Legal Commentary

Anyone who has even perused the newspapers from the last few years has probably encountered references to securitization and MBS and servicers and CDOs and CDS and SPVs and PMI and SIVs. Some of these terms might be vaguely familiar to those who were around in the Enron years. Sadly, I suspect the vast majority of this year's class of law school graduates has no understanding of these terms, although they will be crucial to many practices for years to come.

Looking at law school curricula across the country, a notable absence, it seems to me, is a basic course in financial products, separate from corporate finance. A couple of schools offer such a course, but it is a rara avis. To be sure, some corporate finance classes touch on this, but it is at the 40,000 foot level. Admirably, my colleague Bill Bratton has some 20 pages on securitization in his corporate finance textbook, but he admits that it is basically an aside. I try to fill in some of the gaps in my courses--my bankruptcy students endured a day on the basics of LBOs and securitization in the context of fraudulent transfers, but I didn't want to clutter their notes too much with discussion of credit default swaps or repo agreements beyond what is necessary to understand some of the automatic stay exceptions. 99% of law students, I'd wager, never get a systematic overview of modern financial products and transactions. This is a problem because although the building blocks exist in classes like contracts and payments and secured credit and securities regulation, the level of complexity that now exists makes it hard for students to connect the dots themselves, much less see how these new financial products and transactions affect other areas of law (such as corporate law, e.g, a empty voting).

I think there are two very important reasons to have such a course in the law school curriculum.

First, complicated financial products are now a mainstay of the finance world and that means that they will turn up in lots of deals and litigation and law reform. Attorneys are intimately involved in the design of these products. Consider just on the transactional side: law firms have structured finance and project finance groups as well as securities and bank loan groups. We have courses in securities regulation and secured finance; why don't we have classes in structured and/or project finance? Attorneys need to be fluent in financial product terminology and understand the products and transactions--why they are being used and why other products and transactions are not being used. This can be learned in a haphazard way on the job or in CLE, but law school offers one of the few chances to learn this systematically.

Second, attorneys play an important role as gatekeepers. When attorneys don't understand the economics of a deal, they are more likely to fail in their gatekeeping role. They are more likely to miss fraudulent behavior or simply not to understand the importance of various contractual provisions. This can cost clients lots of money and can lead to the attorney and/or his/her firm finding themselves as defendants for aiding/abetting a fraud (yes, even post-Stonebridge). I worry about students being to shy to raise their hands and demand that a senior associate or partner or someone on the business side take a few minutes to walk them through the economics of a transaction and to insist on having that person go over it until it all makes sense. Having a background in financial products and transactions should give students more confidence when they are in practice to speak up when they don't understand something or something smells fishy.

I am looking at taking my own counsel to heart and aiming to add a structured finance class to my school's curriculum for the '09-'10 year. There are multiple problems in designing such a course. First is the paucity of materials. There is a securitization textbook, which is probably what I'll use as the basic text at least the first time around, but that's about it. There is precious little case law on financial products and relatively little written that provides good introductions to different products. Then there is the problem of making all the pieces stick together. Collateralized debt obligations and credit default swaps simply involve different, if related issues. Trying to form a course with unified themes rather than a pu-pu platter is a challenge. Third, teaching the class as a law class is a challenge. How does one keep a sufficient focus on the legal issues which are generally up in the air? If anyone else is thinking about developing a related course, I'd love to chat.