Thirteenth law of worker entropy

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The JC’s thirteenth law of worker entropy (also known as the “optimal complication theorem”): Over time, a given template will tend to a point of “optimal” complication, (c), which is a function of:

(i) the highest plausibly chargeable fraction of the typical value, (v_f), of contracts concluded on the template,

(ii) the time, (t), required to manipulate the template so it reliably works to the satisfaction of one having the patience, skill and hubris to understand it, and

(iii) the professional charge-out rate, (r), of such an unusually abled person.

The relationship between c, v_f, t and r is as follows: c ↔ v_f = tr.

The JC developed this over a series of papers [Don’t you mean “beers”? — Ed] with sometime collaborator, poet, playwright and tropical disease victim Otto Büchstein when trying to understand how medium term note documentation could be so dreary despite (a) the underlying product being basically straightforward and (b) repeated efforts by market participants to make it easier.

There are underlying dynamics here. Firstly, r and t are positively correlated. This follows: the more patience, skill and hubris required to competently manipulate text, the fewer people can do it, so, by operation or ordinary economic principles of supply and demand the more those who can do it can charge for their service.

Similarly v is actual, real world value, and not “notional fright value imbued by lawyers”.

Thus, a secured medium term note — typically in the tens of hundreds of millions of dollars — has high intrinsic value even though the basic premise of the transaction — “I lend you money, you give me a note, you repay whoever holds that note later with interest, depending on certain externalities” — is pretty simple. Thus, you can expect the documentation for a secured MTN drawdown to span several hundred pages of wretched text, and so it does, notwithstanding the inconvenient fact that one can, and parties typically do, trade on a one-page term-sheet.

By contrast, a confidentiality agreement is part of the traditional pre-trade appendage-measuring ritual of the pea-cocks and pea-hens of finance, is meant to look spectacular, set the scene, but no-one is meant to be seriously hurt by the experience, and nothing of lasting value is achieved by its negotiation. Notwithstanding that, the purely legal points of an NDA can be quite involved, even though nothing of any commercial moment hangs on them. Thus, NDAs — even for secret-squirrel event-driven family office types — rarely get past 5 or 6 pages.

Worked example

Take a USD500m secured note. Even 5 basis points — 0.05% of the deal — is USD250,000. Who wouldn’t pay that to make sure nothing went wrong on a tenth of a yard of debt finance? But even at USD500 and hour that is five full working weeks of a legal eagle’s time: it really wouldn’t do if all that was required was to top-and-tail the term-sheet with boilerplate and bang out an enforceability opinion. Nor would there be much prospect of stopping clients going to some other guy down the road who will do the job in a day and send a bill for a £500.

See also

• charge-out rate
• Time and attendance
• Laws of worker entropy