Act III, Scene iv
A Zoom call amongst the thought leaders of Wickliffe Hampton’s inhouse legal operations team. The General Counsel gazes admiringly at his own Insta feed, which consists entirely of touched-up selfies. The Head of Legal Operations silently fumes while the JC, who has managed to elbow his way into what was meant to be a private meeting of important people, will now not stop talking.
- JC: [Winding down] “... so, I ask you: why has the legal industry been so inept at preventing catastrophic risks? There are more lawyers than ever, but we don’t seem to be able to stop anything: Nick Leeson, LTCM, Amaranth, Enron, Global Crossing, Kerviel, Madoff, Bear Stearns, Lehman, LIBOR, Theranos, London Whale, Mossack Fonseca, 1MDB, Wirecard. All our immense legal firepower failed to prevent any of these.”
- General Counsel: [Deploying the “elephants hiding in custard” gambit] Oh, but imagine how much worse it would have been had we legal eagles not been on hand. It doesn’t bear thinking about.
- Head of Legal Ops: [Darkening]: Ah, yes! Well, it’s simple. Lawyers are not proactive enough in looking for it. They do not leverage data properly.
- JC: What?
- Head of Legal Ops: [Gravely] To add value as an in-house legal function we need to use innovative tools to crunch data, proactively spot emerging risks and escalate them to business.”
- General Counsel: [Snapping shut his phone] Yes! That is it! Why don’t we just have a chatbot?
- Head of Legal Operations: [purring] Oh!
- JC: What? But that’s not what I meant at all!
On every disclaimer any financial services firm has ever sent — and ever will send, in the history of the world, until the End of Days — however paranoid, overblown, absurd, weird or wonderful, there will be one constant, ringing reminder: one thing, which, above all the others it will say: “past performance is no indicator of future results”.
So we know this. It is encoded into what we do. But how easily we overlook it.
A cold night in Vienna, 1808
On a freezing night December 1808, about 1,500 people attended an akademie concert at the Theater an der Wien in suburban Vienna. The programme was to be four hours long, during which a young composer from out of town would be debuting a number of works.
The run-up to the concert did not bode well: many of the musicians in theatre’s house orchestra had “conflicting commitments” with a better-paying gig across town at the Burgtheater, and even the solo soprano dropped out at the last minute, to be replaced by an unknown teenager— “I have to hop” is no modern excuse, it seems — and the composer, an irascible fellow, kept changing the music right up to the last minute. So poor were his relations with his musicians that, on some accounts, they refused his baton, and another conductor was drafted in to lead the orchestra on the day of the concert.
The concert was a disaster. What orchestra the organisers could scrape together was under-rehearsed — “lacking in all respects”, according to one reviewer — the poor young soprano suffered stage fright, the hall was freezing and the show badly overran. During one piece in the first half, the orchestra fell apart completely and had to restart from the top.
So why, two hundred years later, is there even a documentary record of this concert — most of Supercheese’s concerts were like that, and there’s no documentary record of any of them — and how has it found its way onto a Jolly Contrarian article about hindsight?
You will not be surprised to hear there is a punchline.
Of the scathing reviews that followed, one at least — in the Allgemeine musikalische Zeitung — was prescient enough to say the following: “To judge all these pieces after only one hearing, especially considering [...] that so many were performed in a row, and most are so grand and long, is impossible.”
To the punchline, then: the young foreign composer was, of course, Ludwig Van Beethoven, and in that one concert he premiered his Symphony No. 6 in F Major (“Pastoral”), his Piano Concerto No. 4, his Choral Fantasia, as well as playing a few choice cuts from his previously performed Mass in C Major. If that wasn’t enough — and surely, the Pastoral, by itself, would be enough: it would make any sensible shortlist of humankind’s highest achievements — after the interval, the orchestra debuted the most revolutionary music, bar none ever written: the Disco Theme to Saturday Night Fever — although then known only as Symphony No. 5 in C Minor.
If the JC could travel back in time — with thermals and a cushion, of course — for one night in all of human history, this is the night he’d choose. Imagine being one of those lucky 1,500 Austrians who heard Beethoven’s Fifth Symphony for the first time in history. There have been few watersheds in the cultural history of western civilisation quite as profound as this one. Western music would never be the same again.
Okay, so, hindsight?
“Hindsight” because I would choose that night, only thanks to the colossal cultural significance imbued upon it by the two hundred years of subsequent history from which we now benefit. The “lucky 1,500” probably found it quite tiresome. You can imagine them complaining to their spouses about it when they got home. To be sure, they may well have — most probably did — come, later in life, to freight that interminable, mediocre performance with a sacred quality, but only in hindsight: one could scarcely apprehend its significance without a context it was, on the night, categorically impossible to have.
This is the human condition, summarised. Only once it has happened — past tense — and often, only months or years after that, can we possibly appreciate the significance of the unexpected.
The category error: providing for the future by reference to the past
This is where my friend the middle manager makes his category error. Data all come from the same place: the past. When we review risks, catastrophes and step-changes; when we consider punctuations to the equilibrium be they fair or foul, our wisdom, our careful analysis, our sage opinions, our hot takes, our thought leadership — all of these are derived from, predicated on, and delimited by data which, when the event played out, we did not have.
And herein lies the tension and profound dilemma of the received approach to modern legal practice. For we commercial lawyers are charged with anticipating the future but we are sent out to battle armed with a methodology drawn exclusively from the past. Just occasionally, this dissonance rears up and hits us, when the formal imperatives of legibility take priority over the logic of common sense. When, say, the financial controller insists she must hold capital against undoubted shortcomings in a contract documenting a transaction that has already matured — a risk that did not come about and no longer can, even though the reporting period rumbles on. That kind of thing.
It is a persistent frame: by the time we get around to analysing any catastrophe and how it played out, all circumstances are known, all options have crystallised and all discretions have hardened. The employee who, with imperfect information and in the fog of war, tacked to starboard when hindsight revealed a safe harbour to port finds himself short an very ugly option which those with executive responsibility for his performance will be mightily tempted to exercise. This is the lesson of Sidney Dekker’s The Field Guide to Human Error Investigations: the executive blames the meatware, because by doing so, it exonerates the executive.
Madoff and catastrophe
What caused the catastrophe — an inquiry one can only launch upstream — forms, informs, and reforms the downstream narrative. Take Madoff: now we have the book, the film, the exposés, the fabulously gruesome congressional committee hearings (see panel) — now we know all that, everything about Madoff’s investment strategy is obviously bogus. How could this possibly have been allowed to happen? There can be only one explanation: someone further down the chain was asleep at the switch.
But were they? This is where the historian’s perspective is more useful than the thought leader’s. We know Madoff’s regulators were not asleep at the switch because we have Harry Markopolos’s testimony that they can’t have been: he kept prodding them in the ribs with a stick and pointing out exactly the anomalies they should have been alarmed by.
it wasn't that the operators were asleep, that is to say, but that their switch didn’t work. something about the narrative frame was amiss. But a maladroit switch is the responsibility of the executive, not the meatware.
GameStop and catastrophe
As of January 2021, we have an opportunity to see this dissonance live, in the wild, before it to ossifies into wise hindsight, with the GameStop phenomenon. Here, “lack of attention to data” is less plausible even than usual because the putative “victims” — hedge fund industry titans: tiny violins, right? — had more data, and more data-processing capability at their disposal than anyone in history. Their opponents, a rag-tag aggregation of retail deplorables coalescing around a Reddit channel, had the network effect and the wisdom of crowds in their corner, but nothing like the computer horsepower nor institutional support of the funds they took down. As I write the situation is ongoing: GME is fighting like a hooked Marlin, but you sense the end is near. But Melvin is down 53% already. Damage done.
A “failure to crunch data” was not the problem here. The problem was a failure of narrative. Part of that failed narrative was the primacy of data. In God we trust, all others must bring data. But will that be the lesson we all learn from this debacle? Like the certain death of a bricks-and-mortar company with an irretrievably broken business model, don’t bet on it.
It is interesting to that when executives appeal for change, for “revolution” — ironic, I know, but I’ve seen it happen — for “a new way of working” they are not talking about the revealed failings of their own narrative — it’s got them where they are, after all, so it can't be all bad — but is upon the inconstant performance of those mortal, expensive, fallible meat-sacks snoozing away at the switch. Thanks to overwhelming confirmation bias, the idea that the switch isn’t working, and it’s the hierarchy supporting the broken switch that is not fit for purpose, somehow fails to occur.
And this is not to mention — no; no: it is still too soon.
- Signal-to-noise ratio
- The SEC general counsel trying to plead executive immunity from testifying before CongressRepresentative Gary Ackerman (now retired) will forever be a Hero of the JC, First Class, for this excoriation.
- Bonn, in northwestern Germany — a long way from the cultural capital of the Austrian Empire.
- I am sorry. I couldn’t resist.
- Anyone interested in Beethoven’s symphonies — and that is, as Hendrix put it, “everybody here with hearts, any kind of hearts, and ears” — should check out Professor Robert Greenberg’s wonderful lectures about Beethoven.
- Sidebar: Thomas Kuhn, the greatest of all philosophers of science, was neither a scientist nor a professional philosopher but a historian.
- His paper to the SEC, in November 2005 —more than three years before Madoff eventually shopped himself (even then the SEC didn’t see it!), was entitled “The World’s Largest Hedge Fund is a Fraud.” If that won’t wake you up, nothing will.