April 09, 2010
One Law Professor Who Did See "It" Coming
Posted by Erik Gerding

One increasingly common question being asked in the aftermath of the financial crisis is, “Where were the lawyers?"  The popular press has also asked “Where were the economists?” At some point, perhaps we’ll even see the question posed: “Where were the law professors?”

In a post last November, I provided an incomplete list of some of the legal scholars who sounded early warnings. But after my wife read the Transformation of the U.S. Financial Services Industry (2002 U. Ill. L. Rev. 215) article, which I mentioned in that earlier post (we love our banking law in our household), she convinced me that Arthur Wilmarth really deserves wider recognition.

Read this article (it’s long) carefully. Almost everything in it displays an uncanny prescience. Consider just this quote from p. 224:

Doubts about the claimed advantages of universal banks are buttressed by concerns that the creation of large financial conglomerates will intensify the “too big to fail” (TBTF) problem in the financial markets. Over the past two decades, leading banks, securities firms, and life insurers have pursued aggressive lending and securitization programs, as well as speculative underwriting and investment activities in the markets for securities and financial derivatives. As a result of these high-risk activities, large financial institutions have become increasingly vulnerable to disruptions in the capital markets. Moreover, the growing concentration of securities and derivatives activities within a small group of major financial institutions increases the likelihood that the failure of any big institution could create systemic risk and trigger a costly bailout by federal regulators.

That’s just the tip of the iceberg. Remember this article was published in 2002!  Judging from its length and depth, it probably represents years of work, and a lot of it echoes Wilmarth’s earlier scholarship from the 1990s. If I was a journalist, I’d run a long story on this Cassandra at GW Law School. 

Let's ditch the Black Swan metaphors.  They only provide succor to those who argue that this was some inherently unpredictable 100 year storm.  Wilmarth started worrying about this supposed Black Swan event six (maybe more than 10) years before "IT" happened.

It is a humbling to read this piece – it is not only prescient, but it is incredibly nuanced and comprehensive. It makes me wonder whether we in the academy should spend less time coming up with novel takes on the crisis and spend more reading some oldies but goodies.  And, as noted above, there are others besides Wilmarth. 

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