The Study Of Asset Securitization Legilation From The Sub-Prime Crisis Perspective

The article includes "Introduction ", which includes the topics, the academic overview, the research path, the main ideas and the innovations. and the succeeding five chapters.Securitization, as the most important innovation in the last 30 years, had globally grown dramatically and gained a good reputation among theorists before the sub-prime crisis. The crisis calms the panic of securitization and it has been blamed as the main cause of the crisis. In China, securitization emerged in the early 1990s and has gained a rapid enlargement in recent years as the types of securitized assets and the volume of securities have both multiplied. In spite of the impact of the crisis, asset-backed securities still increased in 2008 in China. With the crisis goes gradually, the industry urges to develop securitization again. The purpose of this article is to give a comprehension on the market value and the normative underpinning of the transactions in the background of sub-prime crisis and to analyze the pros and cons of transactions with a view to developing China’s asset securitization market and establishing our securitization law.ChapterⅠ"Overview of Securitization" sets the stage and consists of three sub-parts. The first part briefs the development of securitization in the U.S., indicates the causes, other than the unique legal structures of transaction, which contribute to the rapid growing, summarizes the development of transactions in continental Europe and in Asian emerging markets, and compares the difference between these markets and the U.S. Considering the different performance of securitization in the U.S. and in other markets, the article has the idea that the transactions is not the only reason causing the crisis. The second part focuses on how the securitization works. The structures of securitization transactions are many and varied. This paper focuses on the structure that is commonly viewed as being prototypical, especially on the conformation of SPV and the credit enhancement. The last part examines the fabrics of MBS, ABS and CDOs transactions and emphasizes on the last, which has the most complex structures, the complicated conflicts among the parties and is the main cause of the crisis. At the end, the whole business securitization, which is a hybrid, is explored.ChapterⅡexamines the market value of transactions and is divided into three sub-parts. PartⅠoverviews the Modigliani-Miller Theorem (the Irrelevance Proposition), the Trade-off Theory and the Pecking Order Theory, the three leading theories in corporate financial academy, then probes the advantages and disadvantages of financing through securitization, debts financing(secured or unsecured),and equity financing, and concludes that securitization transaction can offset some shortcomings of other financing. PartⅡexplains the efficiency of securitization. The greatest benefit of securitization is its cost saving for the originators attributable to disintermediation, specialization and economies of scale, and fundamentally the originators’ asymmetry improvement. PartⅢanalyzes the conflicts of the participants and the potential systemic risks caused by the transactions. With the reference of the foreign scholarships, the article addresses the core question:the agency conflicts and the difficulty to align the incentives of participants, then explores the adverse effects of the originate-to-distribute model, which could lead to market systemic risk, the lack of securities’ liquidity, and the complicated relations in transactions. At the end, the author gets the conclusion that the complexity of the transaction determines whether it has market efficiency.ChapterⅢdiscusses the normative underpinnings of securitization law and overviews the foreign legislative practices. Why do we need special legislations for securitization? How to legislate for it? This chapter is devoted to answering these questions. The chapter falls into two parts. The first part addresses the illegality of securitization according to the traditional law, which indicates the necessity of special legislation. In the U.S., the motivation of the originators to initiate the transactions is to avoid ’the Bankruptcy Tax’. Because of the widespread of ’the Bankruptcy Tax’ in different jurisdictions in spite of the different burden degree, the author gets the conclusion that avoidance of ’the Bankruptcy Tax’ is the main motivation for the originators to set out the transactions. With this conclusion, the second part of this chapter then discusses the acceptability of the originators’ avoidance of ’the Bankruptcy Tax’ and draws the conclusion that the traditional path of legislation is to approve only some types of transactions. The legislations in U.S., continental Europe and Asia have all followed this path.ChapterⅣexamines the regulative challenge the traditional law faces after the sub-prime crisis. This chapter includes three sub-parts. After the overview of the sub-prime crisis, the article addresses the lessons from the subprime mortgage meltdown, including why disclosure fails to function, whether the originate-to-distribute model causes serious loan-requirement falling due to the originators’ moral hazards, why the rating agencies fails to anticipate the downgrades and why the market-discipline approach is insufficient. With reference of other scholars’ advises, the author thinks that the main ways to regulate the market risks caused by securitization transactions would be to reduce the moral hazards resulting from the originate-to-distribute model and take measures to cope with credit ratings’ inaccuracy.ChapterⅤgives advises on the construction of China’s securitization law. After overview of China’s securitization practice and the statues applicable to transactions, the article concludes that the existing institutions can not provide the legal foundation for transactions, is contradicted with the requirements of the market efficiency, and is in lack of strict regulation against market risks. For the construction of China’s securitization law, the author argues that a correct understanding of the pros and cons of developing securitization market at present is the premise and the basis of current legislation; fairness and efficiency are the principles in the institution’s construction; correct positioning the role of government and respect for the market should continue to be required in institution’s construction due to our long-term planned economy history. Considering the reality of our current financial market, the author advices the promoting of the securitization of future receivables to broaden the firms and the public sectors’financing markets; with regard to financial assets securitization, we should be very prudent in promoting in order to avoid market systemic risks. In the legislative model, we can draft a basic law, which provides the foundation of transactions, and some other special rules for resolving the unique issues pertaining to individual type of transactions. In the mean time, establishing appropriate regulations is necessary to avoid the market risks, as well as to ensure the regulatory efficiency.