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Anglo Irish Bank
- 30 Apr 2014 at 2:23 PM
- 27 Jul 2012 at 5:03 PM
When people talk about financial innovation one of the main things they mean is legal innovation. CDOs, ETFs, MERS, the poison pill – most of the ways to smooth or roughen the path of investment take the form of jamming entities and contracts together in ways they’ve never gone together before.
Sort of by definition this innovation gets you ahead of what you know works legally: in the Anglo-American legal system, you mostly know for certain that something works because it already exists and some court or regulatory body has looked at it and found it okay, and for that to happen it has to exist first, before you know it works, all exposed and risky.* (You might ponder in your cold cold heart whether this order of operations helps explain why banking is so scandal-ridden.**) So you go to lawyers and you ask them if it works and they read the tea leaves of statutes and prior court decisions and they say go with it and mostly they’re right – because if that wasn’t the case you’d get better lawyers – but sometimes they’re wrong.
Sometimes you’re sort of surprised they’re right. Once upon a time a lawyer told a company “here’s what you do: you issue rights to all your shareholders, and as soon as a hostile bidder acquires 15% of the company, that bidder’s rights will be cancelled and everyone else’s will flip into a zillionty billion shares and the hostile bidder will be diluted down to nothing and you’ll be like ‘haha, now try taking us over.’” This was before my time, but I’m pretty sure that when he said this everyone looked at him funny. And then eventually someone did it, to see what would happen, and the courts looked at it and said “yeah, that sounds good,” and now that is a thing (though not as much as it used to be), and that lawyer is pretty rich.
Other times – most times – the lawyers seem right, so you do it, and that becomes self-reinforcing. One company does a novel thing because the lawyers think it’s okay, and then another company does that thing, and pretty soon everyone’s doing that thing, and every lawyer thinks it’s okay because, hey, everyone’s doing it, and then when it gets to the courts the lawyers are all “of course this is okay, everyone does it, are you nuts?” Often the courts are persuaded by this, though not always, and again go think about banking scandals where everyone just assumed that what they were doing was okay because everyone else was doing the same thing.
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