THE IMPENDING LAW BUBBLE?

Betting on Justice

Investors increasingly have the chance to buy into the lawsuits of others, and, according to an article in The New York Times, the plaintifs don’t even have to know about it.

“Large banks, hedge funds and private investors hungry for new and lucrative opportunities are bankrolling other people’s lawsuits, pumping hundreds of millions of dollars into medical malpractice claims, divorce battles and class actions against corporations — all in the hope of sharing in the potential winnings.” (See, “Putting Money on Lawsuits, Investors Share in the Payouts.”)

Reading this, my brain lit up with an instant sense of recognition. Hadn’t I seen this before, with mortgages?  By bundling and securitizing mortgages, investment firms created new investment vehicles – which they then aggressively marketed to clients who had been lulled into a false sense of security by the AAA ranking provided by the ratings agencies.  And the people who took out the original mortgages never knew it was happening.

There are a couple of differences with these investments, but it is far from clear that these differences will end up actually making a difference.  As of now, it doesn’t seem as if these lawsuit investments have been aggregated and securitized.  But it could just be a matter of time before creative financiers get into the act and figure out ways to do it:  “July 2013 Divorces” or “Cancer Surgery Malpractice Suits/ 2012.”  Moreover, there doesn’t yet seem to be a way to assess risk.

The absence of any significant reform in the financial industry is increasingly a source of worry.  Who will see the dangers of such investments?  Or the madness crossing the line into our personal lives for such purposes?  Or the impact it will have on the law?

Lawsuits could become an obscene set of “reality shows,” the private dramas and conflicts of ordinary citizens being played out for the profit of others.  Investors will be rooting for plaintiffs or defendants, and ordinary citizens who have the misfortune to be engaged in lawsuits that capture the fancy of investors will become celebrities or villains without ever asking for it.  They will be selected by the market.

And then there are additional worries.  Can the integrity of the law withstand such economic pressures and publicity?  With so much attention and so much money riding on the outcome of trials, can any form of impartiality be maintained?  Will people initiate lawsuits primarily for the investment opportunities they will create?

It is easy to imagine our society becoming a vast casino, bets being placed on anything and everything.  But these are not just bets – they are investments.  New classes of interested parties will be following events over time, and like most investors they will inevitably seek to ensure that their investments pay off.

Shouldn’t we think about this first?