The devil is not in the detail. The devil is the detail
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Schümli Pflümli: Mark you this, Triago:
Your eagl’y imp may with celerity excrete
Sheafs and screeds of plushest vérbiage,
For such mute and timorous ends
As convolution may confect.
O! My soul, enswamped with o’erworded haps —
Sees aught but de’ils in every chary detail!
Nuncle: So, open your mind, milady:
You might find God among the gaps.
It is a well-worn trope: there is so much one can commoditise, but the final mile is across ice-fields and shattered obsidian and you must walk it in the moccasins of deep expertise, lest you cut your feet to the bone. It may be true that 80 per cent of your bond documentation is boilerplate, but the rest — oof — is a monster.
Of course, the boilerplate is pretty monstrous, too.
But — as Büchstein’s long-forgotten libretto had it: der Teufel mag im Detail stecken, aber Gott steckt in den Lücken![1]
Make way, I’m a lawyer
On this commonplace is much of the magic circle’s patter premised: to give them credit, they are ably aided in it by their in-house clients, many of them refugees of the same brotherhood, and whose livelihoods are guaranteed by the same presumption.
If you make yourself really complicated, you can exclude virtually everyone.[2]
And, to be sure, should you peruse your average securitisation — here’s the prospectus for Multifamily Connecticut Avenue Securities Series 2019-01 Notes Due October 2049 — you will soon be reaching for the proverbial spoon, to scoop out your own eyes.
Some 25 years ago the European Commission hit upon the idea of requiring structured products manufacturers to produce a one-page summary of the key risks of financial products being offered to the public. The document, a key investor information document, became a part of financial products regulation, over the immense and highly principled objections of the legal community, on the grounds that it is impossible to adequately explain the risks of a complicated legal product in fewer than the 80-100 pages it was presently taking.
The regulators replied, “well, if you can’t explain the big picture risks in a single page, the product can’t be suitable for the general public, can it?”
This the law firms found hard to contradict. The KIID — satirised in Muriel Repartee’s schlocky B Movie The Day of the MiFID — become law.
Yet, the eighty-page prospectus remains — and from a liability perspective, governs — even though no-one can even pretend that anyone reads them any more.
The essence is of the essence.
That our contracts must, at some level, be able to be reduced to their essence isn’t just for gentle pensioners dandling grandchildren on their knees. The neurotic particularisation of risks that are basically generic feathers many a subject matter expert’s nest.
Even sophisticated financial institutions — especially sophisticated financial institutions — need easily to render their contracts in simple fundamental terms, because that is how they risk manage them.
There is no machine,[3] and certainly no human being, in the bowels of an investment bank that is constantly monitoring the text of its ISDA Master Agreement battery to ensure every covenant is performed, every representation true, every implicit option buried in a contingent fallback exercised, or costed, as the case may be. These contracts are reduced to their a few basic economic parameters: that is all the firm’s creaking IT infrastructure can manage. The rest — those lawyer-confected paranoid contingencies the firm paid so handsomely for; that deal with unfeasible externalities, improbable scenarios and outlying tail risks are buried, filed away, to be dealt with, absent any context, by the legal eagles in the heat of the improbable moment that they should arise.
Come to think of it, it is a wonder there isn’t a squadron of waxen, hairless drones buried in some call centre in Bucharest rifling through that mountain of documents manually covering off that exact risk. It would make a great subplot for an Opco Boone adventure, in fact.
This extra detail is, therefore simple heft: to the extent it confers upon a firm optionality that the organisation formally and substantively knows nothing about it is, Q.E.D., in no position to exploit that right; if it grants optionality, it is a risk the organisation is short, but is not managing. In either case, the proverbial unknown known: we nod along and hope that, whatever happens, it isn’t significant.
See also
References
- ↑ “The Devil may be in the detail, but God is in the gaps.”
- ↑ With apologies to Daniel Dennett’s “if you make yourself really small, you can externalise virtually everything”.
- ↑ Not even the mythical J.P. Morgan loan reading machine of Susskind fan fiction.