The idea for this book has been with me for quite some time. It first
emerged when, in the fall of 2007, the global financial system began
to teeter toward the abyss. The speed of the unfolding crisis left little
time for deep thinking, but once the eye of the storm had passed,
I, along with many others, sought to discover what might explain
finance’s stupendous expansion in recent decades, and what accounted
for its steep fall. Together with collaborators from different
disciplines, I aimed to unpack the institutional structure of different
segments of financial markets, one at a time. To me, the most revelatory
part of our findings was how familiar the basic building blocks
of the financial system looked, notwithstanding the fanciful assets
that had been created more recently and the system’s unparalleled
complexity. Everywhere we probed a little deeper, we found the
core institutions of private law: contract, property, collateral, trust,
corporate, and bankruptcy law. They had powered the expansion of
markets in financial assets, but, as it turned out, they were also key
determinants in their undoing. When actual returns on these assets
started falling behind expected returns, asset holders enforced their
legal entitlements: they made good on the collateral calls, credit
lines, repo contracts, and bankruptcy safe harbors, and in doing so,
they helped deepen the crisis. Some still got out in time, but many
others found themselves with assets that no one would take, except
the central banks of select countries.