Bubble as Propertization Failure - National Taiwan … S. Kan_Bubble as... · Bubble as Propertization Failure ... short, taking for granted ... Sheen S. Levine and Edward J. Zajac,

Bubble as Propertization Failure copy Steven S Kan Draft-2014-Summer

1

Bubble as Propertization Failure

Steven S Kan

Abstract

Taking issues with the common point departure of perfect institutions of

property and contract toward an institutional understanding of bubbles by

economists and legal scholars this paper argues that before being generally

accepted as property a new thing must go through a propertization process

Propertization is a social process that transforms relationship in personam into

relationship in rem Propertization also closely interacts and overlaps with

market process Bubble examples of Taiwanese adulterated olive oil and the

2008 subprime mortgage crisis are used to show what were involved in

propertization failures of adulterated olive oil and subprime mortgage-backed

securities This paper also examines contract structures the organization of

SPEs and the industrial organization associated with the propertization of

MBSs and CDOs to find they were incompatible with what would a stable

system of property require After taking into account of human frailty the

conclusion is that systemic risk associated with propertization of a new thing

stems from the incompatibility of organizational structures of propertization

with a stable property system


2


TABLE OF CONTENTS

I INTRODUCTION 3

II PROPERTIZATION 6

A A Missing Idea in Economic Theory 7

B Social Nature of Property 8

C Transformation from Relationship In Personam to Relationship In Rem 10

D Interaction with Market Process 11

III MARKET TEST AND PROPERTIZATION FAILURE 13

A Commodity Bubble Taiwanrsquos Adulterated Olive Oil 14

B Financial Bubble US Securitization of Subprime Mortgages 17

C A Comparison and Lessons Learned 21

IV STRUCTURES OF CONTRACTS 23

A Structures and Rationales for Easement and Mortgage 24

B Unique Features in the Propertization of Corporate shares 26

C Unique Structural Features of MBSs and CDOs 28

V PROPERTY AND SYSTEMIC RISK 31

VI SUMMARY AND CONCLUSION 36


3


Steven S Kan

I INTRODUCTION

Bubble refers to the phenomenon that the price and the volume of a commodity

or an asset exhibit a sharp drop after an extraordinary buildup1 By a ldquosharp droprdquo or

an ldquoextraordinary builduprdquo it means that the price movement is not in accord with the

fundamental value of mainstream economic theory Despite recurrence of various

economic bubbles in the past economists have faith in market process and believe

that all economic bubbles will eventually burst Since their formal mainstream

economic modeling is void of institutional consideration they usually attribute the

primary source of bubbles to economic agentsrsquo psychological biases such as animal

spirits irrational exuberance and herd behavior2 Recurring financial bubbles in

1990s have however changed the atmosphere and prompted economistsrsquo interest in

institutional explanation of bubbles Going through careful examinations of some

institutional arrangements involved in recent bubble episodes contemporary

economic research confirms that pervasive agency and asymmetric information

problems existed and pinpoints a few mechanisms that misaligned incentives3 In

short taking for granted property rights and freedom of contract economists have

adopted mainstream economic modeling as the point of departure and considered

institutions only as add-on explanatory factors to account for the erratic price

movement of bubbles

Institution on the other hand is at the center of legal research Legal scholars

with research interest intersecting law and economics have similarly been drawn to

institutional understanding of the recent 2008 housing bubble and ensuing financial

crisis In addition to echoing economistsrsquo technical emphases of asymmetric

information and agency problems their studies find that regulatory deficiencies

standardization problems and fragmentation nodes hindered timely detection of then

1 CHARLES P KINDLEBERGER amp ROBERT ALIBER MANIAS PANICS AND CRASHES A HISTORY OF

FINANCIAL CRISES (1978) RICHARD DALE THE FIRST CRASH LESSONS FROM THE SOUTH SEA

BUBBLE (2004) 2 JOHN M KEYNES THE GENERAL THEORY OF EMPLOYMENT INTEREST AND MONEY (1936) ROBERT

J SHILLER IRRATIONAL EXUBERANCE (2000) GEORGE A AKERLOF amp ROBERT J SHILLER ANIMAL

SPIRITS HOW HUMAN PSYCHOLOGY DRIVES THE ECONOMY AND WHY IT MATTERS FOR GLOBAL

CAPITALISM (2009) 3 Financial institutions have not until recently caught the interest of economists for example see Franklin Allen Do Financial Institutions Matter 56 J OF FINANCE 1165 (2001) and Markus K

Brunnermeier and Martin Oehmke Bubbles Financial Crises and Systemic Risk in GEORGE M

CONSTANTINIDES MILTON HARRIS AND RENE M STULZ (EDS) CHAPTER 18 HANDBOOK OF THE

ECONOMICS OF FINANCE VOLUME 2 (2013) Social norm as an institutional factor is considered in

Sheen S Levine and Edward J Zajac The Institutional Nature of Price Bubbles available at

httpssrncomabstract=960178 (2007)


4

already escalated system risk due to financial innovations4 However like their

colleagues at an economics department or a business school they have neither

carefully scrutinized the roles played by institutions of property and contract in the

rise and burst of a bubble This neglect of economics and legal scholars is peculiar

for two related reasons First buys and sells leading up to a bubble are real actions

not motivated by an abstract general economic theory but taken with careful

consideration of particular circumstances Second buys and sells apparently involve

the institution of contract and the stability of a transaction is closely related to whether

the thing being transacted is considered property real or personal Given that

mainstream economic theory presumes perfect institutions of property and contract to

obtain its fundamental value of goods and services under market competition the

price movement of a bubble cannot be logically determined as erratic without

affirming that institutions of property and contract are working as assumed

Taking issues with their point departure of perfect institutions of property and

contract this paper proposes a different perspective toward an institutional

understanding of bubbles I argue that before being generally accepted as property

a new ldquothingrdquo must go through a propertization process that involves imperfect

institutions of property contract market reputation and others to be discussed later5

I further argue that propertization usually hides itself in market process and therefore

has not caught due attention from scholars In this perspective I show through an

analysis of a recent commodity bubble occurred in Taiwan and the 2008 US subprime

mortgage crisis that bubble represents a market signal of propertization failure

Additionally my analysis of publicly traded financial contracts shows that

securitization of subprime mortgages is structured with multi-layered servitudes and

without corresponding ldquotouch and concernrdquo limitation as that associated with land

servitudes The conclusion of this paper is that securitization of subprime mortgage

proves to have been a bubble because it not only increased complexity and risk to

financial system but also with rampant arbitrary layering of servitudes effectively

contradicted the clear boundary delimitation requirement of a well-functioning

property system

To make my points clear this paper first elucidates that propertization is a

dynamic social process beginning with commodification and commercialization of a

new thing through private contracting and ending with general acceptance of the new

thingrsquos property status As Coase has gained insights into clear boundary

delimitation of rights stands at the center of efficient transfer of property through

exchange6 What involved in commodifying and commercializing a new thing is an

originatorrsquos delimitation of boundary dimensions of the new thing Contract rights

in commodifying and commercializing the new thing represent relationships in

personam good among definite parties And property rights represent relationships

4 Adam J Levitin amp Susan M Wachter Explaining the Housing Bubble 100 GEORGETOWN LJ 1177

(2007) Kathryn Judge Fragmentation Nodes A Study in Financial Innovation Complexity and

Systemic Risk 64 STAN L REV 657 (2012) 5 RESTATEMENT (FIRST) OF PROPERTY ch 1 introductory note (1936) (ldquoThe word lsquopropertyrsquo is used in

this Restatement to denote legal relations between persons with respect to a thingrdquo) 6 Coase


5

in rem good against an indefinite number of persons through the thing itself

Propertization is therefore in nature a social process that transforms relationships in

personam into relationships in rem

Propertization may be successful or unsuccessful It depends on whether

consumers will accept an originatorrsquos delimitation of boundary dimensions and pay to

become a property owner of the new thing Propertization is tested in the market

when no litigation occurs On the other hand courts intervene when a particular

delimited boundary dimension or the lack of it is challenged to make judgments for

or against the propertization Producers may opt to modify failed delimitation and

renew the next round of propertization Propertization is therefore not an

independent social process but closely interacts and overlaps with market process

To the extent that legislation also grants de jure property status to things it should be

noted that such grant is in kind and a particular new thing still needs to pass the test of

general acceptance in the market before it attains de facto property status

Two recent bubbles of Taiwanrsquos olive oil and the US subprime mortgage

securitization are then used to illustrate what commodifying and commercializing

contracts were involved in their propertization processes and how market process

finally judged their propertization failure The elucidation and the illustration pave

way for a deeper analysis into structures of various types of financial contracts such

as stocks bonds and those associated with the securitization of subprime mortgages

and how they are transformed from relationships in personam to relationships in rem

Two major findings come out of this analysis

First while stocks bonds mortgages and covered bonds are structured with

servitude features derivatives such as mortgage-backed securities (MBS) and

collateralized debt obligations (CDOs) are structured by pooling various servitudes

classifying them into tranches installing higher layer of servitudes on top of

lower-layer servitudes and removing the ldquotouch and concernrdquo as that required in land

servitudes Second the propertization failure of securitization of subprime

mortgages is the result of not only increased complexity and risk to financial system

but also arbitrary rampant layering of servitudes that effectively contradicts the clear

boundary delimitation requirement of a well-functioning property system It is also

noted that a whole slew of legislation involves statutory delimitation of boundary

dimensions to propertize financial contracts so that their trading in exchanges can be

facilitated for examples limited liability of corporate law for the trading of stocks

bankruptcy law to classify priority of debt claims in time of insolvency of firms and

securitization and exchange laws to facilitate orderly trading etc The idea of

propertization emphasized and elucidated in this paper thus helps provide an

institutional perspective to examine carefully what exactly happened and understand

the limit of statutory grant of property-like status to contracts The ultimate reason is

that property is social in nature and property status cannot be attained without being

generally accepted through market process In this perspective this paper concludes

that bubble transmits the marketrsquos message of propertization failure

The remaining paper is outlined in the following Section II contrasts with

received mainstream price theory to expound the necessity of having an idea of


6

propertization to get an institutional understanding of bubbles the nature of property

and propertization what institutions are involved in propertization and marketrsquos role

and function with regard to propertization Recent bubbles of Taiwanrsquos olive oil and

US securitization of subprime mortgage are contrasted in Section III to examine

different institutions involved in their propertization processes and different market

responses to give its final judgment of their propertization failure Section IV

analyzes structures of contracts leading to easement and mortgage and compares them

with contracts of corporate shares They pave the groundwork to show the unique

feature associated with the mass commodification and commercialization of MBSs

CDOs contracts Systemic risk is related to property theory in Section V to show

that fragmentation involved in the structures of contracts and securitization sector was

incompatible with a stable property system Finally Section VI gives a brief

summary and conclusion

II PROPERTIZATION

Propertization is a relatively new expression and connotes a process through

which a thing gains some property status With similar notion its predecessor is

commodification Propertization and commodification are used interchangeably in a

context discussing or criticizing problems associated with such a transformational

process7 Proprietary interest in adopting some new technology gives rise to the kind

of context in which a boundary between private and public domain remains to be

explored Recent examples of controversial propertization or commodification of a

thing include human tissue or organ and personal data or privacy8 The former

arises because of advancement in biotechnology and the latter because of information

technology Controversy of propertization is especially acute in the alienability

aspect of property status When property status involves some restrictions to

alienability the thing and the technology in consideration may be underutilized on

the other hand without alienability limitation they may be over utilized9 Economic

efficiency logically suggests that some balance is needed Debates in legal literature

on propertization arise as a result because moral sentiments demand considerations of

personhood and equity as well10 However they are addressed primarily to court

decisions or legislations without noticing explicitly the role of market process in

propertization

This Section takes up the neglected interaction between market process and

propertization process in economic legal or law and economics literature

Subsection IIA discusses why an idea of propertization is needed to fill the gap

7 Margaret Jane Radin Market-Inalienability 100 HARV L REV 1849 (1987) Margaret Jane Radin

CONTESTED COMMODITIES (1996) 8 Ann Bartow Our Data Ourselves Privacy Propertization and Gender 34 USFL REV 633 (2000) Julie E Cohen Examined Lives Informational Privacy and the Subject as Object 52 STAN L REV

1373 1423 (2000) Paul M Schwartz Property Privacy and Personal Data 117 HARV L REV

2056 (2003) Kevin Emerson Collins Propertizing Thought 60 SMU L REV 317 (2007) 9 Margaret Jane Radin A Comment on Information Propeprtization and Its Legal Milieu 54 CLEV ST

L REV 23 (2006) 10 Margaret Jane Radin Property and Personhood 34 STAN L REV 957 (1982)


7

between mainstream economic theory and the real world The social nature of

property and therefore propertization is briefly summarized in Subsection IIB

Propertization as a transformation from in personam relationship to in rem

relationship the narrower and main interest of this paper is elucidated in Subsection

IIC Against this backdrop Subsection IID is ready to examine interactions

between market and propertization processes

A A Missing Idea in Economic Theory

Without the need to get into complicated mathematical economic modeling the

equilibrium of banana market for example is aptly depicted in principle economics

class as the intersection of supply and demand curves where the equilibrium price

and quantity can be read from corresponding values on P and Q coordinates A

comparative static analysis is then conducted by shifting the supply or demand curve

which means that some underlying banana market condition is exogenously changed

for example due to a change of whether or the price of a complementary good to get

a new equilibrium Freshman A in the class may nevertheless ask about what banana

the professor is talking Student B may contend that budget constraint does not hold

for a thief Wondering how the banana transaction actually works out another

student may pop out the question whether he should hold a banana before he pays

Or what should he do if the seller insists his payment first Professors however are

usually not able to answer such questions in a short time to satisfy students The

reason is that neither specific goods or services are easy to define nor institutions of

property and contract are easy to explain In short price theory is based on the

assumption of perfectly functioning institutions of property and contract

Transaction cost has been assumed to be zero in mainstream economic theory Coase

nevertheless argued very long time ago in The Nature of the Firm If transaction cost

in the market is zero then delimitation and assignment of a right is irrelevant to

resource allocation or market efficiency he additionally elaborated with

understandable examples in The Problem of Social Cost

However transaction cost is not zero in the real world Given well functioning

institutions of property and contract consumers usually still want to make sure a

bananarsquos size weight color smell and taste instead of just taking for granted what a

seller would promise in the simple transaction Such effort is aimed at ascertaining

the characteristics of banana in transaction but not a concern with property as an

institution Namely a well functioning institution of property does not eliminate

measurement cost associated with a particular item to be transacted11 A more

complicated transaction eg procuring coal supplies for a power plant may involve

inspection and delivery plans and corresponding penalty clause in the procurement

contract between two parties Transaction costs in negotiating the terms and

conditions are much higher in comparison with that of a banana transaction Namely

a well functioning institution of contract does not eliminate the need of parties to

reasonably assure that potential unbearable risk of holdup and misappropriation will

11 Barzel


8

not happen

The next level of question is how institutions of property and contract emerge

evolve and consolidate However in the interest of this paper there is no need to

dwell on answering the big question here It suffices to stress that price theoryrsquos

fundamental value of a good or service in exchange cannot be determinate without the

assumption of perfect institutions of property and contract Volatility in a thingrsquos

price movement contrary to what expected from its fundamental value therefore must

originate from the thingrsquos untenable property status during the period in Coasersquos

words blurry boundary delimitation of the thing to consumers is the root cause of the

rise and burst of a bubble

An idea of propertization is advantageous at the outset first in reminding that

there is a big gap between economic theory and real world The gap is not only

about the assumption per se but also about how things attain property status and can

therefore be safely transferred through contracts with reasonable expectations

Therefore second it helps ascertain that things must pass through some process to be

generally accepted as property so that price theory remains to provide viable guidance

Third it is also advantageous in bringing scholarly attention to what propertization

process is involved with such that future discussions and debates on problems of

propertization can be better informed Economic theory is nonetheless void of any

reference to propertization

B Social Nature of Property

Property real or personal is commonly pictured as a bundle of rights12 Most

importantly the bundle consists of legal rights to possess use and dispose a thing

and to exclude others from possession use or disposition of the thing Sole

ownership of a fee simple absolute estate is the typical example showing that these

legal rights of property are undivided and without conditions Such rights to possess

use dispose and exclude are said to be good against the world13 However many

things do not attain such status of property for one reason or another 14

Unauthorized possession of something cocaine for example is simply a crime Use

of things is not always without restriction for example talking on a cell phone while

driving is not allowed in some states Similarly disposition of things through sale

may be deemed impermissible by law for example an organ15 Exclusion is neither

unconditional for example common law establishes that a property owner cannot

exclude someone seeking shelter out of necessity 16 Additionally there are

conditions for a thing to attain legal status of property through legislation For

example stocks and bonds become personal property that can be publicly traded in

exchanges only after their issuers are incorporated in pursuance of state corporate law

12 Wesley Newcomb Hohfeld Some Fundamental Legal Conceptions as Applied in Judicial Reasoning

23 YALE LJ 16 (1913) Criticisms by Henry Smith 13 14 Henry Smith Numerus Clausus 15 Inalienability 16 Henry Smith Exclusion (storm case)


9

and meet regulatory requirements of securities and exchange law

Property is of social nature because rights are social in nature in the sense of

Hohfeldian jural correlatives 17 For example right and duty are Hohfeldrsquos

correlative concepts namely person A having a right against person B is equivalent to

person B having a duty to respect person Arsquos right Apparently the jural correlatives

of right and duty are about relationships between two individuals When one has the

right to possess a ball then all others have legal duties not to take the ball without his

consent When he has additionally the right to exclude then he can defend his

possession of a ball in a reasonable manner His use right of the ball however does

not mean that he can take the liberty to bounce his ball on a neighborrsquos window The

reason is that the neighbor has property rights of the window and smashed glasses

would mean instead a defeat of his possessive use dispositive and exclusive rights

When I honor your property rights in a ball and a window and you honor mine

peaceful relationships between two neighbors may have a better chance to result18

In a similar vein notice and title recordation of real property in general and some

chattels would serve no purpose if property rights were not about social relationships

Economically consumers derive utility from consumptions goods produced by

producers While some consumption goods lasts a long period of time and are

considered durables immediate exhaustion of utility in one use does not even apply to

those considered as nondurables Producers on the other hand cannot produce

anything without land building structures and equipmentsmdashthey are means of

production and classified as capital Resources spent in capitals are resources

diverted from current consumption to future consumption Though more slowly than

durable consumption goods structures and equipments wears out through time as well

Capital investments are needed to replenish or increase capital stocks so that future

productivity may be maintained or enhanced Financial instruments and financial

intermediaries in this sense represent the necessary bridge between consumers and

producers so that a steady flow of resources released from reduced current

consumption can be directed to capital investments Stable expectations of dynamic

social relationships for future growth thus also depend on the property status of

financial instruments

Things attain property status through three routes First customary practices

evolved and led to generally accepted status of property This route had existed even

before law came into existence and is still the predominant route to attain de facto

property status without reference to any particular law Applersquos iPhone is an

example Second after certain complaint being brought courts may find whether

the property status at issue or a restriction to it is appropriate or inappropriate19 This

is what falls under common law Third legislators may enact into law conferring

things with property status For example copyright law confers authorial works

with several specified intellectual property rights The third route is not totally

17 18 Richard A Posner Transaction Costs and Property Rights Or Do Good Fences Make Good

Neighbors Program in Law and Economics Working Paper No 38 1996 19 Henningsen v Bloomfield Motors Inc 161 A2d 69 (NJ 1960)


10

independent of the second route problems of similar nature may be so prevalent that

legislators intervene to expedite their correction to bypass delayed or incoherent

responses of courts It should be noted that de jure property status conferred by a

statutory law or a kingrsquos decree may not materialize into de facto property status

because of the lack of general acceptance In sum property and propertization that

transforms things to attain property status involve social interactions and are of social

nature

C Transformation from Relationship In Personam to Relationship In Rem

New things do not come into existence from nothing20 They may be obtained

with existing knowledge new knowledge some mixing of existing materials or new

material When some collaboration is involved in creating a new thing there is at

least a contract implicit or explicit among collaborators Additionally another

contract would be involved if the new thing is to be transferred to other people

More specifically producers must make contracts with owners of input factors to

embark on their commodification process and with end users to conclude their

commercialization process As roundabout production continues to deepen in

modern times commodification further involves intermediate contracts between

upstream producers and downstream producers21 Similarly commercialization has

become more complex and there are intermediate contracts between producers and

commercial channel operators before end users can acquire a new thing

Propertization process in the interest of this paper therefore comprises the two stages

of commodification and commercialization and begins with private contracting

efforts

A contract is interactively negotiated and entered into In legal parlance

contract rights and obligations are of in personam nature that is binding terms and

conditions of a contract are only good among the definite parties involved 22

Property rights in contrast are of in rem nature they run with the asset and are good

against the world23 In other words the bundle of rights or social relationships

representing property has legal force on an indefinite number of people through the

thing itself a chattel or real estate24

It is worth emphasizing that what in focus are contracts involved in the

commodification and commercialization of new things Collaborators in creating a

new thing must engage in some survey before taking up the project Nevertheless a

project is a plan yet to be tested in the market In contemplating a feasible plan to

meet potential customersrsquo preferences they have to delineate the size shape the

20 First possession of games and accession of meteorites as the origin of property are noted but not

considered here 21 Roundabout production a phrase first used by Austrian Economist Eugene Bohn-Bawerk refers to a process in which production of capital goods and production of consumption goods are in the control of

separate hands See Joseph T Salerno Bohn-Bawerkrsquos Vision of the Capitalist Economic Process

Intellectual Influences and Conceptual Foundations 4 NEW PERSP POL ECON 87 (2008) 22 Hohfeld 23 Henry Hansman and Krrakman 24 Henry Smith


11

functions the quality etc of the thing to be created The implicit or explicit

contract between collaborators is therefore essentially about the boundary of the thing

Upstream and downstream producers do not usually care about specifications the

collaborators have delimited as the boundary of the thing There is few to be learned

from such producers so that their boundary delimitation can be modified and fit better

with targeted customers The commodification process is completed when products

pass all physical and functional tests and ready to be piped into the next stage of

commercialization

Commercialization of such new products involves contracts with advertisers

promoters and channel operators etc Better knowledge of what should be done to

stimulate consumer demand and smoothly move the products to the market can be

more or less learned by interacting and contracting with specialized commercial

agents Consumer acquisition of a new thing is based on perceptions and

expectations of the new thing under appraisal A low quality product that does not

look well on the shelf wonrsquot sell at a good price If such a product is priced too high

then the product simply has no chance to find an owner As a result the product

remains only a product Since it does not become someonersquos property through sale

it does not attain property status What the commercialization process goes through

is therefore to delineate additional dimensions that are related to potential consumersrsquo

perceptions of the boundary of the new thing They are as important as product

dimensions that have been delimited in the commodification process because of the

social nature of property

It is true that commodification and commercialization processes may overlap so

that knowledge obtained in the latter may be received through feedback such that

products can be modified However there is no need to complicate the discussion

In sum there are two major points First propertization is a social process that

involves the transformation of in personam relationship into in rem relationship

Second contractual efforts in the propertization process are about the delimitation of

various boundary dimensions of a new thing so that the new thing may be generally

accepted to attain property status

D Interaction with Market Process

Starting with contractual arrangements in the market an originator of a new thing

interacts with upstream and downstream producers to commodify its products through

delimitation of the new thingrsquos boundary dimensions The originator also interacts

with advertisers promoters channel operators etc to delineate additional boundary

dimensions before moving the products to markets Once the products are on shelf

for sale market process starts to work more It should be noted that new papers of

manufacture new species or new financial instruments fresh on the market are more

precisely test products owned by producers growers or issuers They become

consumersrsquo property only after being sold

While an originatorrsquos delimitation of boundary dimension is only based on an

informed guess targeted consumersrsquo knowledge of what they want from a new thing


12

is usually vague until they get to see feel and experience new products put out by the

originator Informational asymmetry between an originator and its targeted

consumers regarding boundary dimensions of a new thing will not be ascertained until

market process discloses it Failure of planned delimitation of boundary dimensions

shows up in an unexpected low volume of sales or a survey of customersrsquo

dissatisfaction Such feedbacks of market process may enable an originator to

modify erroneously planned delimitations and reinforce the new thingrsquos attraction

with improved delimitations until the new thing is generally accepted and attains

property status Imaginably marketing promoters can enlist a representative group

of consumers to see feel and experience test products and feed relevant information

back to the originator for some modification of its delimitation of boundary

dimensions before moving them to the market In fact this is a part of marketing

promotersrsquo ordinary practices at least for well funded originators Nonetheless only

market can provide the real test unveil the discrepancy of boundary dimensions and

enforce discipline so that test products get to be modified or are withdrawn from the

market

Market process is able to do so because of its salient features First it provides

the venue where test products meet consumers Second it is also the venue where

test products meet competing products Third it helps disclose to an originator how

its delimitation of boundary dimensions is received by consumers through inventory

buildup back orders or survey of consumer satisfaction Fourth it offers an

opportunity for consumers to compare competing products and appreciate variations

in delimitation of boundary dimensions by competing producers And fifth through

its price mechanism it rewards delimitation success with business profits and

disciplines delimitation failure with business losses The institution of market thus

serves to discover knowledge related to delimitation of boundary dimensions

coordinate variations in delimitations make final judgment on the success or failure

of delimitations and discipline them with profits or losses25

In sum propertization of a new thing involves social interactions and its

progression overlaps that of market process when no litigation intervenes During

the commodification stage an originator of a new thing spends efforts delineating

boundary dimensions of the thing in order to acquire property status The

delimitation however does not always coincide with what consumers would expect

to get Promotional programs and marketing channels may change or add new

dimensions to boundary delimitation of the new thing during the commercialization

stage Not until consumers purchase the new thing in the market acquire use

experiences and share them with others the delimitation gets its chance to be

examined in the market and obtain an interactive social meaning So long as the

originator is willing to learn from consumer feedbacks and modify its delimitation of

boundary dimensions generally accepted property status of the new thing will

eventually be attained For example most of Mircrosoftrsquos and Applersquos innovative

products pass examinations of market process and complete their propertization this

way to attain property status and become consumersrsquo property

25 Hayek Competition as a


13

If a complaint is brought to court for example the bundling of Internet Explorer

with Windows by Microsoft then propertization process necessarily extends beyond

market process and involves a court judgment or some legislative change before a

new round of propertization can resume Though the kind of legal intervention falls

outside the limited scope of this paper it is noted in passing that interaction with and

examination by market process will resume after such a temporary disruption until

propertization completes itself in the market unless products are otherwise withdrawn

from the market

III MARKET TEST AND PROPERTIZATION FAILURE

Bubble manifests itself in the market If the examining function of market is

indiscriminate between different things then the bursting of bubble must logically be

the result of market test Now that transaction cost is not zero in the real world and

the delimitation of property boundary is not without vagueness market test cannot

simply be on the calculation associated with profit maximization that mainstream

economic modeling implies If market process indeed represents an interactive

social process among competing producers and competing consumers and between

producers and consumers then what market examines is less whether an originator

sets its business strategy marketing plan or price right but more the delimitation of

boundary dimensions involved in propertization The reason is that even if a thing

is granted de jure property rights it does not mean that the thing has already gained

clear certain and generally accepted property status without going through social

interactions In other words the reason why business strategy marketing plan or

price needs a meaning of social interaction is because the de facto meaning of

property is yet to emerge through social interactions Otherwise as that in

mainstream economics there needs no consideration of business strategy marketing

plan or price but calculation of equilibrium price

If the extraordinary price buildup during the growing phase of a bubble reflects

that propertization of a new thing successfully passes market test then what does the

ensuing sharp drop of price reflect There are four possible answers First both

propertization and market process are successful If indeed so then the bursting of a

bubble and its consequential impacts should be accepted All economists insist that

a bubble will burst and are more or less able to give conditions if not the timing of

bubble burst However like anyone else they do not accept its consequential

impacts Second both propertization and market process fail If so then doubts

must be cast on the earlier finding of successful commodification and

commercialization during the bubblersquos growing phase Apparently most economists

do not unconditionally buy the proposition of market failure and would have a hard

time accepting this possible answer Nonetheless this possible answer is what critics

more sympathetic with sociology scholarship would obviously embrace Third

whereas propertization is successful market process fails This is however

implausible because successful propertization by definition means that boundary

dimensions of property are already clearly delimited and generally accepted such that


14

market process would have no reason to fail with negligible transaction cost

The only remaining plausible answer fourth is that propertization fails whereas

market process works Letrsquos return to the extensive roundabout production

including the long marketing pipeline before products reach markets existing today as

a result of technological advancement Other things being equal the more extensive

roundabout production the longer it takes for social interactions to complete

propertization Manipulating with marketing strategies an originator with its

knowing or unknowing business partners may deceive its targeted customers by

disguising the boundary dimensions delimited earlier in the commodification stage

and promoting the new thing with a false delineation In terms of technical

economic analysis agency problems and information asymmetry may take a long

time for consumers to recognize deceptions of the true boundary dimensions

imbedded in products Certainly similar problems may also exist between an

originator and its business partners At any rate the extraordinary price buildup

shows temporary success of the deceptive commercialization in market process

Nevertheless social interactions among an originator its business partners consumers

and competitors of market process will eventually lead to the discovery of hidden

distorting and deceptive manipulation The sharp drop of price shows exactly that

market process indeed functions well and correctly reflects consumersrsquo final

realization of an originatorrsquos disguise and deception The sharp drop of price

pronounces the bursting of a bubble It is the ultimate signal that market sends after

examining a propertization process and finding its failure

The fourth possible answer in short provides a link that would enable

economists and sociologists not to just deny each other but to sense like ordinary

people that somehow something must have gone wrong The link is the missing

idea of propertization elucidated and emphasized above Its innate nature of social

interaction not only comfort sociologists but also relates directly to law and

economics scholarsrsquo interest in the relationship between law and economy

Operationally bubble burst provides an opportunity for the society as a whole to

examine clues of propertization failure and find what legal rules need be changed and

how to protect and improve the integrity of property system as a whole

In the following I use a commodity bubble and a financial bubble to show how

market process finally came to find their propertization failure The first example

introduces in Section IIIA the 2013 olive oil bubble that occurred in Taiwan

Section IIIB briefs the 2008 bubble of US securitization subprime mortgages whose

severe impacts on world economy are yet fully recovered A comparison of the two

bubbles and lessons learned are summarized in Section IIIC

A Commodity Bubble Taiwanrsquos Adulterated Olive Oil

Changchi Foodstuff Factory Company (CFFC) had enjoyed being one of

Taiwanrsquos market leaders in cooking oil business for almost 20 years until the scandal

of its adulteration broke out in the fall of 2013 Adulteration was soon found in

almost all kinds of products it produced What shockingly angered consumers was


15

its adulteration of olive oil As a result all labels of CFFCrsquos olive oil were ordered

to be immediately pulled off shelf by Taiwanrsquos Food and Drug Administration

The company gained wide reputation by importing Spanish olive oil to Taiwanese

market in early 1990s when consumer awareness for safe healthy and nutritious

foods was on the rise The companyrsquos sale of various labels of olive oil including

100 olive oil pure virgin olive oil and pure extra virgin olive oil was well received

by consumers Its olive oil business continued to thrive without interruption The

thriving olive oil sale drew more companies into the line of business For reasons

explained later they soon opted to outsource a large of proportion of their olive oil

production to CFFC After the adulteration scandal broke out none of the

companies admitted that they knew CFFCrsquos olive oil was adulterated with cottonseed

oil The exact time when the company started adulterating olive oil is still uncertain

What have become clear include two major aspects First the proportion of

cottonseed oil mixed with olive oil increased over time Second chlorophyllin was

added to make adulterated olive oil look indistinguishable from true olive oil

Passing off impure and inferior products of lower cost increased CFFCrsquos profits

such that it had sufficient fund to install new facilities and expand Since its

adulteration was not detected more and more cottonseed oil was mixed with olive oil

It was found that for any label of CFFC olive oil the percentage of cottonseed oil

was more than 50 in volume The ingredients and their percentages of the ldquoolive

oilrdquo CFFC produced for other companies were the same With its selling price

unchanged the companyrsquos business expansion continued to build up its profits at a

fast pace when more and more consumers switched to olive oil from other kinds of

cooking oil As the notion of bubble is attached with observable extraordinary

buildup of a commodity or an assetrsquos price the olive oil case does not seem fit to be

called a bubble Nevertheless if we stretch the notion a little bit then it is clear in

retrospect that CFFSrsquo profit rate the price paid to its equity owners underwent an

extraordinary buildup In this sense I consider it proper to call the case of olive oil a

profit bubble a species of commodity bubble A profit bubble is however more

difficult to detect because profit rates are unobservable to consumers The profit

bubble eventually burst because an ex-manager dissatisfied with not being able to get

a pay raise informed a local prosecutor of the adulteration

More particularly in the framework of this paper CFFC had only two major

boundary dimensions to delimit in commodifying its ldquoolive oilrdquo namely the

ingredients and their percentages Initially the olive oil business of CFFC involved

relatively simple importing bottling labeling and marketing of Spanish olive oil in

Taiwan The delimitation of boundary dimensions of olive oil the ingredients and

the percentage of each ingredient was imported When it occurred to CFFC that

mixing some cheaper oil with olive oil could boost its profits the two dimensions

became important decisions in creating its own new product line After successful

experiments in mixing cottonseed oil with olive oil and adding chlorophyllin CFFC

came up with several formulas and embedded them into its product line of adulterated

olive oil Additional boundary dimensions such as naming of commodified products

and labeling ingredients and their percentages then became CFFCrsquos important


16

decisions in the commercialization stage CFFC could truthfully disclose

information of relevant ingredients and their percentage and name various new labels

However it did not and old labels were continued There was no change in its

marketing strategy either Even pricing remained the same In this sense CFFCrsquos

various labels of olive oil were all adulterated olive oil otherwise they might have

been considered as innovated new products As a result CFFC passed off

adulterated olive oil products as imported Spanish 100 olive oil pure virgin olive

oil and pure extra virgin oil

The first salient characteristic of the line of ldquoolive oilrdquo products is that consumers

are not capable to verify ingredients and their percentages as shown on labels In

other words consumer purchase decisions are primarily dependent on company

reputation price and persuasive power of promotional advertisement The second

salient characteristic is that so long as mixing formulas are able to render sufficiently

similar taste smell and color of genuine pure virgin and extra virgin grades of oil

consumer use experiences cannot help distinguish adulterated olive oil from genuine

olive oil Riding on the two salient characteristics the company gradually adopted

more low-cost ingredients and even illegal additives to increase profits In other

words with prices unchanged CFFC leveraged its reputation earned earlier as an

importer to pass off adulterated olive oil

The two salient characteristics effectively cut off social interactions through

word-of-mouth sharing of use experiences such that the knowledge discovery function

of market process was paralyzed for more than 10 years During the time span

despite that increasing social pressure on and consumer demand for food safety in

Taiwan have become apparent there was neither effective consumer advocacy group

nor industry standard of cooking oil in particular Government efforts in monitoring

and enforcing either consumer protection or food and drug safety law were very lax if

not corrupted The fact that many companies in olive oil business outsourced their

production to CFFC suggests that it had extra production capacity and its production

cost was lower In addition CFFC decision not to expand its own retail business but

to accept outsourcing contracts suggests that outsourcing companies had a cost

advantage in marketing and retail distribution Together they suggest that market

processrsquo coordination function of resource allocation worked fine The fact that

CFFC was able to maintain its old prices of imported olive oil helps remind that its

wide partnership via outsourcing contract with other companies might have been a

form of collusion Market process seemed to have failed because there was not

much evidence of competition at least from the outsourcing companies The only

market function that did work as it was supposed to was coordination However it

surprisingly worked in a wrong directionmdashprolonging the collusive passing of

fraudulent adulteration without being detected Despite all these obstacles market

process did not fail It had to go through a long and circuitous route to overcome the

obstacles and make its final judgment on the propertization failure of adulterated olive

oil

Competition is not limited to product market but applicable to factor market as

well Profits of CFFC increased at a fast pace as mentioned earlier Its chairman


17

of board and CEO was able to enjoy living in the most extravagant property not very

far away from the county where his production facilities resided It became a

common knowledge to his employees and local residents Nonetheless regardless of

its windfall in profits CFFC kept wages of employees unchanged just as it had kept

olive oil prices unchanged Since the company was not a public company listed on

Taiwan Stock Exchange competition in factor market could not have exhibited itself

in it rising stock prices Competition should it function well suggests instead that

its employees might be hired away by competitors in the product market or would

only stay if their boss would raise their total rewards including wages bonuses and

benefits Nevertheless collusion of among the outsourcing companies suggests that

the former route of competition may be ruled out As the latter route would suggest

a manager indeed quitted because he did not get the pay raise he asked from his

employer The ex-manager informed local prosecutorrsquos office of the hidden

adulteration of olive oil Sales took an immediate plunge overnight as running TV

news continued showing store workers pulling plastic bottles of olive oil off shelves

everywhere The bubble burst overnight because market process worked though

slowly through a long and circuitous route

Anticipating a criticism arguing that market process failed because the

ex-manager went to a prosecutor instead I have two short responses First the

ex-manager would not go to the prosecutor if there was no competitive pressure in

factor market Second the argument actually reiterates my earlier points that

propertization may involve legal intervention and that there is interaction between

market process and propertization

B Financial Bubble US Securitization of Subprime Mortgages

The 2008 subprime mortgage crisis provides another example Research

attention to the financial crisis has generated so many insightful papers that a very

brief introduction of US securitization of subprime mortgage and the financial crisis is

sufficient for the purpose of this paper The following focuses mainly on some key

financial instruments their functions and what happened to them before and after the

financial crisis They pave way for a direct comparison with the olive oil bubble in

Sub-section IIIC and motivate further discussions in Section IV

Selling off mortgages that have been extended reduces the risk exposure of a

mortgage originator for example a savings and loan association and the incoming

cash flows help enhance its liquidity for more extensions of home mortgages

Extraordinary buildup in sales and new lending of subprime mortgages a

sub-category of mortgage that has a higher default risk because subprime borrowers

have neither credit histories nor payback capacities as good as that of prime mortgage

borrowers featured prominently in the immediate years before the bursting of 2006

US housing bubble New origination of subprime mortgages increased from about

US$ 200 billion in 2002 to US$ 600 billion in 2005 and 200626 About two thirds of

26 THE FINANCIAL CRISIS INQUIRY COMMISSION FINANCIAL CRISIS INQUIRY COMMISSION REPORT

p70 Figure 52 (2011)


18

them were eventually securitized and sold to investors

After acquiring subprime home mortgages usually from different mortgage

originators special purpose entities (SPEs) set up by investment banks engaged in

slicing them by different risks structuring them into tranches of different priorities in

the receipt of principal or interest payments adding credit enhancements repackaging

them as shares of MBSs and selling these shares to institutional investors such as

pension funds insurance companies mutual funds and hedge funds Tranches

having higher priorities in receiving principal or interest payment of underlying

subprime mortgages were less risky than those of lower priorities These were what

essentially involved with the securitization of subprime mortgages27 Since tranches

junior in payback priorities were harder to sell same techniques of MBS

securitization were further applied to include them with other debt assets as collateral

in creating CDOs that would be rated as good as senior MBS tranches Different

tranches of CDOs were then again similarly pooled and securitized to create further

downstream derivatives as what were called CDO2s and CDO3s which are neglected

here so as not to be distracted from our main focus The total worth of CDOs issued

between 2004 and 2007 was about US$ 14 trillion a drastic increase from US$ 69

billion in 200028

Securitization of subprime mortgage changed the role of banks as a financial

intermediary Particularly in home mortgages lending banks used to consolidate

short-term consumer deposits and extend long-term mortgage loans their financial

intermediary role was primarily in taking up risks associated with the term mismatch

between deposits and loans With securitization of subprime mortgage this

intermediary role of banks was off-loaded through sales of mortgages to SPEs As

originators of subprime mortgages banks were effectively remained only with the

function of screening subprime mortgage applications while their traditional

monitoring and servicing functions were usually relegated to newly created servicing

companies Most importantly with the creation and sale of MBSs and CDOs the

traditional risk-bearing function of banks was shifted to institutional investors who

would acquire these liquid structured financial instruments to meet their investment

considerations Mortgage lending thus also changed from regulated banking system

consisting of insured deposit-taking institutions to unregulated shadow banking

system consisting of investment banks pension funds insurance companies mutual

funds and hedge funds29

27 More precise features of securitization of MBSs and CDOs will be discussed in Section IVC

Jonathan C Lipson Re Defining Securitization 85 S CAL L REV 1229 (2012) (defining true

securitization as ldquoa purchase of primary payment rights by a special purpose entity that (1) legally

isolates such payment rights from a bankruptcy (or similar insolvency) estate of the originator and (2)

results directly or indirectly in the issuance of securities whose value is determined by the payment

rights so purchasedrdquo) Steven L Schwarcz What is Securitization And for What Purpose 85 S CAL

L REV 1283 (2008) (proposing a broader definition of securitization to mean ldquoa financial transaction in which (1) a special purpose entity issues securities to investors and directly or indirectly uses the

proceeds to purchase rights to or expectations of payment and (2) collections on the rights or

expectations so purchased constitute the primary source of repayment of those securitiesrdquo) 28 GRETCHEN MORGENSON amp JOSHUA ROSNER RECKLESS ENDANGERMENT HOW OUTSIZED AMBITION

GREED AND CORRUPTION LED TO ECONOMIC ARMAGEDDON (2011) 29 Tobias Adrian amp Hyun Song Shin The Changing Nature of Financial Intermediation and the


19

The direct economic reason behind the ever increasing housing prices was lower

and lower interest rates since 200130 Between 2001 and 2004 while nominal

30-year rates fell more rapidly than the inflation rate by about 100 basis points the

federal funds rate was adjusted downward even more by 510 basis points after

deducting the inflation rate31 It indicates that during the period short-term interest

rates became relatively cheaper than 30-year rates As adjustable-rate mortgages

were typically based on a one-year interest rate new mortgage borrowers were

increasingly drawn away from fix-rate to adjustable-rate mortgages Inasmuch as

adjustable-rate mortgages shifted the risk of a rise in short-term interest rate back to

borrowers the unregulated shadow banking system became more interested in

supplying MBSs and CDOs32

Unsurprisingly originators of subprime mortgage were much less incentivized to

diligently screen mortgage applications33 Given capital requirement regulation and

ample supply of credit the ldquooriginate-to-distributerdquo model of mortgage lending

inflated the size of a lending institutionrsquos balance sheet and increased its profits as it

became increasingly leveraged34 All of this went fine until some borrowers could

not refinance their mortgage payments and started to default35 These borrowers

were not unexpectedly the ones obtained mortgage loan only because of lowered

standards due to lapses in screening mortgage applications Refinancing was no

longer reliable for them because short-term interest rates unexpectedly started to rise

and housing prices stopped appreciating This happened in retrospect for several

reasons The first is that even applicants who had no income or who had no job or

asset were approved to get their mortgage loans36 Second originating lenders some

if not all misrepresented to securitization sponsors risks of such mortgage loans or

their ability to buy back defective loans as promised in their contracts in turn

Financial Crisis of 2007ndash2009 2 ANNUAL REV ECON 603 (2010) 30 Global savings glut and the Fedrsquos low interest-rate policy to accommodate HUDrsquos affordable housing mandate were suggested as the two primary reasons of the lowered interest rates See eg

Lawrence H White Federal Reserve Policy and the Housing Bubble 29 CATO J 115 (2009) 31 Id at 118 32 Adam J Levitin amp Susan M Wachter Explaining the Housing Bubble 100 GEORGETOWN LJ 1177

(2012) (arguing that ldquothe bubble was a supply-side phenomenon attributable to an excess of mispriced

mortgage financerdquo) 33 See eg Benjamin J Keys et al Did Securitization Lead to Lax Screening Evidence from

Subprime Loans 125 Q J ECON 307 (2010) (providing empirical evidence that ldquoexisting securitization

practices did adversely affect the screening incentives of subprime lendersrdquo) Giovanni DellrsquoAriccia

Deniz Igan amp Luc Laeven Credit Booms and Lending Standards Evidence from the Subprime

Mortgage Market 44 J MONEY CREDIT BANK 367 (2012) (showing empirically that lending standards

indeed were compromised) Michael Simkovic Competition and Crisis in Mortgage Securitization 88

INDIANA LJ 213 (2013) (finding that ldquosecuritizersrsquo ability to monitor originators and maintain high

standards was undermined as competition shifted power away from securitizers and toward

originatorsrdquo) 34 Ricardo Cabral A Perspective on the Symptoms and Causes of the Financial Crisis 37 J BANK

FINANC 103 (2013) (indicating with data that ldquobanking sector profits were historically highrdquo) Tobias Adrian amp Hyun Song Shin Money Liquidity and Monetary Policy 99 AM ECON REV 600

(2009) (finding that ldquoleverage is procyclicalrdquo and ldquofinancial crises tend to be preceded by marked

increases of leveragerdquo) 35 Steven Schwarcz Understanding the Subprime Financial Crisis 60 S C L REV 549 (2009) 36 Benjamin J Keys Amit Seru amp Vikrant Vig Lender Screening and the Role of Securitization

Evidence from Prime and Subprime Mortgage Markets 25 REV FINANC STUD 2071 (2012)


20

sponsors misrepresented in their prospectuses to investors the riskiness of mortgage

loans in a securitization pool37 And third credit rating agencies inflated their

ratings of securities backed by subprime mortgages because they were paid by issuers

but not investors38 As a result many MBSs and CDOs were overpriced

When borrowers became delinquent on their mortgage payments banks

traditionally would consider foreclosure as the last resort and start some renegotiation

with delinquent borrowers on some modifications of the principals or interest

payments involved because foreclosure sales of homes would be well below market

prices As financial intermediation was channeled out of traditional banking and

into shadow banking system renegotiation of mortgage contracts to mitigate the

adverse effects delinquent loans became nearly impossible because servicers did not

have sufficient incentive to take up a renegotiation role as traditional bankers would

in the past39 The reason is that again in retrospect subprime mortgages were

pooled put into tranches and sold to create an additional tier of tranches of another

pooled securities such that the cost of finding which issuer should renegotiate with

which mortgagor became prohibitively high because mortgage assignment data were

usually not recorded40 It goes without saying that for the same reason mortgagors

could not know whom to request modifications of principal or interest payments even

if they were willing to do so Ensuing fire sale associated with home foreclosures

thus could not have been stopped41

The bursting of the housing bubble could not hide and investors of MBSs and

CDOs finally realized the inherent risks involved with securitization of subprime

mortgages It then became clear that not even fire sales could help the subprime

mortgage securities market because every player in the market were caught in the

liquidity crunch Since there were only sellers but virtually no buyers the secondary

market of debt securities fully or partially backed by subprime mortgages came to a

37 Harold C Barnett And Some with a Fountain Pen Mortgage Fraud Securitization and the

Subptime Bubble in SUSAN WILL STEPHEN HANDELMAN amp DAVID C BROTHERTON (EDS) HOW

THEY GOT AWAY WITH IT WHITE-COLLAR CRIMINALS AND THE FINANCIAL MELTDOWN (2013)

(arguing that ldquofraudulent subprime loans was sufficient to collapse the subprime bubble and initiate the

subsequent financial meltdownrdquo) 38 Lawrence J White The Credit Rating Agencies 24 J ECON PERSP 211 (2011) (ldquoA rating agency

might shade its rating upward so as to keep the issuer happy and forestall the issuerrsquos taking its rating

business to a different rating agencyrdquo) 39 See eg Tomasz Piskorski Amit Seru amp Vikrant Vig Securitization and Distressed Loan

Renegotiation Evidence from the Subprime Mortgage Crisis 97 J FINANC ECON 369 (2010)

(finding that ldquoseriously delinquent loans that are held by the bank have lower foreclosure rates

than comparable securitized loansrdquo) Adam J Levitin amp Tara Twomey Mortgage Servicing 28 YALE

J ON REG 1 (2011) (ldquoServicersrsquo compensation structures create a principal-agent conflict between

them and MBS investorsrdquo) Sumit Agarwal et al The Role of Securitization in Mortgage Renegotiation

102 J FINANC ECON 559 (2011) (finding that ldquofrictions introduced by securitization create a

significant challenge to effective renegotiation of residential loansrdquo) 40 Joseph W Singer Foreclosure and the Failures of Formality Or Subprime Mortgage Conundrums

and How to Fix Them 46 CONNECTICUT L REV 497 514 (2013) (arguing that banks could ldquohave

recorded mortgage assignments to give homeowners a way to find out who currently held rights in their

mortgages and the notes to facilitate negotiation in cases of defaultrdquo) 41 Andrei Shleifer amp Robert Vishny Fire Sales in Finance and Macroeconomics 25 J ECON PERSP

29 (2011) (ldquoWhen negotiations do not succeed because additional cash flows cannot be pledged and a

high-valuation buyer is not available a fire sale is difficult to avoidrdquo)


21

freeze Securitization of subprime mortgages that theoretically would promote more

efficient transfer of credit risks turned out to have inadvertently increased the

systemic risk of financial sector The increase in systemic risk was not expected by

financial experts despite earlier warnings from some reputable financial economists

Like all other test products the ultimate judgment of the success or failure can only

come from market process However the market process had to travel a very long

and circuitous route to pronounce the propertization failure of securitization of

subprime mortgages

C A Comparison and Lessons Learned

Securitization of MBSs involves as described above actions of acquiring

subprime mortgages from their originators pooling them together slicing them by

their risks grouping them into tranches and adding credit enhancements

Securitization of CDOs involves similar actions with the exception that what pooled

together were junior tranches of MBSs and some other assets Recall that

adulterated olive oil as described in Sub-section IIIA consisted of two primary

ingredients olive oil and cottonseed oil The adulteration also involved actions of

pooling of the two materials with some specified percentage of each adding

chlorophyllin and separating them by the percentage and the type of true olive oil

mixed The sequences of actions involved in securitization of MBSs or CDOs and in

commodification of adulterated olive oil were admittedly not exactly the same

Nonetheless adulterated 100 olive oil virgin oil and extra virgin oil were just

different tranches that came out of the commodification stage The term of

securitization thus corresponds to the term of commodification as used in this paper

Actions associated with the securitization MBSs and CDOs were therefore aimed at

delimiting their boundary dimensions of a tranche for examples its risk level income

streams of principal and interest and priority

In their commercialization stage MBSs and CDOs could be sold to investors only

after prospectuses of the commodified products being drawn up Prospectuses

served to communicate with targeted investors the boundary dimensions of MBSs and

CDOs they were like the labels informing the boundary dimensions of adulterated

olive oil Misrepresentation or insufficient disclosure of their boundary dimensions

particularly the riskiness of underlying subprime mortgages effectively added new

boundary dimensions or changed those delimited in the commodification stage In

this sense securitization of MBSs and CDOs involved adulteration and passing off

just like that in the olive oil case Misrepresentation and passing off were possible

because investors like their counterpart consumers in the adulterated olive oil could

neither observe risks with naked eyes nor verify boundary dimensions delimited by an

issuer of MBSs or CDOs and conveyed to them through a prospectus It suggests

that misrepresentation and passing-off would be easier to succeed by larger and more

reputable issuers of debt securities Indeed just as that in the case of adulterated

olive oil reputation of investment banks for example Merril Lynch was the prime


22

mover of investorsrsquo acceptance of debt securities42

Securitization of MBSs and CDOs in the commercialization stage further

involved actions in designating a servicer and obtaining AAA ratings from credit

rating agencies that were absent in the adulterated olive oil case As introduced

earlier unwarranted AAA ratings and servicersrsquo bias toward foreclosure did not

mitigate the threat of a housing bubble but promoted the initiation of a housing bubble

When the housing bubble burst these two additional features exacerbated its

consequences because they adversely fastened and worsened the propagation of

deleveraging and liquidity blight throughout the financial sector In other words

they increased systemic risk to financial sector as a whole This was absent in the

adulterated olive oil case where propertization failure was limited to the adulterating

company and did not spread to other types of cooking oil Despite that market

process worked slowly because of the complex interrelationships between the housing

market and the market of securitized debts it ultimately came to pronounce the

propertization failure of MBSs and CDOs

A few abstract lessons learned from the two cases are summarized below First

since property is of social nature boundary dimensions of property are not limited to

physical characteristics imbedded in the commodification stage of propertization

Second the more difficult to observe and verify boundary dimensions delimited in the

commodification stage the more susceptible is boundary delimitation in the

commercialization stage to manipulation Third some businesses would maximize

profits without paying deference to the institution of reputation These three

featured prominently in both the olive oil bubble case and the securitization of MBSs

and CDOs

Routes travelled by market process before ultimately judging propertization

failure of the two cases reviewed however were different It is therefore important

also to characterize major differences exhibited in the two cases Thus fourth when

delimitations of boundary dimensions in commodification and commercialization

stages are controlled by the same business entity market test will not be complete

until it travels beyond product market and into factor market This is what shown in

the adulterated olive oil case which additionally suggests that misrepresentation and

manipulation of the delimitation of boundary dimensions can be easily determined as

a simple fraud independent of other entities in the same business On the other hand

fifth when controls of boundary delimitations are fragmentized into the hands of

several separate entities market test will not be complete until it travels all way

through the whole system because fragmentation increases systemic risk This is

what exemplified in the subprime mortgage crisis which additionally suggests that

propertization failure can only be determined after the system has been severely

impaired Additionally despite many court cases were filed immediately after the

bursting of the housing bubble there could be few evidence showing a coordinated

fraud because controls of origination issuance servicing and credit-rating in the

42 See eg Benjamin J Keys et al Financial Regulation and Securitization Evidence from Subprime

Loans 56 J MONETARY ECON 700 (2009) (suggesting that ldquothe quality of loan origination varies

inversely with the amount of regulation more regulated lenders originate loans of worse qualityrdquo)


23

securitization of MBSs and CDOs were fragmentized Most importantly sixth

while contracts are involved in the propertization of a new thing in the adulterated

olive oil case the new thing in the securitization of subprime mortgages was itself a

contract What were involved in propertizing MBS or CDO contracts and how such

propertization was related to an increase of systemic risk will be further investigated

in Section IV

Court cases related to the subprime mortgage crisis nonetheless helps remind four

points First disputes of rights or duties in court are essentially about conflicting

interpretations of boundary dimensions that have been delimited or should have been

delimited therefore such cases confirm the social nature of property and contract

Second market mechanisms such as customer service department investor relations

department and legal department of corporations have their limitations in resolving

disputes and court intervention is ultimately invoked to affirm rescind or modify

privately delimited boundary dimensions Third bubble signals that no further

correction in the market process can help a thing attain property status And fourth

despite a new round of propertization cannot be reinitiated without court intervention

under this circumstance the market will also examine courtsrsquo judgment in the next

round of propertization

The short conclusion of Section III is that propertization involves social

interactions in both market and legal processes and there are interactions between the

two processes Particularly should economic agents cannot adjust their boundary

delimitations of a new thing to attain property status market test will send out its

signal of propertization failure to invite court intervention

IV STRUCTURES OF CONTRACTS

MBSs and CDOs as introduced earlier are financial contracts backed up fully or

partially by a pool of mortgage loans It is clear that mortgage is a security interest

and a mortgage loan is a loan contract secured by a mortgage It is also clear that

security interest is a property interest created by contract MBSs and CDOs are

therefore contracts secured by a pool of loan contracts of which each constituent

contract is secured by a mortgage that is also created by contract Pooling of

subprime mortgages necessarily involves a transfer of contract rights and security

interests from mortgage originators to a SPE Securitization of subprime mortgage

further involves the creation of new contract rights and new security interests They

must be different from that of the original subprime mortgage loans acquired and

pooled for securitization because MBSs and CDOs are contracts between SPEs and

targeted investors The new contract rights and new security interests in turn are

transferred between investors in secondary markets The transfer however does not

change the contract rights and security interests of MBSs and CDOs in other words

contracts of MBSs and CDOs bind subsequent transferees

Additionally in the propertization perspective of this paper MBSs and CDOs are

created in massive volumes in the commodification stage just like industrial

commodification through mass production In the commercialization stage they are


24

traded in massive volume per transaction even more than that of stocks because

individual investors also trade in stock markets It is worthwhile noticing that mass

transfer of contract rights and security interests necessarily implies that trading of

MBSs and CDOs everyday in the secondary market must involve an indefinite

number of sellers and buyers otherwise securitizationrsquos purpose to expand market

supply of liquidity will not be served Securitization of subprime mortgages

therefore is a process that begins with contractual arrangements involving security

interests between two definite parties and ends with massive transfer of contract rights

and security interests among an indefinite number of people In this sense it is a

propertization process that transforms relationships in personam to relationships in

rem by way of mass commodification and commercialization

This Section examines structural features of MBSs and CDOs contracts In

order to get their unique features a comparative analysis of contractual structures that

lead to the property interest of easement of way and the security interest of mortgage

is conducted in Section IVA Contractual structures of corporate shares and unique

features associated with their mass propertization are analyzed in Section IVB In

the more general perspective of servitude Section IVC builds on the groundwork of

the previous two subsections to find two unique structural features associated with the

mass commodification and commercialization of MBS and CDO contracts In

comparison with easement and mortgage the first unique feature of MBSs and CDOs

contracts is that their security component is either fictitious or doubly fictitious and

cannot possibly run with an nearly unidentifiable asset In comparison with

corporate shares or bonds the second unique feature is that risks associated with

MBOs and CBOs have a tendency to leak out because monitoring and control of

interdependent risks among tranches are structured out of any legal entity and into

markets

A Structures and Rationales for Easement and Mortgage

Eeasement represents an example of how a relationship in personam transformed

into a relationship in rem More generally all servitudes involve similar relationship

transformation43 An easement of way is a type of servitude and may be considered

as involving two contracting parties and future transferees as the third party Its

structure and the relationship between the three parties can be explained in a

simplified example Suppose that Smith has a parcel of land A and Brown has a

parcel of land B Suppose further that land B is adjacent to a road and Smith can

only access the road by traversing through C a part of land B If Brown grants

Smithrsquos use of C as his pathway to the road then C may become Smithrsquos easement of

way Why would Brown grants the burden and make Smith the beneficiary of

pathway A simple reason is that Smith would not buy land A from Brown unless

Brown promises that Smith has a right to pass through C Brown certainly has his

reservation values for land A and land C If he does not grant the burden Smith may

offer a price below Brownrsquos reservation value for land A However Smith may offer

43 See RESTATEMENT (THIRD) OF PROP SERVITUDE sect 11 (2000)


25

a price above the sum of Brownrsquos reservation values for land A and land C With the

assumption of zero transaction they can close the deal Under this scenario Smith

gets only a contract right to pathway The right to pathway is yet to reach a property

status

A third party may now come into contemplation by either Smith or Brown

What if someday I need to sell land A (land B) to someone else Smith (Brown) would

contemplate That someone else would be concerned with whether she has a right to

use land C as a pathway to the road So Smith would like bind Brown in granting

the burden to his subsequent transferee In a similar vein Brown would be

concerned with whether someone after seeing Smith passing through land C would

purchase land B that is attached with the burden when he needs to sell it someday

So long as the cost of the burden will be commensurately reflected in the price of land

A Brown would recon that binding a third-party with the burden of land C as a

pathway will not adversely affect the price of land B Therefore they would reach

an agreement that will bind successors of land B with the burden of land C as a

pathway

The previous scenario serves only as an example If there was no consideration

of a future transferee a court would still find in favor of a transferee-claimant that the

original grant of pathway is binding for the reasons suggested in the previous scenario

In other words binding is the efficient solution to putting lands A B and C in more

valuable use By taking account of indefinite future third parties such an agreement

between Smith and Brown or a courtrsquos decision to bind successors elevates the

contract right of pathway to attain property status in the name of an easement of way

Emphatically there is no separate value for an easement of way it is included in the

price of land A The reason is that transfer of an easement without transferring land

A at the same time serves no productive purpose and may even be used to

strategically frustrate the use of land A or land B In short with indefinite future

third parties in consideration an easement of way is structured in property system

with two salient features to promote efficient use and transfer of land First

easement is a non-possessory property right divided from the ownership of land B and

bestowed upon the owner of land A Second it runs or touches and concerns with

the land A or B namely where as subsequent transferees of land A retains the benefit

of pathway use successors of land B are bound with the burden of the pathway use

granted in the original contract

Mortgage is a type of security interest Again it can be better understood with a

simplified example Suppose Smith intends to borrow $100000 from Brown Bank

for 30 years at an interest rate of 5 Brown Bank looks at Smithrsquos annual income

credit history and assets to find that the borrowed money is used to finance his home

purchase For one reason or another Brown Bank considers that it would lend the

money at 5 interest rate only if Smith is willing to put up the property as collateral

Smith agrees and together they draw up a mortgage loan contract which stipulates the

principal amount the interest rate payment schedule and the amount of each payment

In addition there is a side condition stipulating that Smith allows Brown Bank to take

possession and sell the home to pay off the loan if Smith defaults The mortgage


26

loan contract thus comprises of two components44 The first is the loan component

that specifies the loan amount and its repayment scheme The second is the

mortgage component that permits foreclosure by the lender contingent upon the

borrowerrsquos default Apparently the loan component can stand by itself as a full

contract The additional mortgage component serves only to mitigate the lenderrsquos

risk by shifting the adverse consequence of borrowerrsquos default back to the borrower

In this sense the mortgage component gives some security to the lender The

security obtained through a foreclosure of the borrowerrsquos home is a contract right

A similar thought exercise can be carried out as that in the introduction of

easement of way above Binding the borrowerrsquos contingent obligation of foreclosure

to a subsequent transferee of the mortgage loan contract is therefore an efficient

solution to the problem that situation may arise to call for the transfereersquos financing of

the remaining mortgage loan without disruption and without adversely affecting the

borrower in any way This reflects how and why mortgage is transformed into a

property right of the lender Emphatically like easement of way mortgage cannot be

transferred unless the asset it secures is transferred at the same time it does not have

an independent exchange value45 In short mortgage shares a similar structure of

easement First it is a non-possessory property right divided from the borrowerrsquos

property and bestowed upon on the lender Second it runs with the debt The only

difference is that mortgage specifies a contingent disposition of the secured property

whereas easement or other types of servitude specifies some use of divided property

rights In this sense mortgage is structurally and conceptually the same as servitude

B Unique Features in the Propertization of Corporate shares

A corporate share or stock is a contract through which a company finances its

operations A shareholder as a residual claimant has a contract right to share

together with other shareholders the corporationrsquos profits Let us consider only the

structure of a common stock to simplify otherwise very complicated discussions A

share of common stock carries with it a nominal value indicating the monetary

amount the share contributes to financing the company A shareholder can contract

into a plurality of shares and when shares are traded their exchange value per share

depending on the corporationrsquos past performance and future outlook are usually quite

different from the indicated nominal value

Like a mortgage loan a share of common stock is structured with two

components The first is the residual claim component described above The

second is the voting component that indicates the shareholder has a voting right

The voting right enables the shareholder to have some supervision and control over

the corporationrsquos operations and the supervision and control though individually not

very meaningful most of the time helps mitigate some risk associated with the

44 See eg GRANT S NELSON amp DALE A WHITMAN REAL ESTATE FINANCE LAW sect 527 (5th ed

2007) 45 Elizabeth Renuart Property Title Trouble in Non-Judicial Foreclosure States The Ibanez Time

Bomb 4 WM amp MARY BUS L REV 111 (2013)


27

shareholderrsquos investment The voting component in this sense helps secure the

residual claim of a shareholder and can be viewed as a security interest like

mortgage46 In addition the security interest of voting right runs with the share

However unlike mortgage or easement the voting right is allowed to be

independently and temporarily delegated by a shareholder to a proxy for an upcoming

vote

Transferable corporate shares apparently may likewise promote efficiency in

financing corporate operations The delegation of voting right to a proxy

nevertheless provides a clue to the complicated process in transforming corporate

shares of in personam nature into a property in rem The key to understanding is that

shares are pooled together from a number of shareholders and the number may be

very large This is so because a corporationrsquos mission usually cannot be achieved

without having sufficient funds and knowledge beyond a threshold to start and run

its business Even if someone has sufficient financial resource she may not have the

requisite knowledge Pooling financial and knowledge resources helps not only to

kick start the business but also spread the inherent risk involved Breaking down the

total financial requirement into a large number of shares thus becomes a viable

financing option Delegation of the voting right attached to a share on the other

hand enables efficient flows of supervisory and controlling powers to a few people of

better relevant knowledge So there are a large number of shares and voting rights

and many shareholders

In this sense the residual claim and the voting right components of a common

stock provide some incentive for shareholders to voluntary contract into the common

pool A corporation exhibits more or less features of not only commons but also

anticommons for example fragmentation as a result of job divisions It is well

known that commons is susceptible to depletion of resources and that anticommons

tends to result in idled resource47 Nevertheless free riding and externality problems

associated with commons and fragmentation problems associated with anticommons

may be alleviated through governance strategy so that pooling benefits outweigh

pooling costs48 Since propertization and propertization failure are in the focus here

there is no need to be distracted with details of governance mechanisms It suffices

to note that accounting standards and corporate law have evolved with advancement

in technological and organizational knowledge to enable the provision of governance

mechanisms for reasonably effective operations by executives and supervision and

control by shareholders Otherwise concern with the tragedy of commons or

anticommons would overshadow the enticements of residual claims and voting rights

Exit options also enter into shareholdersrsquo consideration of before they would

46 Perhaps it is why stocks are called securities in the first place however I do not have a reference to corroborate my view 47 See Garrett Hardin The Tragedy of the Commons 162 SCIENCE 1243 (1968) Michael Heller The

Tragedy of the Anticommons Property in the Transiton from Marx to Markets 111 HARV L REV 621

(1998)

48 See Henry Smith Exclusion versus Governance Two Strategies for Delineating Property Rights

31 J LEGAL STUD S453 (2002)


28

contract into a mixture of commons and anticommons49 Transferable shares help

alleviate some concern But there is also the liquidity issue of how soon to find a

subsequent transferee and if the transfer would suffer a discount A thick liquid

secondary market in shares would help a lot more to ease the concern of exit

Exactly for this reason securities exchange laws have come into place to promote

orderly transfer of corporate shares by regulating financial information so that it is

transparent to both sellers and buyers Apparently financial accounting standards

have facilitated the work of Securities and Exchange Commission There is also the

risk that a corporation may become insolvent The concern is exacerbated by

alternative financing options for examples getting bank loans and selling bonds

open to a corporation Though priorities for different groups of stakeholders to get

something back in case a corporation goes bankrupt can be stipulated in contracts

asymmetric information principal-agent problems and holdout may trump what

stipulated in various contracts in the turmoil of bankruptcy and render the situation

more chaotic Bankruptcy laws and limited liability serve to deal with this kind of

problems so that each stakeholder may get a fair share of the value of the

corporationrsquos remaining assets in an orderly exit

Easement or mortgage attains the status of property in rem because the requisite

ldquotouch and concernrdquo integrates the divided rights with a parcel of land or a loan so

that the whole can be transferred as a sealed bucket50 On the other hand a corporate

share represents only a fragment artificially carved out from the corporationrsquos equity

pool The residual claim and the voting right components of corporate shares are

insufficient to sustain a hick liquid securities market as originally intended unless the

corporation itself is a sealed bucket Internal corporate governance and various

external organizational laws are required for corporate shares to attain property

status51 They play significant roles and are unique features exhibited in the

transformation of corporate shares from contract in personam into property in rem

However as recurring stock market crashes suggest these unique features are yet to

render corporate shares fully compatible with the stable property system as a whole

C Unique Structural Features of MBSs and CDOs

The structure of MBSs and CDOs is analyzed first in order As introduced

earlier subprime mortgages were acquired from their originators and pooled together

for securitization Each subprime mortgage loan in the pool has a loan component

and mortgage component For ease of reference let us designate the pool as the

original pool The commodification of MBSs and CDOs as also introduced earlier

results in several tranches of different degrees of riskiness More specifically it is

done by designating priorities in receiving cash flows or loss of subprime mortgages

49 Hanoch Dagan and Michael A Heller The Liberal Commons 110 YALE LJ 549 (2001) 50 For the property metaphor of a container of watermdasha bucketmdashrather than a bundle of sticks

see Lee Anne Fennell Property and Half-Torts 116 YALE L J 14001442 (2007) 51 Henry Hansmann amp Reinier Kraakman Property Contract and Verification The Numerus Clausus Problem and the Divisibility of Rights 31 J LEGAL STUD S373 at S405 (2002) (arguing

that ldquoorganizational law is property lawrdquo


29

in the original pool The most senior tranche gets cash flows generated from the

original pool first The tranche of next seniority is in turn distributed with cash

flows of the original pool Subordinated tranches are more risky because there might

not be sufficient cash flows remaining for them The kind of ldquowaterfallrdquo distribution

of cash flows of the original pool is different from the ldquopass-throughrdquo scheme adopted

in the securitization of government-guaranteed mortgage loans

Through the waterfall distribution arrangement tranches are created with different

levels of risk in the commodification stage Shares of these tranches are then issued

and sold to investors Investors pay a higher price for the interest andor principal

payments stipulated in the contracts of more senior tranches It becomes clear that

investors contract into the pool of payments and risks of a tranche Let us call it a

tranche pool which is apparently derived from the original pool Though a tranche

pool is claimed to be backed by the underlying subprime mortgages no particular

assembly of subprime mortgages can be identified as backing any of the commodified

tranches First the large number of mortgage components associated with

corresponding subprime mortgage loans in the original pool is fictionalized as a

ldquounitary security interestrdquo The security interest of mortgage as described earlier

can be conceptually likened to servitude52 In this perspective the fictionalized

ldquounitary security interestrdquo can be picturesquely visualized as a servitude pool of

20x20 grids for example with each grid containing a mortgage component of a

subprime mortgage loan in the original pool Second the waterfall distribution

scheme shrinks the servitude pool as payments are made to investors of the most

senior tranche Note that once an underlying subprime mortgagersquos cashflow stream

is paid out or becomes delinquent its security component can no longer provide

security Namely the grid containing the security component becomes empty The

smaller servitude pool then becomes another fictionalized unitary security interest for

remaining tranche pools Since which grids will be in turn taken out from the

servitude pools can only be identified ex post no particular assembly of subprime

mortgages of the original pool can be ex ante identified as backing which MBS

tranche Third and most importantly when needy situation arises none of the

several fictionalized unitary security interests can possibly run with an nearly

unidentifiable asset In brevity the first unique structure of a MBS tranche is that it

has a real debt component and a fictitious security component

Let us shift temporarily to consider the unique structure of CDOs As

introduced earlier the same technique of securitization of MBSs is applied to

securitize CDOs However CDOs are backed by subordinated MBS tranches and

securities backed by other financial assets In the perspective of servitude the

security component of a CDO tranche is partially derived from two related layers of

servitude pools The first layer is the servitude pool of the mortgage components of

subprime mortgages and the second layer is the servitude pool of the security

components of MBS tranches Whereas the security component of a MBS tranche is

52 Molly Shaffer Van Houweling The New Servitudes 96 Geo LJ 885 (2007) (considering

shrink-wrap browse-wrap click-wrap restrictions as well as Creative Commons license as new

servitudes)


30

fictionalized from the former servitude pool to be a unitary security interest the

security component of a CDO tranche is fictionalize from the latter servitude pool to

be a unitary security interest As fictitious security interest renders whichever

subprime mortgages backing a MBS tranche nearly unidentifiable the doubly

fictitious security interest of CDO means that it is impossible to find which MBS

tranche is backing up which CDO tranche let alone which subprime mortgage of the

original pool backs up a particular CDO tranche The unitary security interest of a

CDO tranche is thus fictitious and not ex ante identifiable either In addition it

cannot possibly run with an nearly unidentifiable asset when needy situation arises

The unique feature of a CDO tranche is that it is structured with two layers of

fictitious security components

The property interest of easement must touch and concern the land and runs with

the asset otherwise as briefly mentioned earlier opportunism arising from its

independent transfer may frustrate the purpose of property system and destabilize it

For the same reason the mortgage component of a mortgage loan cannot be

transferred without transferring the corresponding loan as a whole There is no

problem for the mortgage component transferred between an originator and a SPE

because it runs with the transferred subprime mortgage loan Let us suppose for

example that there is no cloud on the fictionalized unitary security interest for the

most senior tranche Since the performance of underlying subprime mortgages is

dynamic and contingent in nature the security component of any subordinated tranche

is not only fictitious but also clouded It may be argued that the structure of a share

of a MBS tranche is not much different from that of a corporate bond They both

have a debt component and a security component While the former is backed by

underlying subprime mortgages the latter is backed by underlying corporate cash

flows Further like the waterfall distribution scheme in assigning priorities of MBS

tranches payments and risks associated with a corporationrsquos different issues of

corporate bonds are also carved out from cash flows generated in corporate business

while corporate shares are residual claims subordinate to corporate bonds in

bankruptcy proceedings The commodification of MBS tranches is nonetheless

different from that of corporate bonds Unlike that of a corporation SPEs simply do

not have any internal governance structure to monitor and control interrelated

payments and risks among the tranches In fact no one works at a SPE and it does

not have a physical location53 The second unique feature of a MBS tranche is

therefore that monitoring and control of interdependent risks of MBS tranches are

structured out of any legal entity and into markets

Divisibility of property rights is a major subject of property theory Whether a

delimitation of boundary dimensions is socially acceptable hinges on whether rights

bundled or unbundled in propertization is socially acceptable In the property

metaphor of a bucket of water the issue turns into the question of whether the bucket

is able to contain benefits risks and costs associated with the possession use and

53 Gary B Gorton ampNicholas S Souleles Special Purpose Vehicles and Securitization THE RISKS OF

FINANCIAL INSTITUTIONS (MARK CAREY AND RENEacute M STULZ EDS) (2007) (emphasizing that SPEs do

not control or make business decisions and are designed to be bankruptcy-remote)


31

disposition of a thing and the exclusion of others from such actions with respect to the

thing In this sense corporate and bankruptcy laws help build a property scale into

corporations to effectively contain risks of corporate shares and bonds from leaking

out and enable their monitoring and control of the risks On the contrary no legal

entity is responsible for monitoring and control of interdependent payments and risks

of MBS tranches Similarly there is no internal governance to monitor and control

interdependent payments and risks of CDO tranches If risks associated with MBSs

may not be easily contained by the fictitious security interests of the MBS tranches

then the second unique feature of CDO tranches is that risks associated with CDOs

have a even higher tendency to leak out because the security components of CDO

tranches are doubly fictitious and there is no internal governance structure to monitor

and control them

In sum the first unique feature of MBSs and CDOs contracts is that in

comparison with easement and mortgage their security component is either fictitious

or doubly fictitious and cannot possibly run with an nearly unidentifiable asset The

second unique feature is that in comparison with corporate shares or bonds risks

associated with MBOs and CBOs have a tendency to leak out because monitoring and

control of interdependent risks among their tranches are structured out of any legal

entity and into markets

V PROPERTY AND SYSTEMIC RISK

If all contracts are allowed to bind successors without any restriction then there

is no difference between contract rights and property rights Yet there is the

principle of Numerus Clausus in property law to which Merrill and Smith rationalizes

standardization of property forms through ex ante saving of information processing

costs whereas Hansmann and Kraakman instead argues it to have been the result of

courtsrsquo ex post verification of rights offered for conveyance54 In this context this

Section inquires why without apparent restriction on the freedom to create MBSs and

CDOs contracts and with security interest being an acceptable form of property

propertization of MBOs and CDOs did not succeed as the propertization of

Microsoftrsquos Windows or Applersquos iPhone

A consensus of the primary cause of the 2008 subprime mortgage crisis is that

financial innovations such as MBSs and CDOs increased the complexity and risk of

financial system55 One explanation offered for the increased systemic risk is that

some forms of intellectual hazard were at work56 There was certain truth in it

because apparently were not for extraordinarily brilliant experts managers and

directors complex financial instruments or organizations would not have come into

existence in the first place If it represents an explanation from psychological or

54 Hansmann and Kraakman at 374 55 See eg Steven L Schwarcz Systemic Risk 97 GEO LJ 193 199 (2008) Hal S Scott The

Reduction of Systemic Risk in the United States Financial System 33 HARV JL amp PUB POLrsquoY 671

673 (2010) (ldquoGoing forward the central problem for financial regulationhellipis to reduce systemic riskrdquo) 56 Geoffrey P Miller amp Gerald Rosenfeld Intellectual Hazard How Conceptual Biases in Complex

Organizations Contributed to the Crisis of 2008 33 HARV JL amp PUB POLrsquoY 807 810 (2010)


32

behavioral perspective then various explanations emphasizing problems of

asymmetric information incentive agency or holdup associated with securitization of

subprime mortgages represent views from economic theory 57 Despite these

economic explanations also touch on some differential regulations relevant to asset

securitization there seems no legal perspective exploring an alternative explanation to

the subprime mortgage crisis particularly from the vantage point of property theory58

After last sectionrsquos examination of the unique features associated with the mass

commodification and commercialization of MBSs and CDOs contracts this Section is

ready to provide an account of the incompatibility between institutional arrangements

involved in their propertization and what a stable property system would require

Securitization of private-label MBSs and CDOs primarily involves borrowers of

subprime home loan and several levels of private entities such as originating banks of

subprime mortgages SPEs rating agencies underwriters and brokers and

institutional investors Suppose everything goes out well then the borrowers retire

debts and all borrowersrsquo payments are distributed among the private entities

However these private entities are paid for example they all make profits otherwise

fees or periodic payments or principals must be adjusted to sustain a viable system of

securitization business In this case risks are successfully shifted from originated

banks to institutional investors that have better risk-bearing capacity In other words

risks are as planned contained by various contractual arrangements involved There

is no problem for market process and there is no litigation giving rise to a need of ex

post verification of contract or property rights offered for conveyance by court

Nobody would care any distinction between contract and property

In contrast when things go bad as what happened in the 2008 subprime mortgage

crisis people would start taking actions protecting their stakes mitigating losses or

even bring suits to court Regardless when and why someone takes what actions

against whom the unexpected bad outcome gives meaning to the word ldquoriskrdquo The

outcome further away from what planned suggests the worse the risk It therefore

reminds that risk associated with a contract is localized between the definite

contracting parties while risk associated with a thing may travel very far in terms of

the indefinite number of subsequent transferees It is particularly so when the thing

is a chattel of mass commodification and commercialization Indeed many financial

instruments are considered chattels by law If there was increased systemic risk that

unexpectedly caused or worsened the 2008 financial crisis then it could only escape

detection under two legal structures The first is that risks leaked out from one

contractual arrangement were not internalized by another contractual arrangement at

next level and loomed larger as several levels of contractual arrangements were

involved in the securitization of MBSs and CDOs The second is that MBSs and

57 See eg Oren Bar-Gill The Law Economics and Psychology of Subprime Mortgage Contracts 94

CORNELL L REV 1073 1087 (2009) Steven L Schwarcz Regulating Complexity in Financial Markets

87 WASH U L REV 211 (2009) 58 Sjef van Erp Contract and Property Law Distinct but not Separate 9 EUR REV OF CONTRACT L

307 (2013) (two ends of the spectrum spanning from no to full third party effect) Joseph W Singer

Property Law and the Mortgage Crisis Libertarian Fantasies and Subprime Realities 1 PROPERTY L

REV 7 (2011)


33

CDOs were taken for granted as property without any awareness of the systemic risk

stemming from a propertization based on the false premise

The securitization business indeed involved several levels of contractual

arrangement Subprime mortgage loan contracts were entered into by borrowers and

originating banks Lapses in screening loan applications means that risks associated

with subprime mortgages were not contained within the contract SPEs acquired

subprime mortgages loans through contracts with originators Loan risks could not

have been fully internalized by these acquisition contracts because originators were in

many cases also the sponsors of SPEs Additionally true sale of loans by an

originator not only enables its expansion of off-balance sheet assets but also

transforms its operations into originate-to-distribute model of business that generates

revenues from fees In view of the two levels of contractual arrangements there was

no fragmentation of contract rights but a conduit facilitating and reinforcing risk

creation through lapses in screening subprime mortgage applications While

borrowers who could not obtain a mortgage loan before were happy in getting their

homes and originators were happy with their increasing profits risks were unduly

created and not borne by either party

MBS and CDO tranches were structured as contracts of which terms and

conditions were written as a result of contracts between the sponsor of a SPE and the

SPErsquos equity holders The creation of fictitious security interest implies that risks

created in the previous two levels of contractual agreements could at least hide in

subordinated tranches of MBS and CDOs Originators and SPEs would hide the

risks created because again there was no fragmentation in contract rights but shared

incentive to earn profits from the ultimate source of revenuemdashcash flows from the

original pool of subprime mortgage loans As the Taiwanese adulterated olive oil

case showed none of the outsourcing companies became a whistle blower turning in

CFFCrsquos adulteration practices

Tranches of MBS and CDO were rated by rating agencies though contracts

This is a level of contractual arrangement that had an opportunity to find out the risks

created and disclose where the risks hid However rating review fees were paid by

issuers of MBSs and CDOs not investors Free riding by investors on publicly

disclosed results of rating reviews was probably the primary reason for it As a

result of the agency problem risks were disguised in AAA ratings Lastly sales of

MBSs and CDOs were standardized sales contracts with many pages of fine prints

Indeed the tranching schemes of MBSs and CDOs were so complex that rating

agencies powered by mathematical algorithms could not find disguised risks How

could an investor convince other investors that risks were disguised ratings overrated

or parameters and assumptions of the algorithms were inadequate to assess the risks

Despite that investors were the ultimate suppliers of credits to subprime mortgage

loans and stood at the opposite end to originators and SPEs asymmetric information

compelled investors to rely mostly on reputations of originators issuers and rating

agencies Risks were out there disguised and not internalized even when there was

some competition in the securitization of MBSs and CDOs

The picture changed totally when circumstances became unfavorable and


34

triggered a cascade of events Fragmentation that otherwise was absent in good

times surfaced when borrowers became delinquent on scheduled repayments or

defaulted Rating agencies started to downgrade their previous ratings Reputation

became no longer reliable Risks turned into realities and it became known that the

security interests offered by issuers of MBOs and CDOs were instead fictitious

Investors selling MBOs and CDOs for liquidity either was on fire sale or could not

even find a buyer Borrowers willing to repay through new terms based on

substantially depreciated home values could not find the right people to renegotiate

new contractual arrangements because the current owners of mortgage loans were

nearly impossible to identify Foreclosures became the last resort to maintain some

liquidity and survive nonetheless many ensuing cases in courts indicate that even

who had the power to foreclose was in dispute Fragmentation at every level of

contractual arrangements associated with the securitization of subprime mortgages

were ex post detected but not ex ante imaginable by participants involved

There is only one plausible reason to the asymmetrical appearances of

fragmentation in the good times and in the bad times Fragmentation is not an issue

in contract theory because the nature of contract relationship is in personam In

contrast fragmentation is a major issue of property theory Fragmentation arises in

partitioning of a parcel of land into many smaller parcels that may frustrate the

advantage of economy of scale59 It also arises in Hellerrsquos anticommons where

property rights of a thing are divided into separate hands such that the thing may not

be mobilized to attain a higher economic value because each right holder in an

anticommons has veto power against an integration of several rights60

The chaos of the 2008 subprime mortgage crisis suggests that the system of

subprime mortgage securitization was structured like an anticommons Unlike a

corporation that has decision control and decision management powers over its assets

and liabilities SPEs had no internal governance structure to take up the challenge of

the dynamic and contingent nature of the performance of underlying pool of subprime

mortgages Neither did originators have powers to monitor or control subprime

mortgages sold to SPEs The matters were vertically disintegrated into two entities

In contrast similar matters associated with corporate bonds are integrated and dealt

with under a coherent structure of corporate management Apple sets standards for

iPhone parts and software before outsourcing its mass production and retains the

powers to monitor and control what are to be sold consumers Though iPhone

consumers do not fully understand the complexity of technology involved or possible

risks associated with the use of an iPhone standards strictly enforced by Apple help

steer Apple from problems In contrast investors of MBSs and CDOs who knew

little about the complexity of and risks associated with the financial instruments ended

up with all kinds of problems because rating reviews of MBSs and CDOs were just a

guide to investors and not enforceable at all Namely there was neither internal nor

external enforceable mechanism to uncover risks of MBSs and CDOs Vertically

disintegrated control of operations and fragmentized organizations as a result became

59 60


35

impediments to renegotiation of a solution mitigating losses

The principle of undivided property rights is most important in property theory

because it helps both seal benefits in and contain risks from leaking out of the bucket

Organizational laws are established following the same principle such that an

organized entity is a legal person and can create values a natural person is incapable

of accomplishing Inasmuch as resources must be pooled together to advance goals

of an organization internal governance structure helps keep its resources from

becoming a commons In addition since specialization is required to fully utilize

organizational resources internal governance structure also helps steer away from

tragedy of anticommons that may result from necessary division of work in an

organization Internal governance thus serves also to balance the tradeoff between

falling into the tragedy of commons and falling into the tragedy of anticommons

Moreover division of labor in the market necessarily implies some fragmentation

Industrial structure thus also entails a similar tradeoff between one based on division

of labor and one based on vertical integration Nonetheless human frailty due to

bounded rationality or greed may not be contained by property or organizational

boundaries61 Its adverse effects similarly may not be internalized by contracts

between people or organizations because of asymmetric information and agency

problems When vertical integration 62In other words there is externality and risk

floats everywhere despite that there are also external laws mitigating risks leaking out

from inadequately scaled property boundaries The principle of undivided property

rights does not make the world perfect Yet it provides guidance and is the

architectural foundation for democratic societies to establish a system of property law

and a complementary system of various law supporting liberty 63 The brief

excursion into property theory provides a perspective to summarize salient features

associated with the propertization of MBSs and CDOs

First just like investors contract into a pool of corporate bonds investors

contracted into pools of MBSs and CDOs Second subprime mortgage loans were

contracts between borrowers and lenders they were placed into MBS and CDO pools

through without borrowers knowledge Third unlike the pool of corporate bonds

there was no internal governance structure to monitor and control the risks associated

with the pools of MBSs and CDOs as a result borrowers were unknowingly and

involuntarily associated with the commons of MBSs and CDOs Fourth tranche of

MBSs and CDOs were structured with fictitious security interests that cannot possibly

run with nearly unidentifiable assets Fifth entities of originators SPEs and rating

agencies were vertically disintegrated and such fragmentation inhibited any discovery

of risks Sixth the fictitious security interests and the fragmentation of vertically

61 Coase 62 See eg Herbert Hovenkamp The Law of Vertical Integration and the Business Firm 1880ndash1960

95 IOWA L REV 863 (2010) (ldquoBy the mid-twentieth century a set of aggressive antitrust policies had

emerged that dealt harshly with both vertical integration by contract and ownership vertical

integrationrdquo) and Bruce M Owen Antitrust and Vertical Integration in ldquoNew Economyrdquo Industries

with Application to Broadband Access 38 REV INDUS ORGAN 363 (2011) (ldquoNet neutrality recently

enacted by the FCC but subject to judicial review is an unfortunate ideardquo) 63 Joseph W Singer Property as the Law of Democracy 63 DUKE LJ 1287 (2014) (ldquoProperty is more

than the law of things property is the law of democracyrdquo)


36

disintegrated organization of industrial structure impeded contract renegotiations and

even resulted in disputes of who had the power to foreclose In sum these salient

features of MBSs and CDOs propertization were totally incompatible with a stable

system of property

VI SUMMARY AND CONCLUSION

This paper takes issues with the common point of departure to institutional

understanding of bubbles by economists and legal scholars Instead of taking

institutions of property and contract for granted I consider that a new thing must go

through a propertization process to attain property status Propertization is a social

process and involves commodification and commercialization stages Other than

that from nature a new thing is usually created through some contract and its transfer

to other people involves contract as well Since contract rights are good only

between definite parties involved and property rights runs with the asset and are good

against the rest of the world Propertization involves a transformation of contract

relationship in personam to property relationship in rem Delimitation of boundary

dimensions of a new thing is necessarily involved in the commodification and

commercialization stages However the delimitation must be acceptable to

subsequent transferees to attain property status Propertization therefore begins with

delimitation of boundary dimensions and is not finished until a particular delimitation

of boundary dimensions is generally accepted Since the right to transfer is an

important stick of the bundle of property rights propertization necessarily involves

market process Propertization may also involve legal process because some

delimitation of boundary dimensions may have adverse effect and be challenged in

court by a transferee Depending on the court judgment the new thing must be

adjusted with improved delimitation of boundary dimension or withdrawn from the

market process In the former case next round of propertization in market process

restarts Even without legal intervention market process will examine delimitation

of boundary dimensions and make its judgment on whether propertization succeeds or

fails In this perspective bubble represents a signal of market processrsquo judgment of

propertization failure

Two bubble examples are introduced to show how market process came to its

final judgment of propertization failure The example of Taiwanese adulterated olive

oil shows that market process worked though slowly through a circuitous route all

way to factor market because consumers could neither observe nor examine boundary

dimensions delimited into the adulterated olive oil Relying on its reputation the

company enjoyed an extraordinary buildup of windfall profits from adulteration until

a former manager dissatisfied with not being able to get a share of the profits

disclosed the adulteration to a local prosecutor The new things in the example of

the 2008 subprime mortgage crisis were on the other hand financial contracts

Market process worked differently to send out the signal of its judgment on MBS and

CDO propertization failure The major difference is that systemic risk was involved

in the financial crisis It was so because industrial organization associated with the


37

securitization of MBS and CDO was fragmentized such that risks could not be

detected until the bubble of housing prices burst Market test thus could only be

finished after traversing through to the system as a whole

Systemic risk in earlier economic and legal scholarships of the 2008 subprime

mortgage crisis referred to the risk of financial system Since this paper takes issue

of their common point of departure it becomes important to examine systemic risk

from the perspective of propertization For this reason structures of contract that

lead to property status of easement mortgage and corporate shares are carefully

examined such that contract structures of MBSs and CDOs can be analyzed and

compared to detect if there is any difference between them The detailed analyses of

these contract structures are also related to property theory The results show that

easement mortgage and corporate shares are all of the nature of servitude Their

originating contracts bind subsequent transferees and attain property status only if

they run with the asset This makes sense because otherwise transaction costs due to

risk and opportunism will defeat the purpose of propertymdashfacilitating stable

expectations of use and exchange of resources In contrast the contract structure of

MBSs and CDOs the organization of SPEs and the industrial organization associated

with the propertization of these securities did not pay attention to problems related to

tragedies of commons and anticommons with and were all found to be incompatible

with what a stable system of property would require The conclusion of this paper is

that after taking into account of human frailty systemic risk necessarily stems from

organizational structures that are incompatible with a stable property system And

appreciation of this conclusion is not easy without understanding the idea of

propertization that is missing either in law or economics


2


TABLE OF CONTENTS

I INTRODUCTION 3

II PROPERTIZATION 6

A A Missing Idea in Economic Theory 7

B Social Nature of Property 8

C Transformation from Relationship In Personam to Relationship In Rem 10

D Interaction with Market Process 11

III MARKET TEST AND PROPERTIZATION FAILURE 13

A Commodity Bubble Taiwanrsquos Adulterated Olive Oil 14

B Financial Bubble US Securitization of Subprime Mortgages 17

C A Comparison and Lessons Learned 21

IV STRUCTURES OF CONTRACTS 23

A Structures and Rationales for Easement and Mortgage 24

B Unique Features in the Propertization of Corporate shares 26

C Unique Structural Features of MBSs and CDOs 28

V PROPERTY AND SYSTEMIC RISK 31

VI SUMMARY AND CONCLUSION 36


3


Steven S Kan

I INTRODUCTION


















movement of bubbles



















4






























property system















5














































6














II PROPERTIZATION


















propertization










7










































11 Barzel


8

not happen








































9












































10







nature
















efforts


















11








commercialization




































12
















market






























13








from the market




































14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























3


Steven S Kan

I INTRODUCTION


















movement of bubbles



















4






























property system















5














































6














II PROPERTIZATION


















propertization










7










































11 Barzel


8

not happen








































9












































10







nature
















efforts


















11








commercialization




































12
















market






























13








from the market




































14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























4






























property system















5














































6














II PROPERTIZATION


















propertization










7










































11 Barzel


8

not happen








































9












































10







nature
















efforts


















11








commercialization




































12
















market






























13








from the market




































14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























5














































6














II PROPERTIZATION


















propertization










7










































11 Barzel


8

not happen








































9












































10







nature
















efforts


















11








commercialization




































12
















market






























13








from the market




































14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























6














II PROPERTIZATION


















propertization










7










































11 Barzel


8

not happen








































9












































10







nature
















efforts


















11








commercialization




































12
















market






























13








from the market




































14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























7










































11 Barzel


8

not happen








































9












































10







nature
















efforts


















11








commercialization




































12
















market






























13








from the market




































14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























8

not happen








































9












































10







nature
















efforts


















11








commercialization




































12
















market






























13








from the market




































14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























9












































10







nature
















efforts


















11








commercialization




































12
















market






























13








from the market




































14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























10







nature
















efforts


















11








commercialization




































12
















market






























13








from the market




































14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























11








commercialization




































12
















market






























13








from the market




































14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























12
















market






























13








from the market




































14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























13








from the market




































14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























14












































15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























15














































16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























16










































oil




17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























17










































p70 Figure 52 (2011)


18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























18


















billion in 200028




























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























19











































20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























20















































21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























21








subprime mortgages



































22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























22
























and CDOs






















23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























23






in Section IV






































24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























24


























markets


















25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























25




status












pathway






























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























26











































27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























27






vote


































(1998)




28










































29












































servitudes)


30














































31












and control them































32












































REV 7 (2011)


33














































34











































59 60


35














































36




system of property








































37


























28










































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Documents

Bubble as Propertization Failure - National Taiwan … S. Kan_Bubble as... · Bubble as Propertization Failure ... short, taking for granted ... Sheen S. Levine and Edward J. Zajac,