The 2007 – 2008 financial crisis has been the subject of many articles, books, movies and even a theater play. We take you for a walk along Wall Street, pointing at some aspects of the story that touch our personal experiences and interests. We look critically at some of the main underlying causes. Besides political blindness, we highlight the unbridled growth of power of relatively small groups of investment bankers and how these brought financial institutions to (and in some cases beyond) the edge of bankruptcy. We expose some of the over-complicated financial instruments together with their astronomical volumes traded. We also look more critically at the role played by quants (financial engineers) in general and mathematicians in particular. What is the truth behind “The formula that killed Wall Street”? An important aspect concerns early warnings not heeded to. In summary, this is a chapter on greed, power, complexity, volume and stupidity.

The series of crises started with the global financial crisis that gained speed with the collapse of Lehman Brother in Autumn 2008. The ECB as any other major central bank became deeply involved in solving the crisis, which had eroded banks’ ability to trust each other. The ECB provided increasing amounts of liquidity to banks, and in many ways replaced interbank markets with its own operational framework. Other exceptional measures included easing and expanding of accepted collateral, purchases of high-quality covered bonds issued by banks. The constitutional analysis culminated on the question, whether the ECB measures can be classified as monetary policy. Generally, the provision of liquidity, even in some unusual forms, and its rationales were even classical monetary policy and similar to other central banks. The main objective was stability and sufficient liquidity in the euro area financial markets. The ECB did not give financial assistance to a Member State or their banks, and its independence was maintained. Only the later three-year LTROs could be assessed somewhat differently.

What does solvent mean? JP Morgan CEO Jamie Dimon, 2010 A little more than five years after the passage of the Sarbanes–Oxley Act of 2002 (Sarbanes–Oxley),1 many of the nation’s largest financial institutions failed or were pushed to the brink of failure. An unprecedented decline in housing prices reduced the value of securities backed by housing loans owned by many banks. The resulting insolvency of some of the most significant Wall Street giants prompted the worst financial turmoil since the Great Depression. The crisis raised serious questions about the efficiency of markets as hundreds of billions of dollars in market capitalization suddenly disappeared. The losses suffered by investors were more severe and long lasting than those that came out of the market crisis that helped give rise to Sarbanes–Oxley.

The previous chapter explored the pivotal role of the ISDA Master Agreement in the evolution of the OTC derivatives markets and highlighted the combination of legal techniques behind the various ‘self-help’ remedies in this contract. These contractual remedies, which culminate with Close-out, are designed to manage disruption arising during the lifespan of a derivatives contract without requiring recourse to the formal procedures associated with enforcing rights under general law. While versions of these self-help remedies appear in many types of financial contracts, including in market standard syndicated loan agreements and in the terms and conditions of debt securities, they have reached unmatched levels of sophistication in the derivatives context. As such they have been referred to in a recent English case as amounting to ‘an exclusive code’ under which parties manage the implications of a breach of contract, to the exclusion of the general law. As is now well-documented in the literature addressing the transnational qualities of modern finance, these arrangements underpin the cross-border markets in OTC derivatives by promoting autonomy from national insolvency law, a strategy which has, in turn, enjoyed generous regulatory treatment. The questions to which this chapter now turns is what role is left for the courts in relation to such a tightly designed, closely maintained and ‘exclusive’ contractual framework, and, as a starting point, why such litigation arises in the first place.

Financial markets litigants may, for different reasons, seek to bypass the legal landscape discussed thus far. Where parties have agreed to contracts expressly selecting English law and, in some version of a jurisdiction clause, the English courts, this may give rise to a preliminary dispute about the effects of the parties’ contractual choices. If so, the result is a classic example of what Robert Wai refers to as ‘“touchdown” points’ between a private regime and state law. The concern of the current and the following chapter is how the English courts navigate challenges to the choice of jurisdiction and governing law provided for in derivatives contracts, and the related legal issues that arise as a result of the global reach of the modern OTC markets. The principal focus here is claims arising out of or connected to the parties’ contract; where allegations relate to a broader, fraudulent scheme, the tort of conspiracy or deceit different principles will apply to determine governing law and jurisdiction.

In the wake of the recent financial crisis, Federal Reserve Chairman Ben Bernanke argued repeatedly that fostering healthy growth and job creation required legislative action. He warned that continued political battles over fiscal and monetary policy, financial regulation and the debt ceiling were “deeply irresponsible” and would have “catastrophic consequences for the economy that could last for decades.” At the same time, like Alan Greenspan before him, Bernanke joined secretaries of the Treasury and other technocrats in guiding and enabling legislation, helping presidents outmaneuver critics and compensating for political uncertainty when political battles between the President and Congress stalled economic legislation. Far from being apolitical actors, these technocrats manipulated authority, exploited deference from politicians and business leaders, and alternately bolstered and challenged national politicians in order to shape US economic policy, manage market behavior and coordinate global activities before, during and after the recent financial crises.