponsor has almost complete control of the SPV in the pre-offering period, and determines terms

of the ABS issuance/offering. Secondly, the SPV shareholders/bondholders and the SPV trustees

cannot change the terms of the ABS, and typically cannot change elements of the post-offering

operations of the SPV. Thirdly, the state-actions described above results in significant

limitations/restrictions on the pre-existing contractual rights of the SPV’s shareholders and

trustees – ie. their rights before the SPV purchases (true-sale) or accepts (assignment) collateral

from the sponsor.

The SPV shareholders, SPV bondholders and the SPV trustees have constitutionally

protected property interests in negotiating and entering into contracts (about the SPV’s

13
See: Nollan v. California Coastal Commission, 483 US 825 (1987);
See: Dolan v. City OF Tigard, 512 US 374 (1994);
See: Lochner v. New York, 198 US 45 (1905).
See: Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470, 505 (1987).
See: Boys Scout Of America v. Dale, 530 US 640 (2000).
See: Regan v. Taxation With Representation, 461 US 540 (1983);
See: Healey v. James, 408 US 169 (1972)(freedom of association); Brotherhood Of Railroad
Trainmen v. Virginia, 377 US 1 (1964)(right of association).
See: Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819),
See: United States Trust Co. v. New Jersey, 431 U.S. 1 (1977).
See: Energy Reserves Group v. Kansas Power & Light 459 U.S. 400 (1983).
See: W. B. Worthen Co. v. Thomas, 292 U.S. 426 (1934)(proceeds of life insurance policies)
See: Edwards v. Kearzey, 96 U. S. 595;
See: Bank of Minden v. Clement, 256 U. S. 126.
See: Home Building & Loan Assn. v. Blaisdell, 290 US 398 (1934)(foreclosure and right of
redemption).
operations) that are not un-conscionable, void, illegal or otherwise offensive to others. These

property rights arise from state constitutional law, state contract law, state property laws,

expectations and norms.

With regard to the right-to-contract issues in securitization, in some circumstances, there

are no public policy concerns that justify upholding the sponsor’s and intermediary bank’s

property interests in efficiently structuring and distributing Asset Backed Securities, which are far

out-weighed by the property interests of the SPV’s bondholders and or equity-holders. The

contracts at issue have far reaching effects on other parties and significant economic effects on

the parties.

D. Securitization Constitutes A Violation Of The Equal Protection Clause

For purposes of constitutional law analysis, the relevant “state-action”14 consists

of the US Congress’s failure to create a uniform set of federal laws for securitization

given the significant magnitude of securitization transactions in the US (and its pervasive

effect on the overall US economy). Furthermore, the securitization-sponsor’s selection of

collateral for securitization can be construed as a ‘state-action” because its essentially

akin to a governmental regulatory role - the government has a substantial interest in

14
See: Evans v. Newton (supra).
See: Evans v. Abney (supra).
See: Burton v. Wilmington (supra).
See: Moose Lodge v. Irvis (supra).
See: Edmonson v Leesville Concrete (supra).
See: Tushnet M (2003). The Issue Of State Action/Horizontal Effect In Comparative
Constitutional Law. International J. Of Constitutional Law, 1(1):79-98.
See: Marsh v. Alabama (supra).
See: Screws v. US (supra).
See: Ellman (2001)(supra).
See: Gardbaum (2003)(supra).
See: Gardbaum (2006)(supra).
See: Currie (1986)(supra).
See: Goldberg (2005)(supra).
controlling the quality of assets that are securitized in order to minimize disruptions

caused by default of ABS.

Under the US Constitution, Securitization violates the Equal Protection Doctrine15

because the ‘specific combination of application of different laws/rules and

circumvention of requirements of laws/rules” unfairly discriminates between those who

have the knowledge to structure bankruptcy-remote entities/transactions and those who

do not have the knowledge; and also unfairly discriminates between parties who can

afford to hire skilled lawyers and accountants to circumvent relevant bankruptcy law

statutes, and those who cannot afford to hire skilled advisors; and also unfairly

discriminates between different securitization transactions that are effected using various

combinations of state corporation laws, federal bankruptcy laws, state mortgage laws and

state UCC laws (in such circumstances, the final result is the same but the legal

protections/remedies provided to various parties differ significantly). In Securitizations,

the ‘specific combination of application of different laws/rules and circumvention of

requirements of laws/rules’ unfairly discriminates between SPVs that are different entities

(ie. trusts versus LLPs versus LLC versus C-Corporation); and also unfairly discriminates

between investors that have good knowledge of bankruptcy laws, securities laws,

corporation laws and collateral analysis, and investors who don’t have such knowledge.

15
See: City of Phoenix v. Kolodziejski, 399 U.S. 204 (1970).
See: First National Bank v. Louisiana Tax Commission, 289 U.S. 60 (1933).
See: Griffith v. Connecticut, 218 US 563 (1910).
See: Cipriano v. City of Houma, 395 U.S. 701 (1969).
See: Home Building & Loan Assn. v. Blaisdell, 290 US 398 (1934)(foreclosure and right of
redemption).
See: Bard S (1961). State Action and the Equal Protection Clause: Status of Lessee of Public
Property. Michigan Law Review, 59(3):450-454.
 In securitization transactions, the magnitude of legal protection provided by the

legal documents (agreements, statutory protection, etc) for the mortgagee/borrower and

the investors differ significantly, and depends on the nature of the ABS tranche and the

associated protections.

The foregoing challenged classifications do not serve any compelling government

interest, and the classifications are not substantially related to serving any legitimate

government interest 16.

F. Securitization Constitutes A Violation Of The Separation Of Powers Doctrine

The Separation-of-powers doctrine is relevant to asset securitization, because

several institutional simultenuously create and enforce laws that affect securitization. 17 In

Securitization, thmain disputes are about default, replacement/substitution of collateral

and trustees’ duties. For purposes of constitutional law analysis, the relevant ‘state-

action’ consists of the US Congress’s failure to create a uniform set of federal laws for

Securitization transactions given the substantial volume of securitization transactions in

the United States. As discussed above, the sponsor’s selection of collateral for

securitization is also essentially a “state action” in which the sponsor is effectively

16
See: Railway Express v. New York, 336 U.S. 106 (1949)
See: Kotch v. Bd. of River Port Pilot Commissioners, 330 U.S. 552 (1947).
See: Skinner v. Oklahoma, 316 U.S. 535 (1942).
See: Korematsu v. United States, 323 U.S. 214 (1944).
See: Loving v. Virginia, 388 U.S. 1 (1967).
See: Washington v. Davis, 426 U.S. 229 (1976).
See: Arlington Heights v. MHDC, 429 US 252 (1977).
See: City of Phoenix v. Kolodziejski, 399 U.S. 204 (1970).

See: Katyal N (2006). Internal Separation of Powers: Checking Today’s Most Dangerous
17

Branch From Within. Yale Law Journal, 115:2314-2320.

performing a regulatory role in place of the federal government. This is because the

federal government is statutorily and morally obligated to regulate the quality of

collateral used in Securitization transactions in order to reduce or eliminate disruptions

that may arise from defaults of Asset Backed Securities. The federal government has

effectively shifted part of this regulatory burden to the rating agencies, which control the

quality of collateral used in securities – the ratings produced by rating agencies determine

which ABS can be purchased and held by financial institutions, government agencies,

certain institutional investors and individual investors. The recent turmoils in the global

securitization markets illustrate the importance of the role of selection of collateral for

securitization.

When there are problems with Securitization transaction in which SPVs are used,

the three usual venues for resolution of disputes are the US Bankruptcy Court and the US

Securities and Exchange Commission (SEC), and the US Internal Revenue Service (IRS).

However, the bankruptcy laws that govern aspects of Securitizations (and SPVs) consists

of both federal bankruptcy statutes and bankruptcy judge-made law (such as stays). The

judge-made law arises partly from the significant discretion granted to bankruptcy judges

pursuant to bankruptcy statutes, and the substantial flexibility in subsequent

interpretations of such judge-made laws. Hence, under the US Constitution, the US

Bankruptcy court’s combined role of enactment and enforcement of laws pertaining to

SPVs in securitization, constitutes violations of the Separation-of-Powers doctrine.

The US SEC adjudicates disputes related to disclosure by SPVs, sponsors, rating

agencies and investors. The SEC enacts and implements (performs an adjudicatory

function) its own rules pertain to disclosure, which the SPV, sponsors and rating agencies
must comply with. Hence, the SEC’s combined role of enactment of laws, adjudication

of violations/disputes and enforcement of laws pertaining to SPVs in securitization,

constitutes violations of the separation-of-powers doctrine.

The US IRS adjudicates disputes and non-compliance related to taxation of SPVs,

sponsors, rating agencies and investors; and also enforces the US Internal Revenue Code.

The US IRS also creates man-made regulations, its own statutes and case-law (in its

adjudicative proceedings). The IRS implements both its own rules and the US Internal

Revenue Code, which the SPV must comply with. Hence, under the US Constitution, the

IRS’s combined role of enactment of regulations, adjudication and enforcement of laws

pertaining to Securitization SPVs, constitutes violations of the Separation-Of-Powers

doctrine.

G. The Nature Of Required New Regulations.

 In the US, there is a significant need for new federal laws for regulation of

Securitization processes. 18,19 Ideally, these new federal laws will consist of securities

laws, contract law, commercial law, corporations law (with emphasis on SPVs, special

trusts and traditional corporate entities that are used in Securitization) and civil

procedures. These statutes can be either new comprehensive statutes, and or statutes that
18
See: St. Marc G (2001). French Securitization Law and Practice.
http://www.securitization.net/international/europe/France/Gide/Marc_Kergommeaux0
51501-2.asp.
See: Bar-Gill O, Barzuza M & bebchuk L (2006). The Market For Corporate Law. Journal Of
Institutional And Theoretical Economics, 162: 134-171.
See: Bebchuk L & Hamdani A (2006). Federal Corporate Law: Lessons From History. Columbia
Law Review, 106:1793-1839,
See: Kahan M & Rock E (2005). Symbiotic Federalism And The Structure Of Corporate
Laws. Vanderbilt Law Review, 58: 1604-1614.
See: Farber D (2008). Constitutional Restrictions on Regulation by American States. Institute Of
Governmental Studies, University Of California, Berkeley, CA, USA. Working Paper #WP2008-
5. http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1150&context=igs

See: Australia - Funds Management and Securitisation for Banks:

http://www.apra.gov.au/banks/prudential/PS%20C2.PDF.
See: Regulatory guidelines of Hong Kong Monetary Authority:
http://www.geocities.com/seclawhk.htm.
See: The New Russian Securitization Law October 31, 2008 -
http://www.totalsecuritization.com/ArticleLogin.aspx?ArticleID=2039427.
See: Agboyibor P & Tallot P (2008). France: A New Legal Framework For Securitization.
http://www.orrick.com/fileupload/1421.pdf.
See: Agboyibor P, Bartlam M & Messina P (June 2006). Selected Legal Aspects of the
European Securitisation Practice. Orrick, Paris, France. Available at:
http://www.orrick.com/fileupload/783.pdf.
See: True R (1998). New Developments in Japanese Asset Securitization: Open the Floodgates.
http://www.tuj.ac.jp/newsite/main/law/lawresources/TUJonline/Corporate/assetsecwith
%20glossary.html.
See: Federal Financial Markets Service (Russia) (2008). Passage of Legislation on Securitization
to Create New Possibilities for Financial Market Participants.
http://www.ffms.ru/eng/catalog.asp?ob_no=9149.
See: Dragunov V (March 2007). Proposed Changes to Securitization Legislation in Russia.
Baker & McKenzie. http://www.gtnews.com/article/6657.cfm.
See: Veirano Advogados (2006). New Regulation of Securitization of Receivables (Brazil).
http://www.hg.org/articles/article_1703.html.
See: Virtopeanu C (2007). Securitisation In Romania: Highlights of the New Legal Framework.
http://www.seelegal.org/upload/documents/Media_Articles/Articol%20Global%20Securitisation
%20aprilie%202006.pdf.
See: Frankel T (2006). Cross-Border Securitization: Without Law But Not Lawless. Duke
Journal Of Comparative & International Law, 8: 255-275.
http://www.mayerbrown.com/climatechange/article.asp?id=4389&nid=10445.
modify or clarify existing federal and state statutes that govern Securitization in whole or

part. Given the constitutional problems discussed in this article, the proposed federal

statutes should preempt states laws (contracts, corporations, debtor/creditor laws, etc.)

that apply to the securitization process; and there should be comprehensive pre-emption

standards. The proposed federal statutes should provide more guidance and standards for

See: Scatigna M & Tovar C (Sept. 2007). Securitization In Latin America. BIS Quarterly Review.
2007.
See: Fitch Ratings (2007a). Securitisation In Emerging Markets: Preparing For The Rating
Process. Structured Finance, International Special Report.
See: Fitch Ratings (2007b). Structured finance in Latin America’s local markets: 2006 year in
review and 2007 outlook. Structured Finance, International Special Report.
See: Gyntelberg J & Remolona E (June 2006). Securitization In Asia And The Pacific:
Implications For Liquidity And Credit Risks. BIS Quarterly Review, June, pp 65–75.
See: Gyntelberg J, Remolona E & Tovar C (2007). Securitisation in Asia and
Latin America compared. In L Rob de Vries & P Ali (eds), Innovations in
securitisation, Yearbook 2007, Kluwer Law International.
See: Uqbar (2007): The Brazilian securitization market: a primer, special edition.
See: Boys P (September 2008). New Legal Framework for Securitization. Lovells.
http://www.internationallawoffice.com/Newsletters/Detail.aspx?g=a9415593-42c6-
4286-bea3-eb2d592c6a0c.
See: Ward R (2007). The Process of Enacting Securitisation Legislation and Regulations in New
Markets. Citibank, London, UK. http://www.ubs-asb.com/s/Download/Robin_Ward.ppt.
See: Zhou J (2000). Launch of The Securitization Market in the PRC? Still A Long
Way to Go. Securtization Yearbook 2000 (IFLR). http://www.fangdalaw.com/laws/Publication-
Law7.pdf.
See: Practising Law Institute (2009). New Developments in Securitization 2008: New
Developments in Mortgage Backed Securities (CMBS, RMBS, HELOC, and ASF Project
Restart).
See: Parliamentary documents 5199; ordinary session 2002-2003 and 2003-2004 (Luxembourg)
(March 2004).
http://www.lff.lu/fileadmin/redaction/documents/Legal_texts/2004_03_22_securitisation.pdf.
See:
http://asianbondsonline.adb.org/japan/rules_and_regulations/market_regulation/securitization.php
. Japan's legal framework for securitization transactions includes laws such as:
a) The Securities and Exchange Law (SEL) (amended as the Financial Instruments and Exchange
Law) – these statutes govern securities and securitization transactions.
b) The Japanese Civil Code - stipulates that a notary’s certification to each debtor is required to
complete asset transfers for non-negotiable instruments.
c) The Law of Regulating Business for Specific Claims (known as MITI Law) permits leasing
and credit companies to complete an asset transfer with a special purpose company through
public notice.
d) The Law Concerning Securitization of Specified Assets by Special Purpose Companies (SPC
Law).
See: “Outline of the Amendment Bill of the Law on Securitization of Specified Assets by Special
Purpose Companies (SPC Law) and Related Laws” (Japan)(2008).
corporate entities (such as C-Corporations, LLCs, LPs, Trusts and S-Corporations) that

are used as SPVs in Securitization transactions; particularly for rights of holders of equity

interests, rights of holders of rights-to-payment, default by the SPV; proxy rights,

representation in bankruptcy proceedings, corporate power, etc..

This proposed body of federal law will also contain civil and criminal sanctions

that will be applicable only to securitization processes – existing civil and criminal

http://www.mof.go.jp/english/system/fs004.htm.
See: Messina P (2004). New horizons for the Italian securitisation market. Orrick, Herrington &
Sutcliffe.
See: Nolan A (2005). The Securitization Legal and Regulatory Framework. (Goodwin &
Procter). ASF Securitization Institute, February 29, 2005.
See: European Financial Markets Lawyers Group (May 2007). Legal Obstacles To Cross-Border
Securitization In The EU. Available at: http://www.efmlg.org/Docs/EFMLG_report%20on
%20legal%20obstacles%20to%20cross-border%20securitisations%20in%20the%20EU_adopted
%207%20May%202007.pdf.
See: American Securitization Forum (2006). ASF Securitization Institute: The Securitization
Legal and Regulatory Framework. http://www.americansecuritization.com/uploadedFiles/Legal
%20&%20Regulatory%20Outline.pdf.
See: Oh, G & Park J (2003). Developing the Asian bond markets using securitization and credit
guarantees. Korean Institute of Finance Working Paper, no 2003–04.
See: Reserve Bank of Australia (Sept. 2004). Asset Securitisation In Australia. Financial
Stability Review, pp 48–56, September.
See: Gyntelberg J & Remolona E (June 2006). Securitisation in Asia and the Pacific: implications
for liquidity and credit risks. BIS Quarterly Review. Available at:
http://www.bis.org/publ/qtrpdf/r_qt0606f.pdf.

19
This raises the issue of Federalism and preemption.
See: Greve M (October 2003). Subprime But Not Half Bad: Mortgage Regulation As A Case
Study In Preemption. Federalist Outlook #19.
See: Erin D & Rice T (September 2006). Federal Preemption Of State Bank Regulation: A
Conference Panel Summary. Chicago Fed Letter (Federal Reserve Bank Of Chicago).
See: Bardhan P (2002). Decentralization Of Governance And Development. Journal of economic
Perspectives, 16:185-205.
See: Buchanan J (1950). Federalism And Fiscal Equity. American Economic Review, 40:583-
599.
See: Cary W (1974). Federalism And Corporate Law: Reflections Upon Delaware. Yale Law
Journal, 83:663-705.
See: DeFigueiredo R & Weingast B (2005). Self Enforcing Federalism. Journal of Law,
Economics & Organization, 21:103-135.
See: Easterbrook F (1983). Antitrust And The Economics Of Federalism. Journal Of Law &
Economics, 26:23-50.
sanctions that are applicable to securities law violations will still remain applicable to

securitization processes.

The proposed federal laws should address the constitutional problems inherent in

the Securitization process, which are discussed in this article. The proposed federal

statutes should address some of the “state-action” problems discussed above; and should

also govern the standards for the selection of collateral (amount, type, rating, duration,

monitoring, third-party verification, over-collateralization, types of guarantees/insurance,

servicing; etc.), and disclosure requirements for collateral used in securitization should be

designed to improve transparency and help fulfill the government’s regulatory

obligations.

The proposed federal regulations should address the true-sale/assignment

controversy, the perfection of security interests in collateral, and the Substantive

Consolidation controversy. There should be a single body of federal law to govern these

issues, and there should be clear filing requirements, evidentiary standards, and defined

course-of-conduct or usage of trade (that will reduce transaction costs). The key

considerations when developing these statutes should be to increase transparency and

reduce transaction costs, information asymmetry, shirking, propensity for fraud, agency

problems, and any perceived unfairness of legal requirements. The proposed federal

statutes should also address the findings and recommendations in Nolan (2005) and the

2007 report of the European Financial Markets Lawyers Group (May 2007).

The proposed federal statutes should address the occasional conflicts between the

Uniform Commercial Code (“UCC”), and state debtor-creditor statutes; and between the

US Bankruptcy Code and local/state mortgage laws.

 The proposed federal statutes should provide specific disclosure requirements and

standards for the entire Securitization process – for Terms-sheets, written

communications, Press Releases, computation materials, offering memoranda, and

conference calls.

The proposed federal statutes should address the inconsistencies between the

Investment Company Act of 1940 (the “1940 Act”) and Securitization processes. Any

un-registered Securitization SPV that is deemed subject to the 1940 Act, faces adverse

consequences including SEC penalties, criminal penalties and voiding of its contracts.

The provisions of the 1940 Act includes limitations on transactions with affiliates,

leverage, volume of senior securities, and the amount of unsecured borrowing; in addition

to Registration/compliance requirements and Corporate governance requirements.

There should be some uniformity of tax consequences for the various types of

corporate entities that are used as SPVs in Securitization. This may require the

amendment of the Internal Revenue Code, or the enactment of new tax laws that apply

only to corporate entities that are designated as SPVs in Securitizations.

The proposed federal statutes should also provide adequate civil and criminal

penalties for conspiracy and for non-compliance. Such penalties will be proportional to

the perpetrators’ total wealth and the magnitude and scope of misconduct.

The proposed federal statutes should provide for summary proceedings for

various levels of offenses (based on culpability and expected magnitude of discovery).

The summary proceedings will include non-jury trials, special hearings for summary

judgments, subpeonas and search warrants. There should be limitations on motion

practice, and limitations on the timing and extent of discovery. The proposed federal

statutes should provide for standards of proof that will minimize investigation costs and

enforcement costs while allowing for fairness and minimum standards of culpability.

H. The Implications Of Change.

The Asset-Backed securities market is large and global, but in most countries (and

as indicated in the footnotes above), Securitization principles were copied from, and are

very similar to US securitization laws and processes.

The key issue is whether US state or federal Appellate Courts will declare

Securitization to be un-constitutional and or illegal, given the large scale of

Securitization. In the US, the direct effects of any such “adverse” judicial decision will

initially be limited to one state or federal appellate jurisdiction, until other appellate

jurisdictions follow, or until the US Supreme Court renders judgment on the issue. Any

such decision will be considered as secondary opinions in other court jurisdictions in the

US.

During 2008, the US Congress enacted new financial regulations, and partly

implemented the US Government’s federal bailout scheme. During February 2009, U.S.

President Barack Obama pledged US$275 billion to a program that will reduce mortgage

payments for as many as Nine million financially-distressed homeowners, and expand the

role of Fannie Mae and Freddie Mac in reducing foreclosures. These trends are clear

indications that deteriorating economic conditions may eventually compel the US

Congress to completely overhaul the legal framework for Securitizations.

 The US securitization market can reasonably be construed to be expecting further

regulatory changes and new laws for securitization, given the magnitude and scope of the

new laws that were enacted by the US Congress during 2008 and the continuing increase

in default rates of ABS in the US. Such expectations may already be priced into current

ABS prices, and may also have resulted in the downward trends in the prices of ABS and

some underlying collateral such as mortgages and real estate.

The benefits of declaring Securitization to be un-constitutional can outweigh any

gains from continuing the current “composite” regulatory scheme for securitization. The

same conditions that precipitated the historic new financial regulations enacted by the US

Congress in 2008, may to continue to exist in whole or in part for the next few years.

According to a US research company, there are ongoing permanent changes in the

standard of living in the US, as manifested by increasing unemployment, increasing

consumer and corporate bankruptcies, an Eight Trillion US Dollar negative wealth effect

from declining home values in the US, and a Ten Trillion US Dollar negative wealth

effect from declining and weakened capital markets, and Fourteen Trillion US Dollars

worth of consumer debt in the US. As of December 2008, there was at least US$890

Billion of issued ABS in the US, and the default rate for ABS increased during 2008 and

2007.

One approach will be to temporarily halt all new-issue securitization transactions

while the US Congress enacts new legislation (between July 2008 and May 2009, there

was a significant decline in the volume of new-issue ABS globally). The other approach

will be to simply maintain the status quo and gradually introduce new federal

Securitization legislation.
 If other countries continue to approve and allow Securitization transactions while

the US Appellate Courts declare Securitization to be un-constitutional, the economic

consequences to the US economy may not be significant for several reasons. Firstly, a

substantial volume of Securitizations can be temporarily or permanently shifted to SPVs

that are registered in “off-shore” jurisdictions (which typically offer tax benefits) or in

other major financial centres such as London, Tokyo and Dubai. Most of the major

investment banks (that control more than Fifty percent of the global new-issues

Securitization market) have offices in all the major financial centres, and they manage

their ABS risks on a global basis, and thus, the issue of choice of law and jurisdiction is

somewhat less relevant. Secondly, its probable that participants in the US ABS market

will create new securitization processes that may solve some of the constitutional

problems enumerated in this article. Similarly the Financial Services Committees in the

US Congress are also likely to develop new laws that address the constitutional problems

inherent in the current Securitization processes in the US (the events and new federal

statutes that are associated with the sub-prime loans problems in the US are an example

of how the US Congress can react to major legal problems in financial markets.

Thirdly, most ABS are short term or medium term securities (they have terms of

0.5 to five years). Hence, declaring Securitization un-constitutional in the US will affect

only a segment of the US bond market, but any impact will probably be muted by the

new laws that were enacted by the US Congress during 2008, and by prior market

expectations.

Fourth, if Securitization is declared un-constitutional the effects may not be

overly detrimental but will result in an increase in servicing costs. In one scenario, where
the collateral consists of income producing assets, the ABS bond-holders will take title to

the collateral, and perhaps eliminate all equity interests and continue to receive the

income and other cash proceeds from the collateral. Alternatively, the issuer/sponsor may

be required to refund the outstanding balance of the issued ABS to investors – this

scenario is most likely in a Securitization that involves an assignment of collateral.

Hence, any judgment that declares Securitization to be un-constitutional must also

include summary liquidation procedures or summary partition procedures which will

preclude formal bankruptcy proceedings. Bankruptcy proceedings are notably time

consuming and expensive, and the large number of bondholders or Shareholders of

Securitization SPVs is likely to extend and complicate any bankruptcy process.

Conclusion

Under US laws (and perhaps in most countries whose laws are based on British

laws), Securitization is clearly un-constitutional. Thus, the US Congress should enact

special federal securitization statutes that will regulate all aspects of securitization.

Furthermore, there should be changes in law enforcement patterns and practices such

that fraudulent misconduct can be identified in a timely manner.