Lawyers in the Shadows: The Transactional Lawyer in a World of Shadow Banking

Abstract

This article, which is based on the author’s keynote address at an April 5, 2013 conference at American University Washington College of Law on “Transactional Lawyering: Theory, Practice, & Pedagogy,” examines the role of transactional lawyers in a world of shadow banking. By reducing the dominance of banks as financial intermediaries, shadow banking has transformed the financial system, causing transactional lawyers to face an array of novel issues. This article focuses on one of those issues: To what extent should transactional lawyers address the potential systemic consequences of their client’s actions? First, the article shows that the legal system itself inadvertently enables or requires firms operating as shadow banks to engage in uniquely risky behavior, without protecting against the resulting systemically risky externalities. That finding, in turn, broadens the legal ethics inquiry to two issues: what duty should transactional lawyers have to try to improve the legal system to protect against those externalities, and what duty should transactional lawyers have to try to prevent those externalities, assuming the legal system is not improved.