Research On The Legal Problems In Asset Securitization After The Financial Crisis

Asset securitization, as a financial innovation, has been broadly adopted by corporations as an effective approach for corporate finance abroad, and has won great preference among investors. However, the 2007 subprime crisis and 2008 global financial crisis illustrated that misused asset securitization was a reason for the explosion of the crisis. Asset securitization was under great criticism.In China, the development of asset securitization is now on the preliminary stage. Up to now, only a few previous asset securitization practices has happened. China's supervisory body is always prudential on its development, plus the existing obstacles in current financial and legal system, the development of asset securitization is not quite eye-catching. Nevertheless, China's reluctant development of asset securitization makes China escape from the trap of misusing over-leveraged asset securitization and avoid huge losses. It is worthy to remember that the rise and fall of global financial markets can not deny the essential characteristics of asset securitization, which is an effective, efficient financing approach and a lower-risky, higher-rewarding investment approach. It could be predicted that asset securitization would be further developed in China.As the Chinese term for crisis indicates, crisis means danger while opportunity. It is a great opportunity for China to learn from what happened in this financial crisis and design its own asset securitization legal structure in a right way at the very beginning, to enjoy its benefits but avoid its risks.This paper is focused on the things talked above. Admittedly, asset securitization contains complicated legal problems, and those reform proposals on asset securitization are also numerous. Therefore in this paper only a few topics are picked up to discuss. The United States is chosen for comparative study, because the US is the birth place of asset securitization, also its biggest market, also cradle of this financial crisis and finally the place where most reform proposals are raised and conducted. The experience and lessons of the US is of reference value for China. And, the discussion of this paper is focused on what was illustrated in the financial crisis and what is now going on post the crisis.There are five chapters in this paper.Chapter 1 is a general introduction on asset securitization. It introduces asset securitization's definition, transaction participants, transaction procedure. And it shows finally the legal relationships in an asset securitization transaction and the essence of asset securitization.Chapter 2 analyzes why asset securitization is considered as and is actually a doule-edged sword. Every participant in an asset securitization transaction enjoyed benefits from it and that is the reason why it is so popular in the market. However, over-ledged asset-backed securities accelerated the turmoil of financial markets and enlarged losses.Chapter 3 and 4 focus on 2 specific problem. Chapter 3 declares that investors of asset-backed securities should have a priority status upon the proceedings of assets and recovery of losses. However, in practice, investors'priority is eroded due to the current regulations upon perfection of security interest through registration system and regulations in bankruptcy code. The legal foundation of this declaration is the doctrine of secret liens in the U.S. common law.Chapter 4 discusses problems of credit rating agencies. Credit rating agencies performed improperly during the financial crisis and therefore led to risky investment of investors in the market. This chapter also introduces some most recent reforms in the US upon enhancing supervision on credit rating agencies.Chapter 5 proposes recommendations on China's establishment of a functional asset securitization system. Firstly it demonstrates those current obstacles in China's existing financial and legal system for asset securitization development, then it gives some suggestions on how to perfect China's registration system for credit transference and credit rating agencies supervision.