Power Without Property, Still: Unger, Berle, and the Derivatives Revolution

• Publication year: 2010
• Citation: Vol. 33 No. 04

SEATTLE UNIVERSITY LAW REVIEWVolume 33, No. 4SUMMER 2010

Power Without Property, Still: Unger, Berle, and the Derivatives Revolution

Cristie Ford(fn*) and Carol Liao(fn**)

Introduction

We are in a time when the notion of property is in flux.(fn1) The derivatives revolution(fn2) has shattered the "atom of property" well beyond what was originally imagined in 1932 by Adolf Berle and Gardiner Means.(fn3) This disaggregation has had fascinating, and often adverse, effects on corporate law and securities regulation. Moreover, the phenomenon has had the unexpected effect of permitting some parties that already possess considerable social, economic, and political power to accumulate even more.

Innovations in modern finance have generated a large-scale experiment, running live and on a global basis, on the impacts of disassembling classical notions of ownership and property rights. At the level of corporate law, Henry Hu and Bernard Black have examined the deleterious potential effects that arise from so-called "empty voting" and "hidden (morphable) ownership," where derivatives have allowed investors to readily separate economic ownership of shares from voting rights.(fn4) Over-the-counter (OTC) derivatives also enabled the originate-to-distribute model of lending by financial institutions, which many regard as the catalyst for the collapse of the subprime mortgage market and, subsequently, for the global financial crisis.(fn5) In this model, financial institutions originate consumer mortgage loans which are then tranched, repackaged, and resold in the market to investors, creating a separation in the mortgagor/mortgagee relationship and the accompanying risks. At the level of global markets, the capacity to break traditional property rights down into constituent elements has also made possible an enormous and interconnected market for synthetic financial products, characterized by unprecedented complexity and susceptibility to system effects.

The effect of the disunity of property and its relation to power is interesting to observe when juxtaposed against the theories of Roberto Un-ger and Adolf Berle. Both talk about the breakdown of traditional property rights, though from markedly different perspectives. Unger offers a prescription for the radical destabilization of traditional property rights within society in the service of a more egalitarian and inclusive citize-nry.(fn6) Unger suggests that the fracturing of property rights (as he describes it, not as expressed in recent real world examples(fn7)) is a pro-democratic move. Berle, on the other hand, though he could not have imagined the degree to which property would break down, argued that the disaggregation of property rights results in concentrations of power and unaccountable concentrations of power are bad things. Recent events suggest that, somewhat contrary to Unger, power relationships will reassert themselves in malleable social and economic space, such as that created by a breakdown in traditional property rights. The absence of formal ownership rights will make people more, not less, vulnerable to nontransparent exercises of power. Understanding the pervasive impact of power on human ordering, as Berle did, and addressing it in future lawmaking will allow us to increase the effectiveness of our regulatory frameworks.

This is not to say that we should dismiss Unger's insights. On the contrary, his work continues to be compelling and ought to be grappled with in a conversation about the contemporary breakdown of property and the effect of power. In particular, Unger's recognition that accepted social constructs, including private property, often have the effect of insulating power from challenge-and his consequent demand for what he calls "destabilization rights"-still resonates. Indeed, this aspect of Un-gerian theory is having a real world policy impact through its more pragmatic and concrete (but not necessarily less provocative) descendant: new governance scholarship. The new governance movement has adopted the notion of destabilization rights, among other Unger-informed pieces, and has had increasing practical influence on regulatory design.(fn8)

This article begins in Part I with a broad strokes refresher on some of the theoretical concepts underlying Unger's work, particularly focusing on his notion of destabilization rights and the disaggregation of property to disentrenchment deeply rooted forms of social domination. Part II then explores real life experiments in modern finance where property rights have been decoupled, specifically highlighting the phenomenon of new vote buying as identified by Hu and Black, the originate-to-distribute model of lending in the subprime mortgage market, and the exponential growth of the OTC derivatives in global markets. These examples are reminiscent of Unger's "context-smashing" agenda and yet have resulted in markedly negative outcomes for our economic times. Part III draws upon the lessons found within these modern day experiments and identifies how the complex and nontransparent nature of disaggregated property, as well as the opportunistic pull towards excessive risk-taking behavior, has fostered an environment that allows larger manifestations of power to form within society. Finally, in Part IV we reflect upon the pervasive and persistent nature of power in relation to Un-ger's theories and explore the implications of this power to new governance scholarship. Drawing on Berle's insights, we recognize how understanding the ability of power to reassert itself and coalesce in liquid markets is essential to effective planning and design of institutional and regulatory frameworks. Ultimately, our argument is that power, not property, is actually at the core of both Unger's and Berle's works and also at the core of contemporary structural problems in corporate law and financial regulation.

This is an early stage work, a starting point that we hope will foster a dialogue on the relationship between the disaggregation of property and its problematic connection to greater concentrations of power. This article serves as an examination and critique of Ungerian theory and also a reflection on Berle's work. Recent developments in structured finance help to shed light on these authors' core concerns, just as their work sheds light on those recent developments. In addition, this is a thought experiment in the spirit of the careful work of Hu and Black, and others, which challenges the way in which increasingly complex and innovative financial instruments are becoming mechanisms for reinforcing power and exclusivity. We recognize the challenges that come with applying theory (especially radical theory) to actual practice and the imperfections that, no doubt, faithfully accompany it. Nevertheless the conversation seems to us to be an important one as we continue to chart a path for financial regulation in the wake of the recent financial crisis.

I. Unger's Destabilization Rights and Concept of Property-a Refresher

Unger's work is extensive, spanning the fields of philosophy, law, and politics, all the while offering an alternative way of explaining society and putting forward a program for changing it. One of his central insights is that no particular form of social constraint is necessary or ines-capable.(fn9) For Unger, "[t]he great inspiring idea of the most successful efforts of modern social thought has been the idea of emancipation from false necessity."(fn10) He believes society can improve relative to how it currently operates, contending that "[w]e can construct not just new and different social worlds but social worlds that more fully embody and respect the creative power whose suppression or containment all societies and cultures seem to require."(fn11) Key to this is a recommendation that society should move towards the positive goal of creating social structures that will lessen "the distance between context-preserving routine and context-transforming conflict."(fn12) These new social structures are prevented from forming into immovable constructions of hierarchy or domination since they are vulnerable to challenge and revision. By building these plastic and self-disrupting structures, we thus "cleans[e] . . . the taint of dependence and domination" from our social institutions.(fn13)

Underpinning Unger's approach is a stylized view of human nature as social, flexible, contentious, full of possibility, and poorly served by rigidity, routine, and hierarchy. For him, human flourishing is about permitting the greatest degree of individual self-actualization, subjected to the fewest cognitive, structural, and imaginative constraints. He says, "[t]o be fully a person . . . you must engage in a struggle against the defects or the limits of existing society or available knowledge."(fn14) Self-subverting social structures promote greater human happiness as well as freedom of social thought. Greater degrees of social plasticity, including more "elastic" and structure-denying structures, also allow society to obtain greater wealth and power for all its citizens.(fn15) In Unger's view, citizen subversion and disillusionment by ruling forces have presently subdued humanity into a "restless peace."(fn16) Once citizens rebel against the worlds that have been built, breaking apart the constraints on their transformative wills, humanity will be empowered. In this way, society's practical success becomes a function...