Steven L. Schwarcz
Duke University, Durham, NC 27708
ABSTRACT
This article sets forth a new theory by which to analyze the sale of financial assets. The concept of true sale is the cornerstone in structuring securitization and other capital market and financial transactions.
Commentators previously have identified recourse as the most important criterion in true sale determination, maintaining that high degrees of recourse are inconsistent with true sales. This article shows that recourse is not monolithic. Rather, the article draws a distinction between "credit recourse," in which a buyer has recourse against the seller of a financial asset if the underlying obligor on the asset fails to pay, and economic recourse," in which the seller assures the buyer a certain rate of return on the investment. It then demonstrates that while a high degree of economic recourse is inconsistent with a true sale, a high degree of credit recourse is not.
The article then illustrates how the distinction between credit and economic recourse is useful in structuring more commercially viable and less costly capital market transactions.