Once companies securitize an asset and remove it from the books, are there provisions by which a company can obtain (purchase back) the asset from the special purpose entity?

BY Paul Solman  December 14, 2007 at 3:52 PM EDT

Question/Comment: Once companies securitize an asset and remove it from the books, are there provisions by which a company can obtain (purchase back) the asset from the special purpose entity? Since the market for collateralized debt obligations (CDOs) has been crippled due to the lack of transparency, is there a means by which a firm can reissue it with greater transparency?

Paul Solman: Uh-oh, two seriously sophisticated questions. I don’t have the space (or energy) to define all the parts of each before responding. In addition, a good answer would be chock-a-block with contingencies, qualifications and the like. Here’s my best shot.

1. Can a company buy back a mortgage, say, that it has bunched with a lot of other mortgages into a pool or fund which it has then sliced up into shares and sold?

That, in a nutshell, is “securitization.” The shares of the pool or fund are backed by collateral, which amounts to the mortgages it contains. Thus, it is called a “collateralized debt obligation” – a CDO.

The problem is that these shares have often been sold to other funds, which put them together with shares from different CDOs. This is a way to create a fund – a CDO – made up of shares from other CDOs, themselves made up of a pool of mortgages.

So you can see the difficulty of buying back the original mortgage you sold. It’s been sold to a fund that’s been sliced and diced, perhaps many times. Some investor in Norway may own a share of a fund made up of shares of funds, one of which owns the original mortgage. And the same holds true for car loans, credit card accounts – any form of debt that’s been securitized.

2. As to transparency, my first answer shows you how important it is to the problems this market now faces. That’s the reason so many are now calling for regulation: To force transparency on a market that had managed to steer clear of it. Personally, I don’t know enough to suggest how to make things more transparent. Sorry.