Financial Engineering or Legal Engineering? Legal Work, Legal Integrity and the Banking Crisis

Abstract

A much repeated strand of analysis in the banking crisis has been the issue of financial engineering gone wrong. Problems are attributed to innovative financial products so complex that risk and even ownership became untrackable. Characterising the financial products and transactions that led to the crisis primarily as financial engineering, however, tends to gloss over the other innovative skills and creative participants involved in their construction. This paper demonstrates that the significant practices behind the banking crisis involved not just financial engineering but legal engineering, legal engineering designed to systematically thwart regulation and bypass regulatory control. The paper, first, analyses the role of legal engineering in the banking crisis, showing it to have been a conscious strategy in which regulatory circumvention, complexity and opacity were integral parts. It then sets out some specific implications for future practice in business, government, regulation and the professions, and argues the need not just for new law and regulation, but more fundamentally for a new respect for the rule of law, for a new legal integrity, in both business and the professions.