WASHINGTON DC – In Obama’s press conference of March 25th, he used the term “securitized” when describing efforts to restart the flow of credit –
Financial heads know what this means. I’m thinking a lot of people think this is a cool way of saying “made secure.” Well, that’s not what it means. I refer you to Cornell University for a lucid discussion of securities and security law. (Source) Some key points –
The third part of our strategy is to restart the flow of credit to families and businesses. To that end, we’ve launched a program designed to support the markets for more affordable auto loans, student loans and small-business loans, a program that’s already securitized more of this lending in the last week than in the last four months combined.
- Securities in and of themselves have no inherent value
- They provide information about debt a company has
- They entitle their owner to make claims on the assets of the issuer
- They give the owner voting rights based on these claims
Companies issue securities to raise capital and to “restructure debt.” Which is a fancy way of saying acquiring additional debt to permit operation in the hopes things will get all better and we will be able to actually at least pay the interest on this debt until my bonus comes in and I can leave all this turmoil behind me.It DOES NOT mean the debt is secure. It DOES NOT mean everything is OK now thanks to Obama. It DOES mean someone else owns the debt. Who is that someone? Per Obama’s statement, a “program” owns this debt now. Which I assume is a Government program, which should mean that you and I own the debt. So, we have taken the debt from the financial markets and given it to us taxpayers. Oh, and the trend in securities is toward fungibility. Meaning, it can be exchanged ONLY for another unit of the same commodity. Like one unit of orange juice for another. You can’t exchange one unit of OJ for one unit of pork bellies. Which means a securitized debt can only be exchanged with – debt. To help clear all this up for you, here is the definition of securities from the 1934 act governing same:
“any note, stock, treasury stock, security future, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘security’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or bankers’ acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.” – Section 3a item 10 of the 1934 Act.
Did that just say a security is “any instrument commonly known as a ‘security'”? Why yes it did. Now that we have cleared that up, what does it all mean?We have restructured more debt “in the last week than in the last four months combined.” We have freed up the credit markets, in trouble due to their crippling debt, with debt. We’re on rock solid ground now. On another note, “securitize” rhymes with “nationalize.” For some reason “Change” is beginning to feel very uncomfortable in a certain private area.