Legal Documents as Means of Financial Abstraction: How the Bankers’ Lawyers Constructed Swaps and Changed Finance

Abstract

Finance rests on a process of abstraction, based on various material devices that have been studied by economic sociologists in recent years. The fact that many of those devices are legal in nature has not attracted much attention, even though financial instruments are typically embodied in legal documents. This paper argues that interactions involving legal documents shape both financial markets and their regulation, by specifying the contextual elements that will be deemed relevant in interpreting financial commitments. It takes as a case study the emergence of swaps since the 1980s. Through their work in standardizing, commenting, and litigating swaps contracts, bankers’ lawyers were able to recast obligations between banks and their clients in more abstract terms, discarding all references to specific business projects. Such abstraction simultaneously allowed the spectacular development of swaps markets, their positioning on the fringes of regulations, and the strengthening of bankers’ prerogatives against their clients.