9 ms·

How ‘big law’ makes big money

108 points by prostoalex 7y ago

gnicholas 7y ago
> 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 7y ago
  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.
  - deleted 7y ago
    [deleted]
  - wahern 7y ago
    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.
  - ABCLAW 7y ago
    >- In theory, secured creditors should be ahead in line and always get paid ahead of unsecured creditors. Some classes of unsecured creditors that are paid out before others are employees, pensioners or people with support claims. These people often have what's known as 'super priority' status. So not only are 'some' unsecured creditors afforded more security; they're often the ones society deems at risk, with the least leverage and the most need for the money.
rayiner 7y ago
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.
peter_d_sherman 7y ago
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.”"
deleted 7y ago
[deleted]
graedus 7y ago
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 7y ago
  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.
pattisapu 7y ago
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 7y ago
  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 7y ago
    You are right. I apologize for my overblown comment.
tpmx 7y ago
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 7y ago
  Can you clarify how this relates to the article?
epicgiga 7y ago
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 7y ago
  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.

108 points by prostoalex 7y ago

> 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 7y ago
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.
- deleted 7y ago
  [deleted]
- wahern 7y ago
  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.
- ABCLAW 7y ago
  >- In theory, secured creditors should be ahead in line and always get paid ahead of unsecured creditors. Some classes of unsecured creditors that are paid out before others are employees, pensioners or people with support claims. These people often have what's known as 'super priority' status. So not only are 'some' unsecured creditors afforded more security; they're often the ones society deems at risk, with the least leverage and the most need for the money.

rayiner 7y ago

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.

peter_d_sherman 7y ago

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.”"

deleted 7y ago

[deleted]

graedus 7y ago

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 7y ago
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.

pattisapu 7y ago

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 7y ago
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 7y ago
  You are right. I apologize for my overblown comment.

tpmx 7y ago

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 7y ago
Can you clarify how this relates to the article?

epicgiga 7y ago

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 7y ago
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.