The Law That Blew the Bubble: Commercial Law and The Big Short

TJ King

“Okay, there’s a bubble.” What follows is not merely a cinematic unraveling of Wall Street hubris, but a portrait of how the law can legitimize the very misconduct it claims to prevent. The 2008 crisis was built on contracts that were valid, disclosures that were technically complete, and financial instruments that complied with regulatory frameworks. The Big Short forces us to confront a disturbing possibility: that commercial law did not just fail to stop the crisis - it helped create the conditions that made it inevitable.

The 2015 blockbuster directed by Adam McKay was remembered by theatre-goers for its star-studded cast, fast-paced scenes with celebrity cameos, witty dialogue, and comedic angles on the 2008 global financial crisis. But when I recently rewatched the movie this past month, I was left not only thinking about how effectively Margot Robbie explained mortgage-backed securities to me- but of the underlying commercial law implications of the film and 2008 crisis. As you may or may not know, commercial law firms are heavily involved with big banks and the way these commercial institutions construct their articles of association and run their company. But if that is true:

How could a crisis built on fraud occur without breaking the law? And more so, how could only one guy end up getting arrested?

This article uses the film as a lens to examine legal formality, market deregulation, and how a lack of legal knowledge created a crisis which corporate lawyers did nothing to stop.

How could this even happen?

First, let me give you a very simple explanation of what happened in 2008 that caused the entire global economy to plummet. Unfortunately, I do not have any celebrities to explain it to you, but I can try and break it down into simple terms. Essentially, the 2008 financial crisis happened because big banks gave home loans to people who couldn’t really afford them (subprime mortgages). Then the banks bundled those risky loans together (tranches of mortgage bonds) and sold them like they were safe (mortgage-backed securities). When many people couldn’t pay their loans back (defaulted on their mortgages), the whole system collapsed. Big companies lost money, people lost their homes and jobs, and the economy crashed because everything is connected through the housing market. Who paid for it? You guessed it - not the bankers who lied, but the 99% of people who needed a job and home to support their family.

Why did the lawyers do nothing?

Okay, now that you have the general foundation of how the crisis happened, let's break down how the law played into this. Lawyers are heavily involved in these big banks that orchestrated the financial collapse. Banks like those that collapsed (like Bear Sterns and Lehmann Brothers) all collaborated with their in-house council and the majority of corporate firms in New York City. The issue was not with the lawyers themselves, but the information they were hearing. The securitization contracts that the lawyers were receiving were completely sound - there was nothing to report. The rating agencies like Moody’s and Standard & Poor rated the tranches as AAA, the highest possible grade, signaling that these financial products were safe and virtually risk-free. From a lawyer’s perspective, a AAA rating is a green light: it suggests that the underlying assets pose no legal or financial red flags.

This is where a deeper structural problem emerges. The crisis was not fueled by lawyers ignoring warning signs, it was fueled by a legal ecosystem in which those warning signs were never formally produced in the first place. As Brian Berger mentions in his article, ‘lawyers do not have a duty to question their client's lawful business decisions.’ The legal documentation for securitization deals was meticulously crafted, compliant with contract law principles, disclosure rules, and regulatory requirements. After seeing the documentation that labeled these mortgage-backed securities as economically sound, firms had no reason to suspect foul play. In this sense, commercial law didn’t merely fail to stop the crisis - it actively enabled it by providing the legal approval that gave Wall Street’s false creations legitimacy.

In other words, everything was legally sound while economically rotten.

Shouldn't there be some change?

Professor Steven Schwarcz delivered a keynote speech at Duke about the role of lawyers throughout a global financial crisis. He suggested that lawyers may feel like they have a ‘gatekeeping’ duty to protect the public from financial disasters, but in reality, they have no right to act as a public investigator. Their job is to draft, verify, and execute the contracts - not to analyze the economic reality behind them. Schwarcz suggests reeducation of corporate lawyers; instructing them to diagnose and comprehend the realities behind corporate lies and help limit situations like the 2008 crisis. Because, like I mentioned earlier, the crisis wasn’t lawless - it was hyper-legal world where everything wrong was written into the rules.

I agree with Schwarcz that corporate lawyers need reeducation. But I also believe that The Big Short exposes the need for a more ethical conception of commercial law. A commerical law that includes broader corporate transparency, stronger enforcement of fiduciary duties, and good faith principles in finance. There has been a multitude of financial oversight committees set up since the 2008 crisis (see the Dodd-Frank Act and CFPB), but the damage was still done to the billions of people impacted by the lies and deceits of big banks.

Now, we all still remain relatively in the dark behind the reality of these large corporate transactions. In fact, another bubble looms over the commercial world as I write this article. Consumers are questioning an over-inflation of the value of AI corporations - suitably referred to as the ‘AI Bubble.’ The question I leave with you is:

Do you think that corporate law has developed far enough since 2008 to protect the consumer - or is another bubble bound to burst?