Securitize It #3 – Let’s Try Securitizing Whistleblower Claims ?

Now here is a classic example of securitization gone crazy once again. However this time it was a scheme using the potential future gains (legal cash settlements) of whistleblower claims as the asset. Of course legal settlements of enough claims would have some type of future cash flow … but to securitize them ?

There are clearly as many greedy investors as there are greedy securitizers !

Frank Spinosa, 53, faces 20 years in prison and $1.5 million US in fines, prosecutors said in a statement. He was released on a $250,000 US bond on Friday and is due to be arraigned on Oct. 24.

Spinosa allegedly used his position at … TD Bank to help attorney Scott Rothstein convince investors to buy stakes in what he said were settlements of potential lawsuits over sexual harassment or whistleblower claims.

Rothstein, who is serving a 50-year prison sentence after pleading guilty in 2010, told investors that plaintiffs agreed to sell their rights to a full settlement at a discount in exchange for an immediate lump sum.

“Rothstein and Spinosa would rely upon the prestige and legitimacy of TD Bank … to give investors a false sense of security,” according to the indictment.

Spinosa provided so-called “lock letters” that told investors that funds were held in special accounts from which only they could draw.

Rothstein used the money to fund a lavish lifestyle replete with high-end watches, sports cars, and multi-million dollar homes in Florida, New York and Massachusetts.

I suppose you cannot invent new investment products and grow as an international bank without some creative minds in the asset securitization business !?

Securitize It #2 – What is Securitization ?


Let’s just have a brief review of what securitization is.

Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).

Critics have suggested that the complexity inherent in securitization can limit investors’ ability to monitor risk, and that competitive securitization markets with multiple securitizers may be particularly prone to sharp declines in underwriting standards. Private, competitive mortgage securitization is believed to have played an important role in the U.S. subprime mortgage crisis.[1]

Technically you can securitize almost anything that has some real or perceived value. Of course that is where the slippery boundary lies. Is it real, perceived or fabricated !!

Securitize It #1 – Maximizing Your Profits ?!

So are collecting loan payments made by banks part of their core business ? Clearly not as the issue of Mortgage Backed Securities (MBS) prove. That means the core business activity of a bank is making loans you can sell off to be collected by someone else !? This of course is not banking as defined by old school capitalism. It is fascismizing profits and socializing losses …..

So one of Canada’s big cable/mobile operators has decided that it is overly costly, maybe too risky and certainly not profitable enough to collect the bills from their customers so they plan on selling off customer receivables, probably as AAA debt using the right rating agency!? Maybe the sub-prime or uncollectibles are just a small part of the equity traunch! Sound familiar ? Who would even think of buying this stuff ? Clearly someone who figures they can sell it to someone else before it is too late!

Rogers Communications Inc., has, for the first time in its history, joined the ranks of Canadian companies to securitize part of its trade receivables.

Details of some of the aspects of the company’s plans were detailed in its recently released fourth quarter financial statements, in the documentation for its recent US$1-billion borrowing and in the accompanying ratings reports on that two-tranche financing. But some parts of accounts receivable securitization program will remain secret: there are no plans to name the conduit run by a financial institution that will purchase the trade receivables and on-sell them to third party investors.

Is this just out sourcing none core business activity ? How might it work ? You get as many mobile/cable customers as you can and pump up your customer numbers and show all kinds of increased customer revenue. That drives your stock value and bonuses higher. It works until you cannot collect it all because your customers are students, deadbeats or simply indebted consumers with no intention or capability of paying !? But wait you sold these accounts off to some smart investor who has factored in that he needs to buy it at a 30% haircut and can sell it at a 25% haircut thus making 5% on a billion! So sure you can put this all off by securitizing the debt for a few years but ultimately shit happens for both the company and the guys you sold the receivables to … well maybe!?

Will it once again be the debtor who gets away with reduced consequences and the owners of the “public” company (owned by your pension plan) that get screwed after the big bonuses get paid out to executives and hedge funds for the increased customer and revenue numbers which were never real in the first place … just securitized !?