A recent ruling in the case of the defaulted General Growth Properties (GGP) has sent shock waves through the securitization markets. The ruling placed into question the strength of what's called "bankruptcy remote" entities. These entities are set up to ring fence the assets that represent the collateral pool for structured debt. One key reason for this requirement is to protect the debt holders' collateral from being dragged into bankruptcy if the equity holder defaults.

For example, consider a hedge fund that wants to leverage some assets. It would create a Special Purpose Entity (SPE) to purchase assets (loans, bonds, etc.) The hedge fund then contributes equity to the SPE. The leverage would come from senior lenders who are comfortable with the pool of assets in the SPE as collateral, but want nothing to do with the hedge fund. Their concern obviously is that if the hedge fund blows up, the fund's creditors will go after the assets in the SPE, even if the SPE itself has not defaulted and has plenty of asset coverage.