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The papers at this conference generally focus on the rise of securitization and the possibility that statutes designed to remedy abuses of securitization will wreak undue havoc on our capital markets. I take my starting point from the relatively intractable policy questions that those problems raise. It seems well accepted that securitization provides financing at lower cost to the large companies that use those transactions. If so, rules fostering securitization could enhance the overall performance of our economy. At the same time, there are legitimate concerns that the rise of securitization makes it less likely that large companies in financial distress will have unencumbered assets on their balance sheets to satisfy any substantial portion of the claims of unsecured creditors. The balance between those concerns raises questions that are as difficult to resolve here as they are in the context of conventional secured credit, in which they have been a frequent topic for decades.

What has brought those concerns to the forefront – and what motivates me to write – is that States have been led by those concerns to take the lead in attempting to decide how those issues will be resolved in bankruptcy proceedings. Accordingly, this paper steps back from that debate to ask a more fundamental question: who is to decide the appropriate policy response to those issues? On the one hand, Congress could decide those questions in the exercise of its exclusive constitutional power to enact bankruptcy laws, or, if it chose to do so, in the exercise of its authority over interstate commerce. Conversely, States could resolve those questions in the exercise of their traditional control over basic issues of commercial law, reflected most prominently in the Uniform Commercial Code. Securitization raises difficult policy questions in part because it falls at the boundary between those two spheres: the effect and legitimacy of those transactions is plainly an important question of commercial law, but much of what is most important involves specific questions about how the transactions are treated in bankruptcy.

This Article is distinct from the body of existing literature on the topic because it does not focus on the commercial law questions common to discussions of the topic (i.e., are the securitization transactions efficient? Do they inappropriately undermine the stability of originators?). Instead, it focuses on federalism questions: as a matter of allocation of power, when does the supervening power of federal law preempt state efforts to address those questions?

This Article proceeds in three steps. Part I describes the basic system that successfully delineated responsibility between Congress and the state legislatures until recent years (perhaps about 1990), and a number of systemic factors that have caused the old system to break down. Part II discusses examples of potentially problematic legislation – not only legislation related to securitization, but other pieces of state legislation that have their primary effects in the bankruptcy of the affected parties. Finally, Part III uses these examples to illustrate when those statutes should-and should not-be held preempted by Congress's authority under the Bankruptcy Code.


Bankruptcy Law | Law