What is Securitization? And for What Purpose?

In Re: Defining Securitization, Professor Jonathan Lipson attempts to define a “true” securitization transaction, ultimately characterizing it as “a purchase of primary payment rights by a special purpose entity that (1) legally isolates such payment rights from a bankruptcy (or similar insolvency) estate of the originator, and (2) results, directly or indirectly, in the issuance of securities whose value is determined by the payment rights so purchased.” There is much to admire in Lipson’s attempt but also much to question. Let me start with the admiration. Lipson’s article is by far the most systematic and thoughtful analysis of what securitization should mean. Importantly, he describes what he sees as the “essential elements of a securitization, its inputs (payment rights), structure (bankruptcy-proof legal isolation), and outputs (securities).” Dividing securitization into inputs, structure, and outputs is rhetorically, if not also conceptually, sensible. Indeed, in teaching courses about securitization I often have referred to the left-hand side of the structure--which Lipson more felicitously calls the inputs--and the right-hand side of the structure--which Lipson (again more felicitously) calls the outputs. To the extent such terminology is intuitively descriptive, it advances understanding. In future courses, I intend to refer to inputs and outputs. I would, however, make one change to Lipson’s use of the term “structure” to describe the portion of a securitization transaction between the inputs and the outputs. Because “structure” intuitively means an entire structure--which, in the case of securitization, would also include the inputs and outputs--I suggest using the term “intermediate structure” instead. Thus, I will refer to a securitization transaction’s inputs, intermediate structure, and outputs. Even with that change, I still have several concerns with Professor Lipson’s definition of securitization. This Article will next discuss those concerns, showing that the definition is overly restrictive and potentially inaccurat

The Universal Language of International Securitization

This article introduces the reader to international securitization, first by explaining the concepts of securitization and then by examining securitization in a cross-border context

Keynote Address: Identifying and Managing Systemic Risk: An Assessment of Our Progress

This short address attempts to provide a succinct overview, critiquing how well the Dodd-Frank Act identifies and manages systemic risk

Nonlinear Collapse in the Semilinear Wave Equation in AdS

Previous studies of the semilinear wave equation in Minkowski space have shown a type of critical behavior in which large initial data collapse to singularity formation due to nonlinearities while small initial data does not. Numerical solutions in spherically symmetric Anti-de Sitter (AdS) are presented here which suggest that, in contrast, even small initial data collapse eventually. Such behavior appears analogous to the recent result of Ref. [1] that found that even weak, scalar initial data collapse gravitationally to black hole formation via a weakly turbulent instability. Furthermore, the imposition of a reflecting boundary condition in the bulk introduces a cut-off, below which initial data fails to collapse. This threshold appears to arise because of the dispersion introduced by the boundary condition.Comment: 4 pages, 5 figures, Updated with higher resolution runs; Updated with suggestions from referee and an added panel in Fig. 4; Accepted at PR

Observational Searches for Galaxies at z > 6

Although the universe at redshifts greater than six represents only the first one billion years (<10%) of cosmic time, the dense nature of the early universe led to vigorous galaxy formation and evolution activity which we are only now starting to piece together. Technological improvements have, over only the past decade, allowed large samples of galaxies at such high redshifts to be collected, providing a glimpse into the epoch of formation of the first stars and galaxies. A wide variety of observational techniques have led to the discovery of thousands of galaxy candidates at z > 6, with spectroscopically confirmed galaxies out to nearly z = 9. Using these large samples, we have begun to gain a physical insight into the processes inherent in galaxy evolution at early times. In this review, I will discuss i) the selection techniques for finding distant galaxies, including a summary of previous and ongoing ground and space-based searches, and spectroscopic followup efforts, ii) insights into galaxy evolution gleaned from measures such as the rest-frame ultraviolet luminosity function, the stellar mass function, and galaxy star-formation rates, and iii) the effect of galaxies on their surrounding environment, including the chemical enrichment of the universe, and the reionization of the intergalactic medium. Finally, I conclude with prospects for future observational study of the distant universe, using a bevy of new state-of-the-art facilities coming online over the next decade and beyond.Comment: Invited review, Accepted for publication in the Publications of the Astronomical Society of Australia. 40 pages, 10 figures, 3 table

The ‘Principles’ Paradox

This essay, prepared for a University of Cambridge conference on ‘Principles Versus Rules in Financial Regulation’, posits a new issue in that debate. Although principles-based regulation is thought to more closely achieve normative goals than rules, the extent to which that occurs can depend on the enforcement regime. A person who is subject to unpredictable liability is likely to hew to the most conservative interpretation of the principle, especially where that person would be a potential deep pocket in litigation. This creates a paradox: unless protected by a regime enabling one in good faith to exercise judgment without fear of liability, such a person will effectively act as if subject to a rule and, even worse, an unintended rule

Helping Microfinance Become Commercially Sustainable

Microfinance primarily refers to the making of small loans to low-income individuals and the poor, to enable them to start or expand small businesses. Currently, most microfinance loans are made through nonprofit microfinance institutions (MFIs) that receive donor money. However, donor-funded loans can account for only a small portion of the need. Microfinance analysts estimate, for example, that total market potential is $300 billion, of which only ten percent is currently being captured. Increasingly, the shortfall in funding is being met by commercial banks. But commercial-bank intermediation is expensive, with a global average effective interest rate (on commercial microfinance loans) reported to be as high as thirty-seven percent. I have separately argued that microfinance lending can benefit through securitization. Securitization envisions the creation of a special-purpose vehicle (“SPV,” sometimes called a special-purpose entity or SPE) that effectively replaces commercial banks as intermediaries of funds from capital market sources (such replacement being called “disintermediation”). Unlike commercial banks, the SPV is not intended to be profit-making. The SPV issues securities to capital market investors and uses the proceeds to acquire rights to payment, which are intangibles, under loans, leases, and other financial assets. These intangible rights, in turn, constitute the source of repayment of the SPV’s securities. Securitization can be applied to microfinance in two ways. The more straightforward way, which to some extent is already occurring, is to securitize an MFI’s donor-funded microfinance loans in order to regenerate funding for the MFI to make additional loans (“regenerative securitization”). A more innovative way would be to fund new microfinance lending through the capital markets without expensive commercial-bank intermediation (“transformative securitization”)

Controlling Financial Chaos: The Power and Limits of Law

This Essay examines how law can help to control financial chaos. To that end, regulation should strive to not only maximize economic efficiency within the financial system but also protect the financial system itself. Any regulatory framework for achieving these goals, however, will be imperfect and have tradeoffs. Increasing financial complexity has created information failures that even disclosure cannot remedy, whereas law-imposed standardization would have its own flaws. Bounded human rationality limits the effectiveness of even otherwise ideal laws. Furthermore, the increasing dispersion of financial risk is undermining monitoring incentives. We also do not yet fully understand how systemic risk is triggered and spread. Because regulation therefore cannot prevent systemic shocks, regulation should also operate to reduce systemic consequences by stabilizing parts of the financial system afflicted by those shocks