Playing God: A Newtonian Analogy for Structured Finance

Abstract

The recent failure of a Cayman-based special-purpose vehicle (SPV) might seem trivial, or even irrelevant, compared with some of the more publicized issues in global finance. However, the Chapter 11 liquidation of Zais Investment Grade VII in April 2011 challenged long-held expectations of what should or should not happen to a structured transaction, even one in a state of distress. Beginning with the fundamental concept of “bankruptcy remoteness,” this article examines the cultural impact that the Zais liquidation—and the unprecedented intervention by a U.S. bankruptcy court in a remote offshore jurisdiction—has had on the securitization and structured finance community. To some, the involvement of a distant regulatory regime in such a case might suggest Newton’s deus ex machina, in which a faraway divinity occasionally intervenes in the affairs of men to restore its own paradigm of “law and order.”

TOPICS: CLOs, CDOs, and other structured credit, legal and regulatory issues for structured finance