Academic journal article Harvard Law Review

The Perils of Fragmentation and Reckless Innovation

Academic journal article Harvard Law Review

The Perils of Fragmentation and Reckless Innovation

Article excerpt

In June 2009, the Financial Crisis Inquiry Commission (FCIC) was constituted to "examine the causes, domestic and global, of the current financial and economic crisis in the United States." (1) More than eighteen months later, it released a report concluding that the impacts of the crisis were "likely to be felt for a generation," (2) and revealing that "more than 26 million Americans ... [were] out of work" or unable to find full-time employment, roughly four million families had lost their homes to foreclosure (and nearly four and a half million more were "seriously behind" on mortgage payments), and "[n]early $11 trillion in household wealth ha[d] vanished." (3) The FCIC also cautioned that the United States' financial sector continued to be unstable and emphasized that serious issues remained that "must be addressed and resolved to restore faith in our financial markets [and] to avoid the next crisis." (4) In response to the conclusions of the FCIC, numerous commentators were quick to offer their own analyses of the roots of the crisis. (5) Although none went so far as to blame the financial crisis on a sole cause, there was broad agreement that the creation of and widespread reliance on one popular type of securitization--collateralized debt obligations (CDOs)--played a significant role in the development of the housing bubble, as these instruments often relied upon real property as their primary underlying asset. (6) These securities appear to have been misunderstood by significant players in the market, which eventually led to severe financial instability. (7) Thus, abstracted to an extremely basic and simplistic level, the financial crisis can be viewed partially as a consequence of the market's moving away from a unitary, straightforward conception of a property interest to a more complex one without sufficient attention to the risks that accompanied such a modification.

Property theory can help explain why reliance on this innovative financial vehicle logically would lead to financial instability and ultimately recession. (8) To date, only a handful of commentators have attempted to explain the crisis using established property law theories as an analytical tool. (9) Those who have done so focus on what the financial crisis has revealed about "the nature of property, ownership, and community" (10)--in other words, on what the crisis reveals about the very conception of property itself--rather than on what theories about use and management of property can reveal about the origins of the financial crisis.

This Note endeavors to take this second approach. By applying two prominent property theories--the concept of the tragedy of the anticommons, and the rationale of the numerus clausus principle--it reveals how the concerns animating these theories contributed to the advent of the financial crisis. Part I provides a broad overview of the events leading up to the 2008 collapse. Part II details the development and functioning of CDOs, explaining why this type of securitization is ubiquitous in varying accounts of the economic meltdown. Part III details two important theories in property law--Professor Michael Heller's fragmentation or anticommons theory, and Professors Thomas Merrill and Henry Smith's justification for the existence and endurance of the numerus clausus principle--and explicates how both illuminate the events that precipitated the crisis.


Thousands of pages have already been written in an attempt to explain the origins of the 2008 financial crisis. This Part does not purport to provide the same kind of comprehensive background that can be found in many longer narratives, (11) but instead serves as a basic roadmap of events, in order to provide context for the analysis that follows.

A. Early Foundation

With the benefit of hindsight, many scholars trace the origins of the 2008 financial crisis to two significant developments in the financial landscape that occurred in the late 1990s: national politicians' pushing the mortgage industry to expand home-ownership opportunities to Americans for whom this had long been an impossibility, and the passage of the Gramm-Leach-Bliley Act. …

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