Thirteenth law of worker entropy

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:

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“Je n’ai fait celle-ci plus longue que parce que je n’ai pas eu le loisir de la faire plus courte.”

— Pascal, Lettres Provinciales, 1657.

(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 [do 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 over the years by market participants to make it easier.

There are underlying dynamics here.

Firstly, that charge-out rate “r” and the time “t” it takes the fellow charging it to do a basic task are positively correlated. This may seem counterintuitive, but in the twisted logic of legal practice, it follows: the more patience, skill and hubris required to competently manipulate text, the fewer people can do it and, by ordinary principles of supply and demand, the more they can charge.

Hence, pace Blaise Pascal, charge-out rates tends to rise, not fall, with prolixity: only a true lexical wizard has a hope of understanding ISDA’s latest publications.

Similarly, “v” is actual, real-world value, and not “notional fright-value imbued by the neurotic expostulations of paranoid lawyers”. “v_f ” is a kind of bounded lexo-cosmological constant.

MTN programmes

Thus, a secured medium term note — having a principal amount typically in the tens or hundreds of millions of dollars — has high intrinsic “v” value even though the basic premise of a transaction — “I lend you money, you give me a an IOU, I can sell it, you repay whoever gives it back to you at maturity, with interest, depending on certain externalities” — is simple.

Thus, you can expect the documentation for a bond deal to say very little, but say it expansively, over several hundred pages of wretched text. And so it does, notwithstanding that one can, and parties typically do, trade on a one-page term-sheet.

Netting opinions

Netting opinions are the same: there has not been an insolvency practitioner alive in the last forty years who for an instant has so much as considered challenging the “single agreement” concept of an ISDA Master Agreement, let alone successfully done so. Yet, so ghastly are the dread phantoms that circle the head of anyone foolish enough to ask that plainly stupid question — what if one of them did? — and so comfortable are the incomes of those brave toilers engaged in the annual harvest of prophylactic opinions giving supplying the sober, long-winded answer that so preposterous a question barely deserves — that the industry tolerates a multi-million dollar annual expenditure without second thought.

NDAs

By contrast, a confidentiality agreement is part of the traditional pre-trade appendage-measuring ritual of the pea-cocks and pea-hens of finance. You have to do this; NDAs are meant to look fierce, but no-one is ever seriously hurt by them, and nor does anyone achieve much of lasting value out of them either. They’re a comfy part of the cosmic pantomime that is a career in financial services. But no-one wants to pay for them.

Even so, the abstract legal points of an NDA can be intricate — the world is awash with NDA templates riddled with schoolboy errors — though, since nothing of any commercial moment has ever depended on an NDA, the howlers persist: the people — and machines — engaged to process them need, and usually have, no great acumen, so we should not expect anything else.

So there are local maxima and minima at play. An NDA, however important, complicated, and regardless of what fanciful things you bolt onto it (exclusivity, non-solicitation, restraint of trade, punitive damages and so on) may generate a few thousand pounds in billings, but even that is pushing beyond rational expectation.

With a syndicated bond issue, on the other hand, you can write a ticket to the moon.

This is why magic circle law firms do not have “confidentiality departments” — everyone muddles along as best they can — but devote entire floors to debt capital markets.

Worked example

Take a USD500m note. Even a half of one percent of the deal value — a mere 5 “basis points” — adds up to USD250,000. Who wouldn’t pay such a paltry sliver to make sure nothing went wrong on half a yard of debt finance?

But even at a charge-out rate of USD500 an 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 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. So somehow we need to make this seem a bit more complicated.

Still: is it really possible to charge six figures for a glorified IOU? Well, have a butcher’s at this this 370-page beauty and allow me to rest my case on it, since it plainly wouldn’t fit in it. Quarter of a mill well spent, sans doubte.

Is it any wonder the service economy is in such rude health?

See also

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