Securitizing the Notes of Needy Small Businesses and Workers

Article appears in Bloomberg Law, Sept 28, 2020 ( and University of Bologna Law Review, Volume 6, Issue 2 (

Businesses, restaurants, and shops, whether small or large, are currently closed and many of their employees are laid off. The government lends money to small businesses and unemployed workers, for their sustenance. It then collects the payments from some of the borrowers, and the source of the rest of the money from taxes. Since not all, or perhaps only a few, small businesses own real estate, they sign notes to repay the loans but can offer no asset backing.

Presumably, the nation’s financial deficit is growing. The government adds the aggregate of the loans to the country’s costs and tax collection. However, even though their underlying supports and policies could rub shoulders, the same supports and policies might often undermine each other. The current system is likely to affect the future culture of America by affecting the attitude of taxpayers to needy tax-receivers. Tax-receivers are more easily classified as beggars, which they are not. But it is difficult for them to show that they try and cannot find a job. Many taxpayers become forced donors. For example, usually, tax money is used to maintain the needs of all residents and citizens, such as maintaining the roads. Homeless people are helped by organizations of other citizens. How can citizens help these “able needy” without the recipients being categorized as beggars; can the givers avoid classifying their donations as charity?

Is there any other way, in which some, if not all, of these loans could be financed by investors?

An imperfect model, that was tried and succeeded for some time to some extent, was the securitization of mortgages. The good and bad experiences of the mortgage securitization could help design a better securitization system for the notes of small businesses and employees. To be sure, mortgages are a more solid backing than notes. In addition, although we have a long track record of recessions, and therefore we may have a good sense of what recovery looks like in the current case, we do not and cannot know what the aftermath of the corona-virus crisis would be like. It might well cause a fundamental change to our economy and as importantly—changes in people’s habits.

The securitization of the notes is not similar to that of mortgages and to mutual funds holding notes

The comparison of securitization of the proposed notes to the securitization of mortgages or to pools (mutual funds) of corporations’ notes is not precise. In fact, the first step of securitization was the pooling of notes, but they were offered by very large corporations. In addition, there are currently mutual funds that hold relatively small notes issued by corporations. They are fairly safe and help both parties. In addition, small business investment companies make equity and debt investments in small businesses, and business development companies generally invest in debt of middle-market companies.

Small restaurants and other small businesses during the coronavirus era are different from mortgages during a market decline. Most small businesses do not own real estate but rather rent their offices and restaurants. The notes they issue are of relatively small amounts. These small businesses may not reopen even after the virus is overcome. Small restaurants may have already outstanding loans. Customers might acquire the habit of ordering cooked food, or the habit and perhaps pleasure of cooking at home. Supported employees might not return to work for health or age, or other reasons. In sum, the borrowers’ note-obligations are fairly risky.

Would health recovery bring about the same businesses to full life?

Not necessarily. Restaurants may have to share their business with the rising food and cooking suppliers and services. Besides, unlike the quest for home-rental or ownership, people may have changed their habits of meeting in restaurants. Habits take time to form, but once they do, they take time to change or revert to old or other habits. History demonstrates a similar result. Before the cars took over and substituted for horse and buggy, the “buggy whip” was necessary and highly used for transportation. When carts were substituted by cars, the industry that produced the “buggy whip” was gone.

In sum, the risk associated with loans to small businesses is different from the risks of loans in a traditional recession. To be sure, the government could substitute its direct lending by insuring some of the risk associated with the notes portfolio. That would give lending banks a measure of comfort that, if a wave of bankruptcies occurred as a result of these general economic and habitual changes, they wouldn’t get caught holding all or most of the bad notes. Another possible support is the government’s guarantee of bank losses, but some of the notes will support not only the banks’ business but also the small business as well.

What are the benefits in pooling such small notes and selling participations in the pool to investors? Why would investors buy such participations?

The Treasury may help. Let the Treasury give a discount from taxes to such investments. For some investors, this might be sufficiently attractive to cover the risk of failures to pay the notes. The benefits of securitizing these notes are numerous not only for one participant, but for many participants and the entire country as well.

The notes-issuers will not be worse off, except that they might be subject to bankruptcy rules rather than viewing their obligations as fully enforceable. There is some justification for this reaction, yet the law may offer the borrowers in this case some relaxation as relief, and if the issuers go through banks, the government may allow banks the type of relaxation that would help the borrowers. No law is necessary for these rules, because the Treasury may have the authority to offer them, provided they are offered to all banks in the same position. In fact, currently, banks have some discretion to relax their requirements with respect to any borrower. That is, although banks ordinarily are reluctant to lend to borrowers that are close to bankruptcy, they may set different criteria for this type of borrower.

Investors may be somewhat worse off, as compared to lenders to other businesses. However, (i) their investments are not a donation; (ii) their investment should be given public recognition that they deserve; (iii) the successful revival of any supported business 3 should be publicized; and (iv) the recipients of the money may be given a platform to thank the anonymous buyers of the securitized notes. Pictures may show the opened restaurants if they so wish, their owners, and workers.

These are not and should not be financial rewards. Yet, they may be valued more than any money rewards. The satisfaction of helping, while risking some of one’s money, may balance the risk.

However, the donors’ names whether personal or incorporated or in groups should not be publicized. If pressure to publicize is great, then it should be allowed only if the donees’ group-members are joined. In sum, business and finance need not be drained of all humanity and satisfaction of sharing.

In addition, banks should institute appropriate safeguards. A bank should be responsible for the quality of the manager of the pool. In addition, the cost of the pool should not be charged to any other mutual fund or pool.

The conclusion that generally applied to securitization, seems to apply to the securitization of notes by workers who lost their jobs and small business that had to close down. At this stage securitization seems to be going in the right direction. It allows credit of more risky borrowers but reduces the risks from such borrowers. Securitization also contributes to increased debt by borrowers and intermediaries but reduces such risks to investors.

What is the effect of securitization on monetary controls? When dealing with mortgages the conclusion was the following:

“Securitization renders the Fed’s control over the money supply more complex. However, monetary controls are an art rather than a science. The captain at the helm both guides and is guided by a faulty compass. Since the captain never had a scientific compass it is doubtful whether the country is worse off today than before the emergence of securitization [of mortgages, technology, and competition.”[1]


The model of mortgage securitization is helpful in various ways.

First, it demonstrates how to securitize more complex instruments such as mortgages. Pooling notes is simpler and has continued to be practiced providing more experience.

Second, it suggests that the holders of the borrowers’ notes should be the institutions that have the most experience in this function—the banks, rather than the Treasury, that has some, but not as much experience in doing this, and is charges and focused on other than managing other people’s money and debts.

Third, it is important to manage securitized debts without political and other national issues, such as the money supply. If we agree that those who need help should not be affected by the financial system system’s politics, then let it be focused on helping them without any political self interest and national interested and conflicting national interests. We should help those who are suffering by this epidemic, and give them the respect of avoiding handouts and the honor of borrowers who are expected to repay their 4 debt. Let those who are required to pay through taxes or who give charity, give the needy ones in this case an equal status to the givers—they are parties and partners in a financial deal.

Tamar Frankel
Professor of Law Emerita
Boston University School of Law

[1] Tamar Frankel, Securitization 122-123 (1991).

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