Project Report: Legal Securities Schematic

§ November 21st, 2010 § Filed under Legal Securities, Projects § 1 Comment

One of the projects that we’ve been working on here at Robot Robot and Hwang headquarters is an open source project to develop the legal infrastructure to allow for large scale securitizing of lawsuits. We’ve been working on some of the basic pseudocode necessary for this to happen that’ll be releasing up on Github in a little bit, but wanted to drop out a post outlining the project and what we’ve been thinking about recently.

The basic concept is that there’s convertible risk in the current setup that’d allow for a potential restructuring of the legal market. Individual people have legal claims that they might want to pursue, but pursuing them tends to be an extremely costly and potentially risky proposition. There’s situations where they’d prefer to take an upfront, certain payout in exchange for the rights to a risky payment from pursuing the case.

Firms that have the capital are able to pool the risk by taking on a large number of claims, and reaping the benefit from the payments that come back. At the same time, these pooled bodies of lawsuits are also potentially attractive investments as assets for a whole range of financial firms, who would be willing to buy the rights and take a chunk of the payment as they are processed by firms and the court system. Firms would be willing to sell these pools as bundled assets if there was a framework, since it’d allow them to receive money upfront and fund the pursuit of these claims in the first place. As we’ve noted before, this happens already — though generally on a more one-off scale that doesn’t permit for a larger market to form.

The legal securities project is an effort to set up the legal code that’d put this into place and allow for this to happen. Specifically, there’s two big chunks of contract language that’s needed for something like this to happen:

1) A compiler: Which would allow for a standardized, boilerplate structure for people with claims to exchange the rights to the payout from those claims for a certain upfront payment. These claims would be sold to a bundler, who would act as a wholesale buyer of claims. In the simplest form of the idea, the bundler is a large law firm, who would also take on the role of processing these claims. In future iterations, we might add an initial decoupling step where the bundler sells the claims out to bidding law firms before assembling the complete security.

2) A “securitizer”: Which would allow for a bundler or law firm to stack and merge these purchased claims into a single contract which could then be sold out in the open market. Essentially the contract would allow a purchaser to receive regular payouts as the lawsuits are processed by the bundler.

We’re currently cranking on getting an alpha version of the compiler together and documented so people can take a look at the source and contribute/make suggestions. Stay tuned.

One Response to “Project Report: Legal Securities Schematic”

  • Dave Täht says:

    That is so awesome, but I think Charles Stross has prior art:

    From his Accelerando ( http://www.antipope.org/charlie/blog-static/fiction/accelerando/accelerando-intro.html )

    “In IP geek circles, Manfred is legendary; he’s the guy who patented the business practice of moving your e-business somewhere with a slack intellectual property regime in order to evade licensing encumbrances. He’s the guy who patented using genetic algorithms to patent everything they can permutate from an initial description of a problem domain – not just a better mousetrap, but the set of all possible better mousetraps. Roughly a third of his inventions are legal, a third are illegal, and the remainder are legal but will become illegal as soon as the legislatosaurus wakes up, smells the coffee, and panics. There are patent attorneys in Reno who swear that Manfred Macx is a pseudo, a net alias fronting for a bunch of crazed anonymous hackers armed with the Genetic Algorithm That Ate Calcutta: a kind of Serdar Argic of intellectual property, or maybe another Bourbaki math borg. There are lawyers in San Diego and Redmond who swear blind that Macx is an economic saboteur bent on wrecking the underpinning of capitalism, and there are communists in Prague who think he’s the bastard spawn of Bill Gates by way of the Pope.

    Manfred is at the peak of his profession, which is essentially coming up with whacky but workable ideas and giving them to people who will make fortunes with them. He does this for free, gratis. In return, he has virtual immunity from the tyranny of cash; money is a symptom of poverty, after all, and Manfred never has to pay for anything.”

    Perhaps you could hand out a Manfred Macx award for the winners?

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