Governance in the Ruins

What gets an economy up and running after a catastrophic war or a period of oppressive rule? While there are nearly as many answers to these questions as experts, one of the most prominent for the past century has been law. Nearly every page of Law and Capitalism, a remarkable new book by Curtis Milhaupt and Katharina Pistor, stands in implicit or explicit dissent from the prevailing view. Milhaupt and Pistor’s countermodel begins a matrix consisting of two axes. The first contrasts a purely protective regime on one end, with a pervasively “coordinative” approach on the other. The second axis ranges from decentralized governance at one end to centralized governance at the other. Using the matrix as an organizing framework, the authors then conduct detailed case studies of six high profile corporate crises in a total of seven countries (the U.S., Germany, Japan, South Korea, China, Singapore and Russia), each from the opening years of the new century. In each of the case studies, which they call “institutional autopsies,” Milhaupt and Pistor find evidence both of transition and of retrenchment — and of the rolling relations between markets and law. The first two parts of this Review describe and critique Milhaupt and Pistor’s matrix-and-autopsy approach in more detail. The final three parts offer institutional autopsies of three crises that do not appear in the book. The first two are the two most obvious omissions from the period covered by Law and Capitalism, the collapses of WorldCom in the United States and Parmalat in Italy. Under the prodding of the Securities and Exchange Commission, both companies sought to remake themselves as paragons of corporate governance as they emerged from their insolvency proceedings. The final autopsy explores the more recent failure of Bear Stearns in early 2007. The autopsy considers the possibility that bankruptcy might have been a better solution to Bear’s financial distress than the government-supported sale to J.P.Morgan, and argues that the government intervention delayed and may even have diminished the likelihood of thoroughgoing financial services reform