
How ‘big law’ makes big money - prostoalex
https://www.nybooks.com/articles/2020/02/13/how-big-law-makes-big-money/
======
gnicholas
> _In the twenty-first century, examples of this modern particularism are
> rife. Pistor describes, for instance, the exceptions from general bankruptcy
> rules negotiated by the derivatives industry. In normal bankruptcy cases,
> secured creditors can claim access to their collateral first, and unsecured
> creditors have to divide what remains of the company or estate. For fast-
> moving financial transactions, that procedure is too cumbersome, so the
> collateral pledged in derivatives deals is granted an exemption from the
> usual queue of claims. In cases of bankruptcy, it is transferred directly to
> the counterparty, leaving unsecured creditors empty-handed._

I'm not sure what the issue is here. In both scenarios, the secured creditors
walk away with the pledged collateral, and unsecured creditors are left to
divvy up any remaining assets.

It sounds like the only difference is that the process is expedited, or am I
missing something? (note: I am a former lawyer, but did not practice
bankruptcy law)

~~~
smallnamespace
There’s a couple of deviations from standard practice here:

\- In theory, secured creditors should be ahead in line and always get paid
ahead of unsecured creditors. In actual practice, sometimes unsecured gets
paid something even as secured creditors take some loss. One reason is because
you end up before a bankruptcy judge, and unsecured creditors can fight for
their claim and tie things up, so the secured creditors pay the unsecured ones
something to go away

\- Related to above, security is usually fixed assets (like a factory), rather
than posted cash collateral. Making derivative collateral special means it’s
even better than normal secured assets-especially since your factory is a
depreciating asset while tied up in court

So yeah, one way to look at it is 'security means you’re paid first, what’s
the problem?' but posted derivative collateral under an ISDA can be actually
better than normal security.

~~~
wahern
I guess it's sort of like Transfer on Death (TOD) accounts, which receive
special treatment in estate law. In a contested inheritance people can still
make claims to TOD assets, but because they automatically transfer to a
particular recipient upon notice of death it changes the facts on the ground,
both from a legal posture but also just as a practical matter. For example, a
bird in the hand is better than two in the bush--the receiver of TOD assets
may be willing to walk away with less than they might be able to claim simply
to avoid litigation.

It also makes things easier and cheaper for the fiduciary (e.g. bank, insurer,
etc) because they don't have to be mired in any litigation. They transfer the
assets to the TOD beneficiary as a matter of course and nobody can challenge
it; if you don't like it you sue the nominal beneficiary.

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graedus
This is a book review of Katharina Pistor's "The Code of Capital: How the Law
Creates Wealth and Inequality". The review is written by Adam Tooze, himself
the author of the excellent "Crashed: How a Decade of Financial Crises Changed
the World" among others.

~~~
jonahbenton
From the perspective of a tech person interested in the long backstory to
modern capital management structures (special purpose vehicles, trusts, etc),
Pistor's book is outstanding. Exceptionally well written, and exceptionally
informative. One of the best books I read in 2019.

------
peter_d_sherman
Excerpt:

“There is an estate in the realm more powerful than either your Lordship or
the other House of Parliament,” one Lord Campbell proclaimed to the peers in
the House of Lords, in 1851, “and that [is] the country solicitors.” It was
the lawyers, in other words, who kept England’s landed elite so very, well,
elite: who shielded and extended the wealth of the landowners, even granting
them legal protection against their own creditors. How did they pull off this
trick? Through a nimble tangle of contracts, carefully and complicatedly
applied, as Katharina Pistor explains in her lucid new book, The Code of
Capital: by mixing “modern notions of individual property rights with
feudalist restrictions on alienability”; by employing trusts “to protect
family estates, but then [turning] around and [using] the trust again to set
aside assets for creditors so that they would roll over the debt of the life
tenant one more time”; and by settling the rights to the estate among family
members in line for inheritance. Solicitors maximized their clients’ profits
and worth through strategic applications of the central institutions at their
disposal: “contract, property, collateral, trust, corporate, and bankruptcy
law,” what Pistor calls an “empire of law.”"

------
rayiner
This is a Marxist screed. And by that, I do not mean to be dramatic,
portraying anything to the left of University of Chicago law & economics as
Marxist. I mean, it is literally Marxist, objecting to modern law's emphasis
on private rights:

> On the one hand, the law codes the original violence of enclosure, such that
> something that was everyone’s becomes one person’s legally protected private
> property in perpetuity.

For those not familiar with Marxism, a recurring grievance is
"enclosure"\--the process by which the commons (hunting and grazing land)
became turned into private property. It's hard to respond to the article,
given that doesn't actually say much of anything, but I wanted to highlight
one passage in particular:

> In the liberal account of property rights, the crucial question is how far
> law and the courts can protect private property against the capricious,
> self-interested, and short-sighted acts of the government. Individual
> property must be protected, in this view, not only because of the
> inalienable right to enjoy what one owns without fear of damage or theft,
> but also because if there were no guarantee of this right, economic progress
> would be impossible. Few would make an investment in a business that
> couldn’t seek redress for major acts of vandalism or larceny.

The article is not wrong. This is the basic principle underlying American law
and our Constitution. Where the article is wrong is to suggest that there is
any problem with it. When the Soviet Union and China tried to undo "enclosure"
and create communal farms, tens of millions of people died. To the extent
these countries reduced inequality, they did it by making everyone poor. By
contrast, country after country has gone from poor to wealthy through a simple
formula: rule of law, protection of private property rights, and unleashing of
capital.

I cannot emphasize enough that there are no proven alternatives to this legal
framework. There are no wealthy countries that have legal codes that depart
from this concept. Even "social democracies" like Denmark have Constitutions
that provide:

> The right of property shall be _inviolable._ No person shall be ordered to
> cede his property except where required by the public weal. It can be done
> only as provided by Statute and against _full compensation._

The Constitution of Sweden provides an even stronger guarantee, not only
against expropriation, but against restrictions on use that significantly
diminish a property's value:

> Art. 18. The property of every citizen shall be so _guaranteed_ that none
> may be compelled by expropriation or other such disposition to surrender
> property to the public institutions or to a private subject, or tolerate
> restriction by the public institutions of the use of land or buildings,
> other than where necessary to satisfy _pressing public interests._ A person
> who is compelled to surrender property by expropriation or other such
> disposition shall be _guaranteed compensation for his loss._ Such
> compensation shall also be guaranteed to a person whose use of land or
> buildings is restricted by the public institutions in such a manner that
> ongoing land use in the affected part of the property is substantially
> impaired, or injury results which is significant in relation to the value of
> that part of the property.

~~~
gamblor956
Ah, the great nation of Sweden. With an enormous GDP not even remotely
rivaling that of _cities_ with notorious "socialist" land use laws, like NY,
LA, Chicago, or San Francisco. LA, in particular, has approximately the same
population but fewer natural resources and yet has a GDP double that of
Sweden.

Private property protections are not a panacea. If they were, then Somalia
would be a capitalist's paradise instead of a warlord's paradise.

~~~
jakeinspace
It doesn't make any sense to compare the GDP of a city to that of a country,
especially a largely rural country. LA's GDP benefits from many large
corporations which choose to headquarter there, not to mention one of the
largest ports in the world. Why not compare to a US state with similar
population, like Georgia, which has a GDP somewhere around 80% of Sweden's.

~~~
hilbertseries
The US has a higher gdp per capita than Sweden anyway.

~~~
andrepd
And it is a much worse place to live.

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epicgiga
Quite impressive, I didn't know I was reading a Marxist gripe until half way
through. Started out interesting before its agenda was revealed.

~~~
andrepd
You just admitted that you were reading it just fine and found yourself
agreeing with it, only to then identify that it was "the wrong opinion" and
dismiss it as "an agenda". Sad.

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tpmx
I think the only way not to get screwed by lawyers is by employing them and
using them to avoid getting screwed by other lawyers. Still it's a giant cost
center.

~~~
GavinMcG
Can you clarify how this relates to the article?

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pattisapu
Clickbait.

"Lawyers, therefore, sustain a fiction by dressing up claims and placing them
in opaque asset-backed legal entities and applying an alphabet soup of
labels—"

"The first thing we'll do..."

A diminishingly small subset of a profession is tagged with some interesting,
historical practices.

Most lawyers have nothing to do with any of this.

It is like saying carpenters have something to do with modern society's damage
to the environment because everybody is buying houses.

~~~
GavinMcG
This is specifically about how "Big Law" does this – so no, most lawyers don't
do this, but the prestigious and high-paying firms do.

They're hardly "historical practices" when the 2007-2008 financial crisis is
so recent. And the article goes deeper into the premises and mental models
that place state power in service of private capital. I'm not sure why you so
quickly dismissed it.

~~~
pattisapu
You are right. I apologize for my overblown comment.

