Why lawyers?

This is the real topic of Kenneth Anderson’s brief and more modestly titled Do Lawyers and Law Professors Have Any Comparative Advantages in Opining on Financial Regulation Reform? A Brief Essay.

Anderson wonders whether “the skills of the lawyer and law professor are, at most, those of scribe seeking clearly to write down policy positions necessarily reached elsewhere?” He argues that there are two important things lawyers and law professors know.

First, as he says in the abstract, “a particular disciplinary appreciation in the law for the ‘thick’ relationships of agency, fiduciary, loyalty, and care that bind together institutions far more than the simplification of ‘nexus of contracts’ can capture.” The essay says my “uncorporation” idea has “shifted the nature of managerial agency to merely contracted-for duties, but left the questions of agency buried rather than banished.” Actually, I think that a contractual approach clarifies rather than “buries” these concepts.

Second, and perhaps more importantly, Anderson says in the abstract:

lawyers have a better appreciation than other disciplines of the ways in which financial instruments used in markets as though they were economic equivalents are not actually legal equivalents[.]

The essay discusses the lawyer concept of repos as more than just the financial equivalent of a secured loan but, legally, a spot sale and contract to repurchase. Under ordinary circumstances the financial idea may be good enough. But under conditions of stress – that is, in a financial crisis – the lawyer’s concept comes to the fore. And then only lawyers can provide the critical information that helps the market put a value on the contingency.

Anderson’s reasoning on this point is worth quoting at length:

[O]ne . . . has to wonder whether the apparent virtues of the repo over the strict forms of secured lending were, actually, far more an expression of the fact that it was cheaper to execute – but cheaper to execute precisely because it lacked the terms of secured lending. Is it cheaper because it is genuinely more efficient, a reduction in mere transaction costs that themselves convey no value – or is it cheaper because, at the end of the day, you get what you pay for? * * *

[D]oes the market efficiently price the legal contingencies found in financial instruments that are increasingly baroque and complex, and in particular does it efficiently price legal contingencies that take place at the performance margins? Perhaps it does when things are going swimmingly, and the terms that distinguish a cash CDO from a synthetic CDO do not appear to matter, mere and apparently pointless legalisms. But when financial contracts fail, in some way or other, and are submitted to a court for interpretation and adjudication? Financial instruments (and not all are contracts, of course) are finally written down by lawyerly scribes; the words matter, and so does the source of law governing the instrument for particular purposes. * * *

The point for our purposes is that lawyers are embedded in the legal form and contingencies of financial instruments in such a way as to give crucial information about the differences between apparent financial equivalents. This includes the crucial information that there is legal uncertainty. Not just risk, but contingent uncertainty. What might occur in bankruptcy, under the Uniform Commercial Code, under other crucial legal regimes – lawyers can offer expertise that directly goes to the valuation, and differentiation, of instruments that market participants want to treat as financially equivalent when, in the fine print and almost always in the break-down circumstance, they are not. * * * Lawyers have information, in other words, that directly bears on some aspects of valuation; this is hardly news, but when one looks to apparent massive valuation failures of important financial instruments, it bears repeating.

These specific points about lawyers’ and law professors’ value-added may be debatable. But they are at least thoughtful attempts to understand an increasingly important question: what, exactly, are lawyers good for.

This is important among other reasons because, as I’ve argued at length, the old order is dying. The walls of professionalism that licensing laws have built are collapsing. The barbarians from other disciplines and other parts of the world are rushing to claim the space that lawyers have staked out for a century. In order to hold at least some of their ground lawyers have to articulate precisely what they contribute to the world, and figure out how to do it better.

Law schools obviously have a big role to play here. One hears a lot in law school about “thinking like a lawyer,” but not much about exactly what that means. We’re going to have to figure that out pretty quickly.