Congress has eliminated several sections of a bill that could have dealt a mortal blow to the synthetic and cash securitization market, according to DW sister magazine Real Estate Finance & Investment. The clauses were part of the pending Employee Abuse Prevention Act of 2002 and would have allowed bankruptcy trustees to seek a more senior position than securitization investors in the event of a bankruptcy. This could have resulted in investors suffering delays in receiving recovery values or even losing their whole investment because the bankruptcy trustees could have had priority over the company's securitized assets, according to Lorraine McGowen, partner in the bankruptcy and debt restructuring group at Orrick, Herrington & Sutcliffe in New York. Steven Weise, attorney in the Los Angeles offices of Heller Ehrman White & McAuliffe, agreed, "Some of the provisions could have had a severe and dramatic effect on the structured finance markets."
This act would have put the future of bankruptcy-remote vehicles into doubt. "There would have been a huge question if you could have transfers into a bankruptcy-remote vehicle," said Weise, adding that this also would have affected rating agencies' valuations when looking at new issues.
McGowen explained that in a typical synthetic securitization the assets are transferred to a special purpose vehicle and in turn certificates are transferred to the trustees as a book entry rather a physical security. If this legislation had been passed it would have meant that unless the physical assets were transferred to the trustees the bankruptcy trustee could have stood in a senior position to the securitization trustee.
Although the structured finance markets could be off the hook, Weise noted that Congress has said it will revisit the issue, possibly in the next session. "We were very pleased that the bill is likely to be changed as a result of a lot of lobbying. And now that it has been changed, we will stay in close touch with Congress. The lesson here is that you always have to pay close attention to what is going on in Congress. Our discussions there were fruitful," he said. Sections 102, 103, 105 and 203 are likely to be cut from the bill, which was sponsored by Senator Richard Durbin (D-Ill.) and Rep. William Delahunt (D-Mass.).
