Agency problem: Difference between revisions

Second, it takes no account of “[[convexity]]” effects: I can build up my reputation incrementally by faithfully carrying out thousands of small transactions — I can ''look'' like a five-star collaborator — only to blow it on one big position. I can sell ten thousand ball point pens in utter good faith and welch the one time I sell a Ferrari.  

When that one outsized reward more than compensates for all the thousands of pennies in front of the steamroller, the normal rules don’t apply and an iterated game of prisoner’s dilemma becomes a one-off. This is what {{author|Nassim Nicholas Taleb}} calls the “Rubin Trade”.

Any one of its agents is charged with protecting the principal’s interests, but two overriding considerations will inevitably take priority: (i) their wish to protect and perpetuate their own role ''as'' agent, and protect its accompanying income stream — their need to ''persuade the principal that their role is needed'' whether or not it ''is'' needed — no turkey votes for Christmas; and (ii) their wish to not ''fuck up'' — not only is the role necessary but ''I am a suitable person to carry out that role''.  

The JC humbly submits that any plan to revolutionise the legal industry that does not account for the [[agency problem]] ''will fail''. Everyone who purports to speak for a corporation does so in a way that, above all else, does not prejudice {{sex|his}} own agency with the corporation.

This puts our old friend the [[drills and holes]] conundrum into perspective: it is true that a corporation desires quick, cheap and effective legal services. In many cases, it does not need ''any'' legal services ''at all'' — it could do not just with legal protections delivered in a convenient format and by a less expensive source, but ''no legal protections at all''. What percentage of legal agreements are ever litigated? But it is hard for an inanimate pile of papers filed at companies registry to have that sort of insight. It relies on its agents to arrive at that conclusion on its behalf. But who, amongst the byzantine control structure that those very agents have constructed to help it make decisions of that sort — its [[inhouse counsel]], [[outhouse counsel]], credit risk management, document [[negotiators]], client [[onboarding]] team, [[compliance]] or [[internal audit]] — who of these people would ever say that? And even if one did, would {{sex|he}} not be shut down by the consensus of the others?<ref>Those who don’t believe me should try proposing that you don’t need [[cross default]] in trading agreements. You will get bilateral consensus on this, in private conversations, from almost everyone; no-one will say it in public.</ref>

Each bank will appoint it's own law firm to advise ''it'' — the target will have its own independent counsel too — principally on the underwriting, regulatory and reputational risks posed by being involved in the proposed transaction. The bank’s legal advisors will conduct due diligence, negotiate contracts, shareholders agreements, draft prospectuses, advise on all kinds of competition issues that may arise, and will issue batteries of [[legal opinion]]s — enforceability opinions, [[true sale opinion]]s, fairness opinions, security opinions, [[10b5 opinion]]s — you name it — all of which are designed to give the [[arranger]] and syndicates — the ''banks'' — comfort that ''their'' risk of shareholder action or regulatory censor is minimal. Who pays for all this legal advice? The bank’s ''client'', of course. This, on top of the underwriting fee, will be in the first blushing exchanges of the [[engagement letter]].

Inhouse advisory teams are likely exempt from the usual rubber glove inspection — competitive tenders, law firm panels, methodological justifications —that follow requests from other parts of the legal department to incur “own legal spend”, even in nugatory amounts.