Journal of Corporation Law, Vol. 35, No. 4, 2010
31 Pages Posted: 7 Jan 2010 Last revised: 28 Dec 2014
Date Written: May 31, 2012
Legal principles enable society to order itself by preserving broadly based expectations. Sometimes, however, parties transact in ways that are so inconsistent with generally accepted principles as to create uncertainty or confusion that undermines the basis for reasoning afforded by the principles. Such a distortion might occur, for example, if a normally mandatory legal rule were unexpectedly treated as a default rule. This article explores the problem of distorting legal principles, initially focusing on rehypothecation, a distortion whose uncertainty and confusion contributed to the downfall of Lehman Brothers and the resulting global financial crisis. But not all distortions are, on balance, harmful; sometimes they represent a positive evolution of law. To this end, the article also seeks to construct a normative framework for determining how government lawmakers, judges, and lawyers should address distortions of legal principles.
Keywords: intermediary risk, rehypothecation, financial crisis, fiduciaries
Suggested Citation: Suggested Citation
Schwarcz, Steven L., Distorting Legal Principles (May 31, 2012). Journal of Corporation Law, Vol. 35, No. 4, 2010. Available at SSRN: https://ssrn.com/abstract=1532465 or http://dx.doi.org/10.2139/ssrn.1532465