Propertization: The process by which financial corporate power has risen and collapsed
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Kim, Jongchul Article — Published Version Propertization: The process by which financial corporate power has risen and collapsed Review of Capital as Power Provided in Cooperation with: The Bichler & Nitzan Archives Suggested Citation: Kim, Jongchul (2018) : Propertization: The process by which financial corporate power has risen and collapsed, Review of Capital as Power, Forum on Capital As Power - Toward a New Cosmology of Capitalism, s.l., Vol. 1, Iss. 3, pp. 58-82, http://bnarchives.yorku.ca/552/ This Version is available at: https://hdl.handle.net/10419/182583 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0/
58 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENAND COLLAPSED Suggestedcitation: Kim,Jongchul,(2018),‘Propertization:TheProcessbywhichFinancialCorporatePowerhasRisenandCollapsed’,Reviewof CapitalasPower,Vol.1,No.3,pp.58‐82. Propertization: TheProcessbywhichFinancialCorporate PowerhasRisenandCollapsed JONGCHULKIM Abstract: ElsewhereIarguethatthelegalconceptofpropertywascreatedintheimageofmoneyinthelate RomanRepublic.Sincethen,thedivisionofpropertyandcontracthasbeenanunderlyingstructure ofWesternlaw.Thepaperarguesthatamainwayofstructuringfinancialcorporatepower,especially moneymarketfunds(MMFs),isapropertizationofcontractualclaims.Propertizationheremeansto grantpropertyrightstoshareholderswhoarealmostreducedtofunctionlessdebentureholdersand thussupposedtohaveonlycontractualclaims.Thepaperarguesthatthispropertizationhasledto theriseoffinancialcorporatepower,especiallyMMFsandtheirmoney‐creationmechanism.The paperalsoexploreshowthepropertizationofMMFsharescontributedtogeneratingthefinancial crisisof2008,anditendsbybrieflydiscussingapossibleMMFreformpolicy. Keywords:Property,propertization,finance,corporatepower,moneymarketfunds,financialcrisis, money,credit,contract,shares,repurchaseagreements apital is, as Jonathan Nitzan and Shimshon Bichler (2009) argue, “a symbolic quantification of power, representing the organized power of dominant capital groupstoreshapetheirsociety.”Thispaperarguesthatacrucialwayofstructuring theorganizedpoweroffinancialcorporationsisapropertizationofcontractualclaims.This wayofstructuringpower—themixture of two disparate rights, property rights and contractualrights—hasnotbeenexaminedbyscholars,evenbyscholarswhoarguethat capitalisasymbolicquantificationofpower.Thispaperaimsatfillingthismissingand,by doingso,contributingtothetheoryof“capitalaspower.” C
59 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED Propertyisaclassicalnotionthatsocialsciencehasusedtoexplaintheessenceof capitalism.Forexample,classicalwriters,suchasKarlMarxandMaxWeber,arguedthatthe nature of the transition from feudalism to capitalism can be understood as the rise of absoluteprivateproperty.However,thisclassicalnotiondisappearsintheliteratureonthe globalfinancialcrisisof2008andontheevolutionoffinancial corporations. This disappearanceisunfortunatebecauseitmakesthewritingsoftheclassicalwritersnolonger relevanttothecurrentcrisisandtothecurrentfinancialcorporatepower. Propertyandfinancehavebeen,thispaperargues,stronglyintertwined.ElsewhereI (Kim2014b)arguesthattheconceptofpropertywascreatedintheimageofmoney.This mirroringhappenedinthelateRomanRepublic,wherethenewconceptofpropertywasfirst settledatlawandmoneybecameapredominantmediumforsocialrelations.Inmodern times,thesituationhasbecometheotherwayaround.Modernmoneyiscreated,asI(Kim 2014b)elsewhereargues,whencreditbecomesamoney‐likeinstrumentbymirroringthe imageofproperty,thatis,whenpropertyrightsaregrantedtocreditors.Icallthisgranting thepropertizationofcontractualclaims.Thatmoney‐creationmechanismdiffersfromthat ofpreviousmoneyeconomy.Previousmoneyeconomiescouldextendthemoneysupply only by mining precious metals or debasing coinage. In modern times, by contrast, by grantingcreditorspropertyrights,creditcanbetransformedtomoney. Recently,somescholarsusethetermpropertizationtodescribeasocialphenomenon whereinwhatisoriginallynotpropertybecomesproperty.Thistermismostoftenusedfor common natural resources or intellectual abilities such as ideas and knowledge. These resources and abilities are originally not propertybut should be commonly available to everybody according to the social rules of distribution. But whensomeoneisgranted exclusive rights over the use, disposal, and transfer of the resources and abilities, they becomeproperty.Thisiscalledpropertization.Thetermpropertizationisusedinthispaper inasimilarsense:whatisnotoriginallypropertybecomesproperty.However,itsusehere hasadifference.Thepropertizationofcontractualclaimsdoesnottotallychangecontracts intopropertybutmakesthemJanus‐facedhybridsofthetwolegal rights(propertyand contractualrights)thatconstantlychangetheirfacestoenjoythebenefitsandreducethe costsofbothrights. Scholarsalsousethetermcommodificationtodescribeasocialphenomenonwherein whatisoriginallynotproducedtobesoldbecomesacommodity.Thetheoryofcapitalas poweralsoconsiderstheconceptofcommodificationseriouslyand argue that “without commodification,therecanbenocapitalization”(NitzanandBichler2009,p.307).Itistrue thatwithoutmarketwherecapitalistpoweriscommodified,therewouldbenocapital.But thiscommodificationisonlyoneaspectofcapital:NitzanandBichler(2009,p.18,myitalics) stillsaythat“capitalistpoweriscommodified,structuredandrestructured.”Stillitshouldbe
60 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED explained not only that how capitalist power is commodified but also that how it is structuredandrestructured.Ibelievethattheconceptofpropertizationcontributestothe latterexplanation. I elsewhere (Kim 2011) examined how modern banking and its money‐creation mechanismoriginatedinthelateseventeenthcenturyinEngland.Todoso,Iusedthelegal termtrustsinsteadofpropertization.Butthesetwotermsimplythesameprocessthrough whichcreditorsaregrantedpropertyrights,therebytransformingtheircreditintomoney. InthispaperIextendthispreviousresearchofminetoexplainhowthepropertizationof contractualclaimshascontributedtotherisingandstructuring of corporate power, especiallymoney marketfunds (hereafter,MMFs) and their money‐creationmechanism. Shareholders in the present form of business corporations, includingMMFs,arealmost reducedtofunctionlessdebentureholderswithlimitedresponsibility.Thatis,theirrights andresponsibilitiesarethoseofcreditorsintheireconomicsubstance.Nonetheless,thelaw grantsthemtheopposite,propertyrights.Thisgrantingisa“propertization.”InthispaperI extend this concept of propertization into explaining the money‐creation mechanism of modernfinancialinstrumentsincludingMMFsharesandrepos(repurchaseagreements). ThepaperalsoarguesthatpropertizationoccurredinMMFsharesandreposwasakeycause ofthefinancialcrisisof2008. MMFsareakeyelementofshadowbanking,wherethefinancialcrisisof2008occurred. Shadowbankingreferstothebank‐likefinancialactivitiesconducted by unregulated or lightlyregulatedinstitutionsoutsideofthetraditionalbankingsystem.Theothertwokey elementsofshadowbankingaresecuritizationandrepos(Gorton&Metric2010),whichwill beexplainedlater.MMFsareopen‐endedmutualfundsthatareregisteredunderRule2a‐7 of the Investment Company Act of 1940 in the United States. MMFs have rarely been discussedintheliteratureonthe2008crisisbecausemanyscholarshavefocusedtoomuch on securitization and subprime mortgages. However, as a few scholars have correctly noticed,MMFsplayedadecisiveroleincreatingthecrisis(Gorton & Metric 2010) and transmittedittoWesternEurope(Baba,Robert,&Ramaswamy2009). Theintertwinedrelationshipbetweenfinanceandpropertymakes it possible to rethinktheconventionaldichotomyoflawandfinance.Theliteratureonlawandfinance considerslawandfinancetoinfluenceeachother,butittreatsthemasseparatespheresthat donotconstituteeachother’snature.Accordingtothisconventionaldichotomy,theroleof the law is at most to provide a good regulatorylegalenvironmenttofacilitatefinancial interactions.Thisconventionalviewisopposedtotheinstitutionalistperspective,according towhichinstitutions,includingtheinstitutionoflaw,constitutetheverynatureofeconomic phenomena(Pistor2013).Thispaperusesthisinstitutionalistperspectiveandidentifiesthe current legal structure and decisions that have determined the very nature of shares,
61 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED includingMMFshares.Bydoingso,itovercomestheconventionaldichotomybetweenlaw andfinance. Western law has Roman origins and is structured by the Roman legal division of propertyandcontract.ThepaperexplainshowthisRomanlegalstructure became the foundationonwhichthenatureofshares,includingMMFshares,wasestablished.Itargues thatMMFsharesviolatethetraditionalRomanlegaldivisionbecausethepropertizationwas regardedasillegalfromthestandpointoftheRomanlegalprinciple.Butatthesametime, MMFsharesgrowoutofthelegaldivision.Ifpropertyrightswerenotdevisedseparately fromcontractualrightsinthelateRomanRepublic,societycouldnotgrantpropertyrights tocontractualclaims.Thisargumentallowsustoapproachtheissueoffinancialreform differentlyfromthecurrentdiscourseonthesubject.Thecurrentdiscourseneverconsiders thenecessityofreforming(investment)companylegislationitself,focusinginsteadmostly onhowtoexternallyregulatethe greedyand ill‐behavedfinancesectorbyaddingmore regulatory schemes and governmental intervention. This paper briefly discusses in the conclusionhowtoreform(investment)companylaworthestructureofthelawitselfin ordertocreateajust,stable,andsustainablefinancialsystem. Thispaperbeginsbyexamininghowpropertyrightsoriginatedin the late Roman Republicandhowtheserightswereconsideredtobefundamentally different from contractualrightsbytraditionalRomanlaw.Thepaperthenexploreshowthelawinmodern times has come to grant the privileges of property to its opposite, contractual rights, in shares, including MMF shares. Then it discusses how this propertization of MMF shares playedadecisiveroleincreatingthefinancialcrisisof2008.Thepaperendsbydiscussing financialreformpolicyfromalegalperspective. PropertyRightsversusContractualRights TheconceptofpropertyhashauntedWesternlawfor2,000years.Propertyislegally definedasrightsinrem(rightsinthings),incontrasttocontracts,whicharedefinedasrights inpersonam(rightsinpersons).Thisdefinitionofpropertyasarelationbetweenpersonand thing has a metaphysical implication. It implies that property rightsarenaturalrights regardlessofwhetherotherpeoplehaveagreedtothem,incontrasttocontractualrights, whichareconsideredtobecreatedbyanagreementbetweenpersons.Thismetaphysical conceptionofpropertyis,asOrlandoPattersonhasargued(1982,p.32),afiction,because propertyis,inreality,arelationbetweenourselvesandeveryoneelse.Ifapersoncanexert herabsolutepoweroverherpossessions,shecandosobecauseeveryoneelserefrainsfrom interferingwiththemandallowshertotreattheminanywayshelikes(Graeber2011,p. 200).
62 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED Thismetaphysicallyfictionalconceptofpropertywasinventedasalegalcategoryfor the first time in the late Roman Republic, and before the time the Romans considered property a set of relationships between persons, more or less like rights inpersonam (Patterson1982,p.31).Theoriginofthenewconceptionofrightsinremhasbeenrarely discussedbyscholarsexceptPatterson(1982).AccordingtoPatterson,theRomanneededa newconceptofpropertythatallowedthemtodistinguishslavesfromotherpersons,when slavesbecameoneofthemostsourcesofwealthandobjectsofproperty.Thus,theRomans inventedanewconceptthatimitatedtherelationshipbetweenmasterandslave,wherethe slavewasconceivedofas“aboveallares(thing),theonlyhumanres”(Patterson1982,p. 32). Hisreasoningsoundscorrectbecausetheimageofrightsinremfitswellfortheimage ofslaves.AsDavidGraeber(2011,pp.168‐9)describes,theimageofslavesisthedeathofa person,andthisdeathissocialonethatoccurswhenapersonisforcedlyrippedfromher contextandfromallthesocialrelationshipthatmakeherahumanbeing.Analogically,rights inremaresuchapoweristoripoutathingfromallsocialrelationshipwithothersand therebyallowanowner to exert absolute powerover thethingwithoutagreementwith others.Forexample,iflandbecomestheobjectofabsoluteindividualproperty,itshouldbe rippedfromitssocialrelationship.Butthisismetaphysically impossible because landis hardlyownedandcultivatedby“an”individual.Landwasusually possessed by families ratherthanindividuals,anditwascultivatedbymanypeopleforgenerations.Landhasoften beenownedbyvariouspeoplesimultaneously.Anditsrightsofuseandcultivationareoften separatedfromitslegalownership,andthesetworightscanbelongtodifferentpersons.But, landshouldberippedfromthesesocialcontextandrelationshipiflandwouldbecomean objectofproperty.Infact,thisbecominghistoricallyentailedviolence:thelegalenclosureof landinearlymoderntimesentailedviolenceagainstpeasants.Thisviolenceseemstobe similar to the violence that occurs when a slave is ripped fromhersocialcontextand relationship. I(Kim2014b)offersanotherinterpretationoftheinventionofrightsinrem.Iargue thatthe“thing”inthemindsoftheRomanswasnotonlyslavesbutalsomoney.Isuggesttwo reasoningwhymoneyisagoodcandidatefortheobjectfromwhichrightsinremarederived. First,bycomparinganothercandidate,land,Iexplainwhymoneyisamoreperfectobjectof individualabsoluterights.Second,Iexplainasocialcontextinwhichmoneyhadbeen essentialtotheeverydaylifeofRomans.Otherwise,theRomanswouldnotprojecttheimage ofmoneyontothenewlegalconcept.Infact,thenewideaofpropertyappearedinthelate RomanRepublicnotonlywhenhundredsofthousandsofcapturedslaveswerepouringinto Italy,butalsowhenplunderedpreciousmetals,suchasgold,silver,andbronze,werealso pouringintoItaly.ThesepreciousmetalsplunderedbyRomansoldierswerecoinedbythe capturedslavesandchangedtheRomanRepublicintoagenuinemoneyeconomy.Money
63 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED wascoinedinvariousdenominationssothatitcanbeusedtobuycommoditiesofvarious prices.Inparticular,largequantitiesofmoneyofsmalldenominationsshouldbecoined,so thatordinarypeoplecanuseitasthemainmeansofprocuringproductsofeverydaylife. BronzecoinageintheRomanRepublichadsuchasmalldenomination,anditwascoinedin extraordinarilylargequantitiesbecausethearmyundertheRepublicwasoriginallypaidin bronze(Crawford1970,p.47‐48).Afterbronze,silvercoinagewasintroduced,and,byend oftheRepublicperiod,goldcoinagewasbeingproducedregularly.Inthelateperiodofthe Republic, when the concept of rights inrem was created, money of small and big denominationsbecamethedominantmediumofsocialrelations. I(Kim2014b)thenarguethattheimagetheRomansfoundincoinedmoneywasthat ofthelordshipofakingorGod.Moneycanendowitspossessorwiththeabilitytocancelany ongoingmoralobligationstoothers—thatis,tobetotallyindependentofthem.Thisgodlike orking‐likeimageofmoneyseemstohavebeenonereasonwhyEmperorTiberiusdeclared it“acapitaloffencetotakeacoinwiththeimageofAugustusintoabrothelorlavatory” (Crawford1970,p.47).Iarguethatthisimageofakingorgodwasrealizedinthenew conceptofproperty.Rightsinremisabsolutepoweroverathingregardlessofwhetherother peopleagreeornot,anditisthepowertoignoreanyongoingmoralobligationstoothers— thatis,tobetotallyindependentofthem.Thispowercanonlybepossessedbyakingorgod (Graeber2011,p.205). Thegodlikeabilitytocancelandfinalizeanyongoingmoralobligationstoothersis,in fact,realizedinmoney’sfunctionoffinalizingdebtobligations.Thisfinalityfundamentally differentiatesmoneyfromcredit.Bothmoneyandcreditcanfunctionasmediaofexchange andbedenominatedbythesameunitofaccount.Nonetheless,becauseofitsassociationwith finality,theconceptofmoneyistheoppositeoftheconceptofcredit.Thetransferofacredit instrumentcreatesacreditor‐debtorrelationinwhichdebtobligationisimposedto the transferor.Bycontrast,moneyisanythingthatisgenerallyacceptableinthefinalsettlement ofcreditor‐debtorrelations,andbythisfinalsettlementthetransferorbecomesfreefrom debtobligation.Later,thispaperexamineshowthisfinality,inwhoseimagetheconceptof propertywascreated,allowspropertizationtotransformcreditintomoneyincapitalism. Propertizationistheprocessofgrantingtheimageoffinalitytocreditandbydoingsoof transformingcreditintomoney. Howthisfunctionoffinalitywasgiventomoneyhistorically?Graeber(2011)offersan explanation.Inprimitivecommunalsocieties,accordingtohim,therewasnoideaofcoldbloodedcalculativedebt,andthusthemodernideathatmoneycanfinallysettledebtdidnot exist either. We don’t know precisely when and how calculative interest‐bearing debts originated,becausetheypredatewriting(Graeber2011,p.64).Also,wedon’tknowthe precisehistoricaloriginofmoneywhosesocialroleistofinallysettlesuchdebts.Butsome anthropologists find those two existed in ancient Mesopotamia, but the way how they
64 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED workedwasquitedifferentfromwhatwefindnowadays.Interest‐bearingdebtsinancient Mesopotamiabeganincommercialloansbutlaterdevelopedalsoinconsumerloans.Money wasusuallystockpiledintemplesorpalaces,andmerchantsusuallyusedcreditinstruments, ratherthanmoney,fortheirtrade.Commercialloansdidnotcreateserioussocialproblems becausetheseloanswereproductive,thatis,becausetheywereinvestedtotradethatwould beexpectedtoproducesurplus.Butconsumerloans—usuryintheclassicalsenseofthe term—often threatened to rip society apart (Graeber 2011, p. 65), because these were unproductiveandcouldnotexpecttoproducesurplus.Theyusuallyloanedtothepeasantry whourgentlyneededfoodbecauseofabadharvest.Asconsumersloansdeveloped,large proportionsofthepeasantryfellintodebtpeonageandlosetheirlandtocreditors.Theway how the society solved such a debt crisis in consumer loans was “clean slate” by which Sumerian and Babylonian kings periodically announced general amnesties:thedebt cancellationofconsumerloansandthereturnoflandtothepeasantry(Graeber2011,p.65). However,thesocialroleofmoneychangedsignificantlywhencoinagewasinvented aroundthesixthcenturyB.C.(Graeber 2011). It was invented to solve debt crises that occurredinconsumerloans.RomancoinageinancientRomewasatypicalexample.Debt crisesinRometookaformofconflictbetweenthearistocracyandthepoor.Topreventthe debtpeonageofpoorpeasantstoaristocratsandtomaintainafreepeasantry,Romansociety chosethemilitaryoptionofdistributinglootplunderedfromothersocieties.Intheearlier, ancient credit economy like ancient Mesopotamia, gold, silver, andbronzehadbeen stockpiledintemples.ButnowtheywereplunderedbyRomansoldiers,mintedbyslaves capturedinwar,anddistributedtosoldiersandthepopulationonamassivescale(Graeber 2011, pp. 228‐229). Plundered money could allow population to ease their urgent debt obligation. Inadditiontothegeneralmilitaryoptionofdistributingcoins,coinswerealsoused directlywhenadebtcrisisoccurred.Forexample,in33A.D.,whenthemoneylendersof Romeattemptedtocallinalldebts,debtorswerethreatenedwithhavingtosellofftheirland inarapidlyfallingmarket.Tosolvethedebtcrisis,EmperorTiberiusprovidedthedebtors withaninterest‐freeloanofonehundredmillionsestertii(Crawford1970,46).Moneywas alsothedirectsolutiontothedebtcrisisofthe80sB.C.DebtreformbyL.ValeriusFlaccus alloweddebtorstopayofftheirdebtsatarateofoneasonthesilversestertius(Crawford 1970, 45). A sestertiuswaspreviouslyvaluedatfourasses. Interestingly, according to historian Michael Crawford, such political interventions did not occur when currency shortagesoccurredin63,49,and44B.C.Thelackofinterventionintheseinstancesimplies thatcoinagewasapoliticalmeasuretosolvedebtcrisesratherthananeconomicmeasure toencouragecommerce.EventhoughcoinageinRomeplayedanimportantroleasameans of exchange, this economic function was not its primary purpose.Itwasinstead“an
65 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED accidentalconsequenceoftheexistenceofcoinage,notthereasonforit”(Crawford1970, 46). Ininventingtheabsolutepowerofpropertyownersintheimageofthefinalityof money,thetraditionalRomanlawconsideredpropertyrightstobe different from contractualrights.AndintheRomanlaw,propertyrightsandcontractualrightscannotbe mixedwiththem.Forexample,underRomanlaw,adepositor’srightsareconsidered differentfromacreditor’srights.Therightsofadepositorare,ontheonehand,rightsinrem, and thus a depositor retains legal ownership over the deposited property. A depositary shouldkeepdepositssafe,maintaina100percentreserve,andhonourdepositors’requests towithdrawdepositsatanytimeondemand,anddepositorsarechargedasafekeepingfee. Ontheotherhand,inaloantransactiontherightsofacreditorarerightsinpersonam.The creditor cedes legal ownership of property to a debtor duringaspecifiedperiod and, in exchange,obtainsadebtclaimthatgoesagainstaperson.Thecreditorcanobligethedebtor tofulfilanobligationtorepaytheprincipalandtheinterest. Table1,DepositsversusLoansinRomanLaw LegalCategory Ownership Purpose Temporality Reserve Deposits RightsinremNot transferred Safekeeping Withdrawon demand 100% Loans Rights in personamTransferred Interestgaining Fixed specific period Noreserve Thesetwoinherentlydisparatetransactionsaremixedwhendepositariesattemptto loan deposited funds for profit while depositors enjoy the rightstowithdrawanduse depositsatanytimeondemand.Thismixtureistheessenceofmoderncommercialbanking. Thiswassystematicallyinstitutionalized first by London goldsmith‐bankers in late seventeenth‐century England. This beginning of modern commercial banking has been examined extensively by myself elsewhere (2011). What goldsmith‐bankers institutionalizedwasthepropertizationofacontract.Thesegoldsmithsmadealoancontract with their depositors. In this contract, the depositors allowedthegoldsmithstoloan depositedfundstothirdpartiesinthebankers’nameforprofit.Here,thegoldsmithbecame debtors, and the depositors became creditors. But at the same time,thecontractwas propertizedbecausethedepositorswerestillgrantedpropertyrightstowithdrawanduse depositsatanytimeondemand. In fact, this attempt to propertize contracts was considered embezzlement in the Romanlawtradition.Inthistradition,anhonestdepositaryofevenfungiblethings,suchas
72 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED ownershipofcapitaltothecompany,andthe1855‐62CompaniesActsgrantedshareholders limitedliability.Becausethelawbegantotreatshareholdersascreditors,itshouldhave stopped granting them the opposite—property rights—if it had wanted to maintain consistency in the legal principle that separates the two legal categories—property and contract.Butthelawhasgivenupitsconsistencybycontinuingtograntpropertyrightsas well.InthecaseofMMFs,shareholdersstillenjoytheabilitytofinalizetheircreditor‐debtor contractsfreelyatanytimeondemandbywritingchecks.Thispropertizationcreatesa double‐ownershipscheme,amoney‐creationmechanism.Here,propertizationgrantsthe privilegedfinalityofmoney,inwhoseimagetheconceptofpropertywascreated,tocreditordebtorcontracts,andbydoingsoittransformscreditintomoney. Thispropertizationisakeycauseoftheemergenceofbiginstitutionaldebtors.By offering shareholders the two disparate benefits together—interest gathering and redemptionrightsondemand—MMFscancollecthugeamountsofcapital.Becausemostof the time their creditors—shareholders—would not all withdraw their money simultaneously,aportionofthedebtsremainsinthehandsofMMFsandistransformedinto permanentcapitalthatMMFsdonotneedtorepayandcanusefortheirowngainmostof thetime. MMFassetshavegrownrapidly,fromlessthan$2billionin1974to$11billionin1978, to$76billionin1980,to$1trillionin1997,andtonearly$4trillionin2009(Fink2014,p. 87). This rapid growth has been possible because MMFs have offered both the demanddeposit servicesofsafekeeping and highinteresttothelarge amountsoffunds, oftenin billionsofdollars,ofinstitutionalinvestorssuchasassetmanagersandglobalcorporations. Commercialbankscouldnotmatchtheseinterestratesbecauseaninterestceilinghadbeen imposedontheirdemand‐depositsbyRegulationQfrom1933until2011(Fink2014,p.86). Propertization&theCrisis BeforediscussinghowthepropertizationofMMFsharesplayedadecisiveroleinthe crisis,weneedtounderstandthemechanismof“off‐balance‐sheetfinancing,”wherethe financialcrisisof2008occurred. Thisfinancing,whichhasbeenpopularforthelastfewdecades,beganwhenthesupply sideofthefinancing,commercialbanks,nolongerheldtheirassets,whichgenerateastream ofincomeoverthelongterm,ontheirbalancesheets.Theseassetsincludemortgageloans, credit‐cardloans,andautomobileloansthatthebanksoffertotheircustomers.Thebanks transfertheportfoliosoftheseloanstoatrustcompany(aspecial‐purposeconduit),andthe trustcompanyslicesthepoolofdebtsintodifferenttranches,whichitthensellstoinvestors. Theseproductsarecalledasset‐backedsecurities(ABSs)andcollateralizeddebtobligations (CDOs).Toraisefundstobuytheseproducts,thoseconduitssellshort‐termasset‐backed
73 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED commercialpapers(ABCPs).ThesesafeABCPsareensuredaAAAratingandsoldprimarily toMMFs.Thesaleoftheseproductsisusuallybrokeredbybroker‐dealerssuchasMerrill LynchandMorganStanley.Thisoff‐balance‐sheetfinancinghasbecomesopopularinpart becauseofthebanks’needtoavoidthecapital‐regulationrequirementimposedbytheBasel IAccord(Brunnermeier,2009,pp.80‐81).However,themainreasonforitspopularityisthe highdemandforsecuritizedproductsfrominvestmentbanking,especiallyfromMMFsfor safe,high‐qualityassetstoinvestin(FCIC2011,p.30). Before the 2008 crisis, as I (2014a) argues elsewhere, off‐balance‐sheet financing lookedsafefromstandpointofinvestors.Forexample,largebankstypicallypromisedto providecreditguaranteestotheirconduitsiftheconduitsfacedadefault.AndtheCDOssold tothedemandsideofoff‐balance‐sheetfinancingweremainlythesafesttranches,andthe toxicwaste—themostjuniortrancheofsubprimemortgageloans—wasoftenheldbythe issuingbankandwasthusrarelyinjectedintotheoff‐balance‐sheetfinancing.Butinvestors createdarunonMMMFs,andthesefundssuddenlycreatedarunontherepomarket.The reasonfortheserunscannotbeexplainedentirelybythesub‐primemortgagecrisisbecause “prospectivesubprimelosseswereclearlynotlargeenoughontheirowntoaccountforthe magnitudeofthecrisis,”asBenBernankeclaimed(quotedinFCIC,2011,p27) MMFsarethedemandsideoftheoff‐balance‐sheetfinancing.Thecrisisof2008began within the demandside of the off‐balance‐sheet financing, wheninvestors,especially institutionalinvestors,createdarunonMMFs(Brunnermeier2009;GortonandMetrick 2010). Unlike other mutual funds, MMFs are exempted by the Security and Exchange Commission’s(SEC)“Rule2a‐7”frommark‐to‐market,sothatMMFsdonotadjusttheir pricespersharetoreflectthedailymarketvalueoftheirassets.Thus,MMFscanclaimthat theirassetsarealwaysworth100centsonthedollar,evenwhentheyarenot.MMFsarealso openended,makingitpossiblefortheirretailinvestorstoredeemtheirsharesondemand onthesameday.Togetherwiththeopen‐endednessoftheshares,bypromisingtomaintain anetassetvalueof$1pershare,MMFsfalselyleadtheirshareholderstobelievethatwhat theyhavekeptinMMFsiscash.4However,inrealitythecashthatMMFshareholdersinvest inMMFsisloanedtothirdpartiesinthenameofMMFs.Whentheshareholderssuddenly realizethattheirbeliefiswrongandthatMMFs’loantotheirpartiesmightbeintrouble, theycreatearunonMMFs.OnSeptember16,2008,whentheReservePrimaryFund—a largeMMFwith$65billioninassets—announcedthatitsshareswereworthonly97cents, itfacedabout$39.6billioninredemptionrequests.Thiseventtriggeredbankrunsonother MMFsandresultedinthewithdrawalofabout$172billioninaweek(Kacperczyk&Schnabl 4IntheUK,thisfalsebeliefiswrittenintothelaw.Englishlaw regards money market deposits as ‘cash,’ differentiatedfromfinancialinstrumentsthatincludesharesincompaniesorbonds.AccordingtotheFinancial CollateralArrangements(No.2)Regulations2003,Article3,“‘cash’meansmoneyinanycurrency,creditedto anaccount,orasimilarclaimforrepaymentofmoneyandincludesmoneymarketdeposits[…].”
74 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED 2010,p.41).MMFswerethusforcedtoselltheirassets,suchascommercialpapers(CP)and certificatesofdeposits(CD),atfire‐saleprices,creatingamajorliquiditycrisisamongthe primeborrowersintheCPandCDmarkets.Suchrunswouldhavebeenmuchgreater,and theU.S.financialsystemwouldhavecollapsed,hadtheU.S.DepartmentoftheTreasurynot promisedtemporarydepositinsurancecoveringtheentire$3.45trillionworthofMMMFs onSeptember19. MMFsalsotransmittedthecrisisintheUnitedStatestoWesternEurope.Atthattime, MMFsintheUSinvestedmassivelyinEuropeanbanks,especiallyincertificatesofdeposits issuedbythebanks.Interestingly,thelargepartofthesepurchasebyMMFsstartedafter August2007becausetheywantedtofindsaferinvestmentinordertobeawayfromthe subprimemortgagecrisisof2007.InSeptember2008whenMMFssoldcommercialpaper andcertificatesofdepositsatfire‐saleprices,amajorliquiditycrisisamongEuropeanbanks wascreated(Baba,Robert,&Ramaswamy2009).Thisprivate‐bankingcrisisofEuropean banksbecameasovereign‐debtcrisiswhenEuropeanstatesprovidedbailoutpackagesto thebanks. Theabove‐mentioneddouble‐ownershipschemeofMMFsharesisalmostthesameas thatofcommercialbanks.Incommercialbanking,oneamountofcashdepositscreatestwo cashbalancesofthesameamount,onefordepositorsandtheotherforacommercialbank. This double‐ownership scheme has historically created financial crises, exposing a communitytoanewtypeofriskliketheriskina“passtheparcel”game,inwhich“theloser is the one holding the parcel when the music stops” (Kim 2011). When depositors in commercialbankssuddenlyrealizethatthebanks’loanstothirdpartiesareintrouble,they createarunonthebanksinordernottobetheloser.Asimilarformofbankrunhappened withMMFsin2008.Thisrunhappenedbecausethecreditor‐likeshareholders had a propertyright,therighttowithdrawfundsatanytimeondemand.Whentheshareholders runonMMFsinordernottobetheloser,theyshifttherisktoothersandcreatetheriskof financialcollapse.Inthissense,asGortonandMetrick(2011,p.2)argue,thecrisisof2008 isanalogoustothebankingpanicsofthe19thcenturythathappenedbecauseofbankrunsin thedemanddepositsofcommercialbanks. MMFsalsoexpandedthecrisisbycontributingtothecreationof another propertization,arepo.Arepoconsistsoftwosalestransactionsinwhichtheseller(inour example,abroker‐dealer)sellsanassettothebuyer(inourexample,MMFs)withapromise to repurchase the same asset at a higher price in the future. Arepoisinitseconomic substanceasecuredloaninwhichadebtorpledgessomeassetascollateralfortheloan.The sellingpriceoftheassetbecomestheamountoftheloan,andthedifferencebetweenthe sellingpriceandtherepurchasedpricebecomesinterest.In2008,MMFsmadearunonrepo markets. This run and the resultant collapse of repo markets wereamajoreventthat
75 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED generatedasystemiccrisis(GortonandMetrick2010).MMFscouldmaketheserunsbecause theirinvestmentinrepomarketswas,asshallbeseen,propertized. Interestingly,thispropertizationofreposwasdemandedbyMMFs.TheInvestment CompanyActrestrictedmutualfundinvestmentinentitiesengagedinsecurities‐related businesses, because a mutual fund can be exposed to the risks of the business. This restrictionshouldhavebeenappliedtoreposwhenabroker‐dealeriscounterparty,because MMFs’investmentinreposisineconomicsubstancealoanandMMFsarethereforeexposed totheriskoftheloan.ButtheUSSECmadeanexceptionforrepos to satisfy MMFs’ investmentdemand.TheSECdidsobyregardingreposasa“purchase”ofsecuritiesrather thana“debt”ofthebroker‐dealerwhenthepurchasesatisfiescertainconditions(Kaplowitz 2014,pp.122‐3).Theseconditionsinclude:(1)thelegalownershipofthecollateralsshould becompletelytransferredtoMMFs;and(2)MMFsshouldbeexcludedfromtheChapter11 bankruptcyprocessandbepermittedtowithdrawtheirinvestmentwhenthesellerofarepo goesbankrupt(Kaplowitz2014,pp.122‐3). Asshallbeseenbelow,ifaninvestmentsatisfiesthesetwoconditions,aninvestor(a creditor)isgrantedpropertyrightsthatothersimplecreditorsdonotenjoy.Itisascheme ofpropertization.Reposcansatisfythosetwoconditionsbecausetheyarestructuredasa sale,even thoughtheyareineconomicsubstanceasecuredloan.Unlikeasecuredloan, however,areposatisfiestheabovecondition(1).Becausearepotakestheformofasale,the ownershipofcollateralistransferredfromadebtor(aseller)toacreditor(abuyer,MMFsin our case) in repo contracts.This transfer does not occur in a secure‐loan contract. In a secure‐loancontract,adebtorretainspropertyrightsinthecollateral,andacreditorhasa righttopossessthecollateralortosellitonlyafterthedebtorbreachesapaymentobligation. Incontrast,thecreditorinarepohascompletepowerandtherighttopossessandsellthe collateralbecausetheownershipofcollateraliscompletelytransferredtothecreditor(in ourcase,anMMF).Thecreditor(buyer)isonlyobligedtoreplacethecollateralwithan equivalentsecuritybythedateoftherepurchasecontract. A single piece of collateral is often used to effect settlement in a number of repo contractsonthesameday.Thisfurtheruseofcollateraliscalledrehypothecation.Through rehypothecation,forexample,abroker‐dealercanleverageherinitialcapitaltwentytimes in the repo market (Gorton and Metrick 2010; Singh and Aitken 2010). Before their bankruptcies,BearStearnsandLehmanBrothershadleverageratiosofover30:1(Duffie 2010,61).Moneyiscreatedhereasincommercialbanks’demanddeposits.Asmentioned, thesellingpriceofcollateralistheamountoftheloanthatisdeliveredtothedebtorofarepo. Thedebtorenjoystheownershipoftheloanandusesitspresentavailability.Butatthesame time,itscreditortakestheownershipofthecollateralandusesitforothercontracts.Itis money creation because the creditor does not loan any money to a debtor from the perspectiveofthecreditor,eventhoughthedebtorborrowsandusesthemoney.Thismoney
76 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED creationhappensbecausereposareaschemeofpropertization,thatis,becausethecreditors ofreposaregrantedpropertyrightsoncollaterals. Conditions(1)and(2)grantarepobuyerthepropertyrighttofreelywithdrawtheir investment when the seller goes bankrupt. Because repos are loan contracts in their economicsubstance,theyshouldhavebeensubjecttotheChapter11bankruptcyprocess. Thisbankruptcyprocessisdesignedtodistributetheassetsofabankruptdebtorasfairlyas possible among the creditors. The process includes an automaticstay,whichprevents creditors from collecting a debtor’s assets before a court assesses both the value of the debtor’sassetsandthefullextentofcreditors’claims.Theprocessalsovoidsanyrecent paymentsmadebythefirm,becausepaymentsmadejustpriortobankruptcycanfavourone creditoroverothers.Thisprocedureiscalledavoidance.Thus,collateralpostedagainsta derivative contract during the ninety days before declaring bankruptcy is subject to avoidance.Arepo,however,isexcludedfromtheChapter11bankruptcyprocessandisthus notsubjecttotherequirementsofanautomaticstayandavoidancebecausereposlegally taketheformofasalecontract.Thisway,creditorscanquicklywithdrawthecontractby selling collaterals before their prices collapse, even when a debtor goes bankrupt. This advantageofreposhasbeencriticizedforgivingcreditorsofrepos an unfair privilege because other creditors cannot withdraw their loans until afteracourtdecision.This privilegeisapropertyright—therightofpropertyownerstowithdrawtheirmoneyand finalizeacontractregardlessoftheagreementandconsensusbetweenparties,including creditorsandthecourt. Thispropertization,whichgrantsthecreditorsofrepospropertyrights,hasledtothe boomoftherepomarketoverthelastfewdecades.Eventhoughthereisnoofficialdata,the USrepomarketexceeded$10trillioninmid‐2008(GortonandMetrick2010).InDecember 2008,MMFsaloneheld$552billioninrepos(GortonandMetrick2011,p.8).Butarunon repomarketsoccurredin2008becausethecreditorsofrepos(inourcase,MMFs)could enjoythepropertyrightofwithdrawingtheirinvestmentquicklywhendebtorsgobankrupt, whileothercreditorshavetowaituntilacourtmakesitsdecision. Tosumup,arepoisapropertizationofcontractualclaims.Eventhoughthebuyersin reposareintheireconomicsubstancemerelycreditorshavingrightsinpersonam,theycan alsoenjoyrightsinrembecausetherepoisdisguisedlystructuredasasale:thelawconsiders abuyerofarepo(thecreditor)tohaverightsinremoncollateral.Thispropertizationgrants theprivilegedfinalityofmoney,inwhoseimagetheconceptofpropertywascreated,toa creditor‐debtorcontract,andbydoingsothecreditorsofreposfinalizetheircreditor‐debtor contractsfreelywithouttheabove‐mentionedinterventionofbankruptcycourts. Propertizationinreposwouldnothavebeenpossiblewithoutpoliticalsupportfrom Congress.In1982,aUSbankruptcycourtinInreLombard‐Wallruledthatarepoisasecured
77 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED loanandorderedthebuyer(creditor)ofarepototurnoverthecollateraltotheseller.This courtdecisionmadecollateralpostedforareposubjecttotherequirementofanautomatic stayduringthebankruptcyprocess.Thisdecisionaimedto defeattheartfulself‐serving attemptsbylawyersandfinancierstomakeloantransactionslooklikesaletransactionsin ordertoavoidthebankruptcyprocess (Schroeder 1996). But this court’s decision so distressedthegovernment,theFederalReserve,andthefinancialcommunity,whichfeared that it would impair repo markets, that Congress attempted to override it in 1984 by amending the Bankruptcy Code and exempting repos from the bankruptcy process (Schroeder1996,p.1011).Sincethen,whenthecourtshaveconsideredthenatureofrepos forbankruptcypurposes,theyhavedeterminedthemtobesales,andtosupportthisdecision they have prioritized the form of the contracts over their substance.5This prioritization differsfromtheearlydecisionsofthecourtsinUnitedStatesv.Drickson(1979)andSECv. Miller (1980), which considered the economic substance of the contract when they addressedthenatureofrepos.ButUScourtsstillconsidertheeconomicsubstanceofthe contract when they have to deal withtheissueofthetaxability of the interest income received by the creditors of repos. For example, the United States Supreme Court, in NebraskaDepartmentofRevenuev.Loewenstein (1994),justifiedgovernmenttaxationof interestincomebydeclaringthat“ItdoesnotmatterthattheTrustsandSeller‐Borrower characterizethereposassalesandrepurchases,sincethesubstanceandeconomicrealities ofthetransactionsshowthattheTrustsreceiveinterestoncashtheyhavelenttotheSeller‐ Borrower.”ItwouldbeinterestingtoresearchwhathappenedwhenCongressattemptedto overridethelegalreasoningmadeinInreLombard‐Wall.Adetailedstoryoftherelationship between MMFs, the SEC, the Federal Reserve, the government, and other institutional investorsatthattimewouldimproveourunderstandingofthepoliticaleconomyoffinance andlaw. Conclusion TheuseofthefinalityofmoneyintheRomanRepublicandEmpirewasasubstitute foranoldsolutiontodebtcrises.Previously,inBabylonian,Sumerian,andotherancient civilizations,consumerdebts,whichordinarypeopleowedtotaxfarmers,werecancelled without the use of money. They were simply cancelled by the emperor in a periodic “redemption”or“yearofjubilation.”Thedifferencefromthisoldsolutionwasthatmoney allowedtheRomanstosolvedebtcrisesevenwhencreditorswerestillrepaid—thatis,even when creditors’ rights were still guaranteed. As Graeber (2011) demonstrates, coinage ultimatelycouldnotsolveRomandebtcrises.Thesupplyofcoinagebasedontheimperial optiononlymitigatedcrisestemporally.Thus,bytheendoftheRomanperiod,mostpeople inthecountrysidehadbecomedebtpeonstorichlandlords(Graeber2011,232).Sincethe 5Forexample,seeCohenv.ArmyMoralSupportFund,67B.R.at598.
78 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED financialcrisisof2008,enormousamountsofmoneyhavebeencreatedinordertobailout privatebanksandboostthemoneyeconomy.However,ifwhathasbeentruehistoricallyis truetoday,thecreationandinjectionofmoneyisnottherealsolution.Itwillmerely postponetheburstingofthecapitalisteconomy.Arealsolutionwouldbethecancelationof thedebtofindividualswithoutusingmoney. Moderntimesbeganwhennatural‐rightstheoristsresettledtheconceptofabsolute propertyrightsonthebasisofRomanlawaroundtheseventeenthcentury.Itsexamplewas JohnLocke’snatural‐righttheoryofpropertythatprovidedtheideologicalfoundationfor theGloriousRevolution.Forhim,propertyrightsareabsoluteinthesensethattheyexist priortotheestablishmentofsocialinstitutionsoranagreementwithotherpeople(Please seeKim2014a,pp.327‐8).Thecurrentlegalpracticeoffittingcertaineconomictransactions intotwodifferentlegalcategories,propertyorcontract,isdefinitelyofRomanheritage.In thissense,ourtimesareanextensionofRomantimes,butwithanimportantdifference:we freelypropertizecontractualrightsbygrantingtheprivilegesofpropertyrightstocreditors. Thatis,financiersaregrantedrightsinremovercreditclaimsandtherebycreateahybridof propertyandcontract.Iarguedthatthispropertized,hybridownershipschemeconstitutes theessenceofMMFsharesandthecauseforthecurrentglobalfinancialcrisis. I conclude this paper by commenting on a possible reform policyofthecurrent financialsystemfromanewperspective.Thiscommentisbriefandincomplete,butitoffers adirectionforfutureresearch.Thecurrentdiscoursefocusesonhowtoexternallyregulate the greedy and ill‐behaved finance sector by adding more regulatory schemes and governmentalintervention.Thispaperimpliesthatweshouldreformcompanylaworthe structureofthelawifwewanttoreformfinanceinamorefundamentalway.Onereform policywouldbetoprohibitanypropertizationofcontractualrights,thatis,topreventall financialinvestorsfromenjoyingbothlegalrightssimultaneously.Inthesamevein,Ireland (2010)offersaradicalreformpolicytocorrectcorporateirresponsibility.Hearguesthatthe policyshouldstrictlydividecreditors’rightsfrompropertyrights,thatis,decouplelimited liabilityfromcontrolrights.ThesamereformpolicycanbeappliedtoMMFreform.MMF shareholders are merely functionless creditors with limited responsibility. The reform wouldinvolvenolongergrantingthempropertyrightsintheirshares,thatis,toabolishthe redemptionrightsofMMFshareholdersatpar. Our discussion allowsus to rethink the concept of property rights (rights inrem). Propertyrightsare,asmentioned,ametaphysicalfiction.Ifso,thepropertyrightsofMMF shareholdersarealegalfictionaswell.MMFshareholdersenjoythepropertyrightofbeing abletoredeemtheirsharesatanytimeondemandatpar.WesawthatthisrightleadsMMF shareholderstoenjoyenhancedpropertyrights,toshiftarisktoothers,andeventuallyto causeasystemicinstabilityoffinancethatnegativelyaffectsanindefiniteclassofpersons.
79 PROPERTIZATION:THEPROCESSBYWHICHCORPORATEPOWERHASRISENANDCOLLAPSED Thissituationopensaquestion:whyshouldthelawsupportthesemetaphysicallyfictional rightsthatprivilegeasmallgroupofpersonsandaffecttheworldnegatively? Forcenturies,socialscientistshavedebatedthelegitimacyofpropertyrights.Some haveconsideredpropertyrightsto benaturalandinviolable,andhavearguedthatthey shouldthereforebeprotectedbythestate.Followingthislineofreasoning,propertyrights havebeenestablishedatlaw.Othershavemaintainedthatpropertyrightsarecreatedbyan agreement between people and can thus be redistributed, regulated, or re‐contracted throughanotheragreementorbythestateforthepurposeofthewellbeingofsociety.This paperattemptstocontributetotherediscoveryofthisclassicaldiscussionofpropertyrights as something directly relevant to the current global crisis, assomethingcentraltoour understandingthecauseofandsolutiontothecrisis.
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