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Monday, June 12, 2006

Divorce Loans and Financial Innovation

A while back, I mentioned how lawyers are now making cash advances to clients engaged in lawsuits. Here's another "legal finance" innovation. According to this story in the Financial Times (subscription required), London bankers are going after the divorcee market.

"We've been approached by three banks in the past two months," said Susie Barter, a family law specialist at Speechly Bircham, a City law firm with a private client and family practice. She added that a few private banks started to provide litigation loans for divorcees when Britain's legal regime began to shift in a "wife-friendly" direction after another law lords' decision, White v White, five years ago. But she described those firms as "pioneers". Now, she said, "it's becoming much more commonplace".

Sandra Davis, head of Mischon de Reya's family practice, agrees: "There absolutely has been an increase [in bank interest] - because it's a very soft way of ensuring that someone who has had a relationship with the bank will become a portfolio client."

Only this week, for instance, Duncan Lawrie, the Belgravia-based private bank, announced that it was introducing a "matrimonial dispute loan", which offers funds at 2 per cent over base rate, with a 1 per cent fee.

There's an interesting opportunity for financial innovation here-- why not securitize the loans? For those not familiar with the term, this would mean taking a large number of these loans, combining them into a portfolio, and writing new securities on the cash flows from the portfolio. After all, they've securitized just about everything else from mortgage loans to credit car obligations to leases, to David Bowie's song portfolio.

But what would you call the resulting bonds? Something other than "covenant" bonds, I'm sure.

HT: Daniel Gross

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