Essay: Do Lawyers and Law Professors Have Any Comparative Advantages In Opining on Financial Regulation Reform?

• Author: Kenneth Anderson
• Position: Professor of law at Washington College of Law, American University, where he teaches business and finance law
• Pages: 10-14

B u s i n e s s L a w B r i e f | S p r i n g / S u m m e r 2 0 1 01 0

I. A COMPARATIVE ADVANTAGE PEP TALK

When it comes to advising on how to reform the finan-

cial sector, on occasion I wonder whether we lawyers

and law professors have something genuinely expert

and special to offer. Self-doubt among lawyers is not frequent,

yet sometimes I query whether this subject is something upon

which those without serious and formal economics training, in

particular, really ought to opine. Of course it is true that the legal

profession has a lot to say about regulation, but it is less true that

expertise in regulation so deeply rooted in far more fundamental

economic questions gets the reform effort very far. Is this topic

something on which lawyers and law professors genuinely have

something special, unique even, to offer? On what basis does one

opine? Upon what does one offer expertise, rather than simply

amateur opinion? Are we lawyers and law professors, on these

fantastically complex and difficult topics, scaling the heights of

often highly mathematical and technical economics of risk, the

formal modeling of financial markets and systems – are we as

lawyers just, well, kibitzing?

After all, several of the leading, competing explanations

of the financial crisis are fundamentally macroeconomic. They

depend on deep views of monetary policy. Thus John Taylor

of the Taylor Rule fingers the role of an expansionary money

supply; the rest more or less, is just noise. Alan Greenspan, late

of the Fed, discounts the Fed’s role and points instead to a dif-

ferent monetary driver, capital flowing in from global trade and

currency imbalances. Bernanke, currently of the Fed, says that

no one (including the regulators) could see the crisis coming;

diplomatically faulting regulation and regulators in general but

not faulting anyone in particular. Various “quants,” including

numbers of “quants-turned-skeptics,” point to failures of risk for-

mulae, ranging from the seemingly comprehensible (but, for that

very reason, dangerous) Value at Risk (VaR) to the apparently

wide-spread misunderstanding and misuse of David Li’s esoteric

Gaussian copula function for assessing risk. Even outside of pure

mathematical esoterica, economist Gary Gorton, for example,

points to a breakdown in the repo market; repos being financial

contracts, one might think that lawyers would have something

to say as to whether this hypothesis is true and how much so,

but on Gorton’s theory of their role in the crisis, it is not entirely

evident how.

Even the famous Harvard undergraduate thesis on collater-

alized debt obligations (CDOs) by Anna Katherine Barnett-Hart

melds admirably clear questions and answers about CDOs and

data set analysis. An increasing number of business law profes-

sors these days could do this statistical analysis (and not just read

it). But in so doing, it is not clear that we law professors have a

comparative advantage; and it leaves a question as to how doing

the actual work of gathering such data sets and performing the

statistical analysis fits within our field, except by intellectual

conquest, as it were (and, if we are honest, performing a law-

professor technical-acuity “sorting function”).

One could go on and on. In the end, most observers seem

to hedge their fundamental “cause-of-crisis” bets and say, “Well,

there are many different causes coming together and much blame

to go around.” Quite a while back I gave up trying to buy every

reasonably serious book on the financial crisis and how to go

forward. No one could possibly read them; several dozen are

piled up now around my desk. Unsurprisingly, moreover, the

same fundamental concerns about root causes of the financial

crisis replicate themselves in the current debates over financial

regulation reform that might, or might not, prevent another

crisis. This being a political process, many parties insert them-

selves into the legislative debate – interest groups of all varieties

– some of whom have a great deal of expertise to accompany

their naked self-interest, and others of which have strong views

and enthusiasms, but not necessarily technical expertise in the

fundamental economics or finance. Out of this process, over the

next few weeks or months, Congress will produce a bill or several

bills; presumably the die will be cast on at least some basic ques-

tions of forward-looking financial regulation reform.

But signing the bills will mostly just set a long-term regula-

tory process underway – especially as it appears, at this writing,

that the several bills wending through Congress run several thou-

sand pages. Someone will have to transform that extraordinary

Essay: Do Lawyers and Law Professors Have

Any Comparative Advantages In Opining on

Financial Regulation Reform?

By: Kenneth Anderson†

†Kenneth Anderson is a professor of law at Washington College

of Law, American University, where he teaches business and

finance law.