Book Review
[On this page, we review securitization books. If you are the author or publisher of a book relevant to securitization and structured finance, you can send a copy to our address, to be considered for review]
Securitization:
Structured Financing, Financial Asset Pools and Asset backed Securities
By Tamar Frankel
Second edition 2005, published by Fathom Publishing Company
Tamar Frankel’s [see www.tamarfrankel.com] Securitization is a massive effort: the mass goes in two volumes in over 1200 pages, and considering the fact that the book’s focus is not on everything about securitization but principally the legal aspects, it is an intensive source of information and analysis on the subject. The second edition of the book has come after nearly 15 years, during which both the market and the laws surrounding securitization have undergone a massive change – hence, Tamar’s efforts at revising the book must have been no less than rewriting it.
The book is broadly into 3 parts. The first part contains prelims – chapters about what and why of securitization. Part II gets into what is popularly termed as securitization, viz., pooling of portfolios and issuance of securities. Part III gets into what is clearly the precursor to securitization and still followed in several cases – loan participations.
The book’s basic strength lies in elaborate treatment of the legal issues concerning securitization. The author has devoted more than 200 pages on compliances with the Investment Company Act, Securities Act and the Securities Exchange Act. The perennial question facing all financial innovations including securitization is the form versus substance question – the transaction is structured as a sale, but is it really a sale? On this issue, the author says: “Like other instruments that do not bear clear “class earmarks”, the transfer of loans to SPVs can point to both loans to the transferor and an assignment of beneficial ownership in the loans, and courts do not follow a uniform analysis in choosing and weighing the earmarks”. She then goes through the caselaw on the issue. The author cannot be expected to develop a test or series of tests for distinguishing between sales and financings, as such a question has to be largely subjective, she nevertheless points out the factors that are relevant.
Likewise, on the tangled question of structure of SPVs and their consolidation, the author has done intensive analysis of caselaw, backed by her own commentary.
To give a complete picture, the author has included some chapters on financial structure of the transaction, such as Chapter 8 on the financial structure of the SPVs, and Chapter 9 on credit enhancement. Since it is essentially not a text on financial structuring, these introductory chapters would be helpful for a lawyer to get a quick view of the other parts of the story as well. At some places, there are paragraphs which seem like relics from the earlier edition, admittedly 15 years old. For instance, on page 72, the author seems to suggest that a pool with a small number of large loans will be better than one with large number of small loans: on the contrary, financial theory suggests that correlation will be reduced if the pool is more granular. Likewise, the chapter on credit enhancement largely deals with the regulatory angle, instead of comparing the substantive implications of different form of enhancement on the aggregate cost of the transaction.
Tamar is certainly very optimistic about securitization, and her long association with the industry gives her ample reason to be so. She says: securitization is here to stay. She expects relaxation in several laws for this to happen; while there has not been much of relaxation of laws (on the contrary, there have been tightening – like Regulation AB), securitization has continued to grow over time.
Tamar’s treatise is surely a very valuable source of information for everyone dealing with securitization in the US market.
Structured Finance
A Guide to the Principles of Asset Securitization
By Prof Steven L Schwarcz
This is the 3rd edition, 2002, of a very popular text by one of the World's most respected legal experts on securitization. Prof. Schwarcz does not need an introduction for a securitization professional – he was featured as an eminent personality on this site at http://vinodkothari.com/secpersonality.htm. Prof. Schwarcz has been contributing to structured finance by his articles and teachings, some of which form a part of the present loose-leaf volume.
Prof. Schwarcz is a quintessential legal expert, even though the present binder contains elaborate articles on taxation issues and accounting issues as well. Besides the main course consisting of 9 chapters, Prof Schwarcz gets into an essential issue that has been debated more often over last 3 months than over last 30 years: is securitization is zero-sum game or does it really lead to an tangible benefit on macro basis.
Moody's recently came out with an elaborate collection of articles on the same issue. Several others, such as Nomura Research, wrote articles highlighting the benefits of securitization [see also, a page on this site http://www.vinodkothari.com/secbenefits.htm.] It is not for the first time that analysts have questioned the relevance of securitization to economic development – see for instance, the views of Prof Henry Kaufman cited on our page linked above. In recent times, structured finance has come for criticism post-Enron as a mere re-arrangement of creditors rather than any value-addition. Prof. Schwarcz' book argues, in accordance with his well known stance on this issue, that the capital market window provided by securitization transactions is a positive value addition, presuming capital markets reduce agency costs and provide cheaper funding.
A common problem with books running into several editions is that they contain a lot of material added at different points of time. Thus, certain references to data or research are dated, such as references in Chapter 9 to market data from 1993 and 1994. Also, certain conclusions seem like going back in time – for example, "securitization can also be applied to "project finance" transactions to help meet the current demand for infrastructure development and improvement", while today, there are a number of whole business and commercial property securitization transactions already concluded on both project finance and infrastructure finance. Nonetheless, most of the sections of the book contain updated information. For example, Bankruptcy Reform Act of 2001 finds a place.
The discussion on the taxation issues both under non-REMIC and non-FASIT structures, as also under REMIC and FASIT is quite elaborate. Prof Schwarcz's chapter on regulatory issues goes into investment company regulations, and other SEC rules etc. It does not, however, address FDIC regulations which affect bank securitizations.
The various credit enhancements and structures used in the market are discussed at length, with the exception of only two significant developments: CDOs and synthetic structures. These would have made the book an even more complete and updated master-source to look into for finding wise answers to nagging issues.
Prof Schwarcz' treatise is a very authentic source of information and advice and is a must for all securitization professionals.
CDO Handbook
by J P Morgan
Not exactly a book but a booklet, but there cannot be a better introductory text on CDOs. Written by the CDO research team of J P Morgan, this 50 page text is a very simply, yet very comprehensive exposure to the ever-enticing field in securitization – CDOs. If there is only one book that you want to read on the subject, this is the one.
J P Morgan has a domineering presence in the US CDO and credit derivatives market, and therefore, the book comes from the horse's mouth. Sections of the book introduce various types of CDOs and compare the same. I have never come across a better presentation of the three main CDO types – arbitrage cashflow CDOs, balance sheet CDOs, and abitrage market value CDOs, than Table 4 on pages 9-10.
The booklet covers the subject concisely but comprehensively: there are legal issues, taxation and accounting issues, and finally, backed by a glossary of market terms.
The publication is available in the print form as well as PDF form.
We have also placed the PDF of the Booklet in the Premium section of this website – click here for access to the Premium section by joining the Premium mailing list.
Federal Income Taxation of Securitization Transactions
by James M Peaslee and David Z Nirenberg, 2001
This book, written by tax practitioners having substantial experience of the US tax rules relating to securitization transactions, is an evidence of the pain-staking research undertaken by the authors. Over 1300 pages on a specialised subject such as taxation of securitization is not easy reading by any means, but surely not an easy writing for the authors.
For the authors, this is the third revised edition of their first one that came out in 1994 but the present edition has an added importance in that it deals with both mortgage and non-mortgage securitizations.
The book is a complete discussion on taxation issues – it deals with originator taxation, vehicloe taxation and investor taxation.
On originator taxation, it delves into the often-complicated issue of whether a purported sale of receivables is a sale or a financing in substance. Credit risk retention by the tranferor is the key question in sale-financing distinction, and though the authors deal with the question in detail, they apparently do not provide a clear, mechanical answer: most tax questions do not have an answer in a book; they have an answer with the author of the book!
Vehicle tax rules on securitization in the USA have been amplified by the type of securitization vehicles – REITS, REMICs, FASITs and other vehicles. The authors devote chapters to each of these, besides talking in detail about offshore vehicles as well. As for FASITs, the authors have added a 160 page long chapter detailing out the nitty gritty of FASIT regulations.
Taxes are an ever changing domain, and the authors have promised to keep readers updated through their website, at http://www.securitizationtax.com/
The website contains updates right upto 30th June, 2001 which speaks of the level of commitment the authors have maintained.
If you have interest in the highly specialised area of securitization taxation, and unless you want to leave it all to your CPA, the book is a must read. [You can also buy the book at the website address above].