PHOENIX, Ariz. - The impact on securitization of Enron Corp.'s failure is ultimately unknowable, but is slowly revealing itself, according to industry sources concerned with the contagion.
One source at the ABS West conference confirmed that at least three companies which had intended to sell assets into the ABCP market backed out of the transactions late in the process due to accounting worries linked to the Enron buzzwords: "off-balance-sheet" and "special purpose company."
Quite possibly a precursor to the scrutiny that securitization will face in the wake of Enron Corp., a contingent of 30-plus academics are lobbying both the House and Senate to nix the asset securitization provisions (section 912) written into the proposed Bankruptcy Reform Act, H.R. 333.
Ironically, the said provisions, which would have essentially nullified LTV Steel-like litigation, were set to be written into law pending House and Senate revisions that dealt solely with the consumer side of the reform act.
The securitization segment would have made it easier to render a true sale opinion on assets, and would have taken away the bankruptcy court's ability to rule that the selling of assets into a trust is actually debt financing disguised, so that the assets could be taken back onto the insolvent company's balance sheet.
On Jan. 23, law professors from approximately 30 different universities directly attacked this provision, section 912, in their letter.
Cited from the letter: "Cloaked in highly technical language, the asset securitization proposal would fundamentally change American bankruptcy law. It would permit large, sophisticated, well-counseled lenders to engage in off-book transactions' that are not publicly reported, and if the company gets into financial trouble, to avoid the bankruptcy process entirely, to the detriment of the corporation's employees, its other creditors, and its very prospects of survival. Especially in this economy - with Enron only the latest example of what can happen when a company and its auditors do not make full public disclosure circumstances - the Congress should not adapt this proposal."
Apparently, these professors adamantly oppose bankruptcy remoteness, which is, of course, an underlying principle of securitization technology.
The letter actually cites LTV Steel Corp. as an example, stating that LTV would have shut down immediately if "the creditors claiming they had purchased' LTV's accounts had been allowed to remove the corporation's most liquid assets."
It did not take long for the Bond Market Association to issue its own letter defending the provisions, calling into question academia's knowledge of the securitization market and, more so, its alignment of mainstream securitization activity to the shenanigans that occurred at Enron.
From the BMA's response: "More disturbing, however, is the letter's attempt to cast aspersions on long-established and widely accepted securitization techniques - including structuring conveyances of assets as true sales' at law, segregating and isolating those assets in bankruptcy-remote, special purpose vehicles, and accounting for these transactions as sales, or partial sales (to the extent that consideration other than beneficial interests in the transferred assets is received in exchange) - by obliquely linking such activities to the collapse of Enron, and suggesting that passage of the amendment will perpetuate similar calamities."
Further, the law professors are skeptical of securitization transactions because of the perceived secrecy surrounding them.
However, securitization professionals are quick to point out that issuers in this market are well ahead of the curve when it comes to disclosing their assets, both on-balance-sheet and securitized.
The technology, with few exceptions, is highly transparent, argued Glenn S. Arden, of Jones, Day, Reavis & Pogue, on a panel discussing the use of derivatives in ABS.
"One thing I really respect about the securitization market is the sharing and transparency of the technology," Arden said.
Arden coined Enron's dealings, which were in fact highly secretive, as "a warped adaptation of securitization technology."
