Law Flexibility

The seniority argument did not work for new world English settlers because the natives had seniority. Property rights  would not be  based on the seniority because it belonged to  indigenous Indian residents. Instead, because settlers who had discovered and improved the land, they were granted the common law property right.  The English court flipped by applying the 1881 English common law in  American with the 1732 with the debt recover act. It treated the life tenant as owner and responsible for the debt to English landlords.

The plantation with slaves could now be sold at auction to satisfy creditors. Not until 1925 did England complete property rights.

Property rights development was a political process and not always the same in countries A and B. But this flipping could cause problems. To sustain the authority, legitimacy, and trust law requires application continuity and consistence.

Legal Power Structure

In medieval England, the legal power structure consisted of lawyers who were mostly noblemen and relegiouse leaders. Eventually the business class would join and eventually dominated.

This power structure "frames" the law. Over time, property rights associated with land could be transposed. Think moved like in sold.

Being politically desirable, this right was backed by the state, think king. It was declared legal and defended by state coercion.

Think Obama declaring that the priority rights of secured creditors would be ignored and the Union pensions would be first to receive bailout funds.

Think auto bailout. Think Trump blackballing those who do not cooperate with the United States policy

Economists believed that markets existed outside a legal framework. The law helps and supports market structure but is not essential. Rational actors make contract with no explanation required and markets insure efficient outcome. When this failed, the cause was behavior, psychology, animal spirits.

In-depth analysis of credit default swap, collateralized debt obligation, asset backed securities... revealed that everyone trying to enforce these contracts were not irrational when they all try to sell at the same time and brought down the financial system. Many answered "well that is how the law" works."

The framework of law/economics needs to be scrutinized by the academy.

An Application:
Debt and the Financial Crisis

In California the crisis began with a loan mortgage originated by New Century. They  collected a bunch of mortgages and sold them wholesale to a New York located City Group subprime mortgage subsidiary. They put the mortgages into a trust which got the cash flow from mortgage payments irrespective of the   City Group's and her subsidiaries finances. JP Morgan with be the trustee for this City Group trust and vice versa.

This securitization began in the 1970's after the 1968 Federal Housing Act allowed government sponsored entities, Fannie Mai in particular, to securitize (group and sell) securitized mortgages.

She had guaranteed mortgages and now while she could not to originate mortgages, she could buy them on the secondary market, package them, and sell the package.

This securitization diversifies the risk, lowering interest rates, and increases mortgage availability. Freddie and Ginnie just put the  mortgages into a pile and sold  equal portions.

Private companies soon followed  but they created trenches (slices) with different  priority rights. Seniors got cash in first and were  last to incur a loss. Juniors tranches were second, third the middle. People knew this and bought based on risk aversion.

Guaranteed pensions might always buy senior trenches. Fannie also bought only senior securitized debt. In the book example, City often bought the junior trenches because hoping to make a high profit with a private placement. But, this was a mass market operation with little demand for the real junior stuff which was too risky for A and not risky enough for B.

To produce buyers City set up a shell corporation located in the Carmen Island tax haven sell mortgages tranches. They went so far as to create a co issuer in Delaware to allow buyers with foreign purchase limitations to join the fun

This shell solicited funds to invest in low level trenches from different sellers to diversify risk They could then rate some as senior even though they consisted of all junior CDO to begin with. If you still get stuck with some trenches you just bundled them into another CDO, consisted of all defaulted trenches, a CDO squared. If some of these default, bundle them into a CDO cubed.



Globalization has evolved the legal sphere of private actors who can now pick and choose from two legal systems of England , New York state, and for corporate law you can add Delaware. Most financial assets are coded in one of the legal systems and are managed by the top 100 law firms. All have angel Saxon names, many merged with European and Japanese firms and all are located in NY.

Private individuals can easily avail themselves of State Power to enhance mostly their own private wealth with little concern for the public good. The easier we make it to opt-out of domestic legal system, the more tension we create, Think East Asia with china wanting more import to make control vertical from the top rather than horizontal, from the participants.

Lawyers of these firms are masters of the financial code which is designed not for economic efficiency but to control, about power.

Foreign courts provide vindication to protect property interests. This interferes with the ability of a society to seek and govern because some actors choose to opt-out of their home legal/tax system. This vindication sometime can apply to our domestic courts. This process first affected financial assets, then intellectual property, Ownership of data could be next.

A balanced approached related to all assets is required. We need a balance between private autonomy with the prerogative of legislature-lawmakers-and more generally. We have to question our bias toward private autonomy and for those who opt-out of our legal system, we should consider limiting the scope of enforceability.


Specifically, we have to limit the flexibility of coding that occurs outside the legislature and increasing outside the courts. A better public regulatory framework is not enough. Over many years we have learned that controlling the code modules make it easy to bypass regulation.

The concept of numerus clausus is the concept of property law which limits the number of types of right that the courts will acknowledge as having the character of "property." It should be used to limit co-opting out of local law by those who completely ignore the public good. Think avoiding taxes for private gain.

We should not blindly guarantee the "enforceability of private rights," the punch bowl. We might and we might not. We could disregard your corporate identity. Think we will tax you regardless of your Cayman Island location.

Example: When banks do not check the income  and  sustainability  of mortgage payments, these mortgages may not be enforceable. Credibility requires enfacement by the state. Do not give the lawyers the legal certainty they so desire. Originally, land was given the property right because owners would internalize cost. This has not happen. Think self enforcement limiting pollution.

When judges created feudal English common law, they made political decisions which was not neutral allocation of rights when vindicating the claims of A or B. In doing so  they refashioned the rights of capital again and again. This continues today after the financial crisis where a herd mentality was anything but rational, many economists became behaviorist.. But today we have a Legislature to make laws  that consider the common public good