The Jolly Contrarian

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It works like this:
It works like this:
====The prehistory of law in finance====
Once upon a time there were deals, and banks who did them would engage law-firms to do the legals. Each one of these deals — [[Merger|mergers, acquisitions]], equity offerings, [[bond]] issues, syndicated [[Loan|loans]] — involved parties who didn’t know each other awfully well transferring each other lots and lots of ''[[money]]:'' not merely millions, but ''tens'' or even ''hundreds'' of millions of dollars. Every now and then, even ''billions'' of dollars. 


Once upon a time there were deals, and banks who did them would engage law-firms to do the legals. Each one of these deals — [[Merger|mergers, acquisitions]], equity offerings, [[bond]] issues, syndicated [[Loan|loans]] — involved transferring lots and lots of ''[[money]]:'' not millions, but ''tens'' or even ''hundreds'' of millions of dollars. Every now and then, even ''billions'' of dollars. 
Two rather obvious observations:  
 
*Firstly, if you are funnelling hundreds of millions of dollars around the financial system to randoms, things quite easily can go wrong, and when they do go wrong, they go ''badly'' wrong. Just ask [[Citigroup v Brigade Capital Management|Citigroup]].  
Now, observe two rather self-evident things: firstly, if you are firing hundreds of millions of dollars around the financial system to random third parties, things can go wrong quite easily, and when they do go wrong, they go ''badly'' wrong. Just ask [[Citigroup v Brigade Capital Management|Citigroup]]. Secondly, a very small percentage of “a couple of hundred million dollars” is still a very large amount of money, even if you charge out at £400 per hour.<ref>In 1990 pounds. The going rate at the time of writing, displaying a sustained immunity to gravity and the general principles of mean reversion, is more like £1,000.</ref>  
*Secondly, a ''very small portion'' of “a couple of hundred million dollars” is still a ''very large sum'' of money, even if you do charge out at £400 per hour.<ref>In 1990 pounds. The going rate at the time of writing, displaying a sustained immunity to gravity and the general principles of mean reversion, is more like £1,000.</ref>  
 
Therefore bankers, who themselves might collect as much as ''seven'' percent of the value of a deal, would quite happily expend say ''one'' percent of the value of the deal, on decent firm of lawyers. After all, the lawyers wind up doing most of the hard yards, churning out thousands of pages of [[verbiage]], often much of the time running down quixotic ideas, accommodating spurious considerations and regularly working through the night generating needless “turns” of the documents to accommodate some artificial deadline imposed by uncomprehending analysts who would then, when it was met, routinely ignore the draft for the next 48 hours. 


Therefore bankers, who themselves might collect as much as ''seven'' percent of the value of a deal, would quite happily expend say ''one'' percent of that value, on a decent firm of lawyers to make sure nothing went wrong. After all, the lawyers usually wind up doing the hard yards, churning out thousands of pages of [[verbiage]], running down quixotic ideas, accommodating spurious considerations and regularly working through the night generating needless “turns” of the documents to accommodate an artificial deadline imposed by uncomprehending analysts who would then, when it was met, routinely ignore the produced draft for a couple of days before opining  that the deal had changed anyway and this draft could be junked. 
====The rise of the [[Magic circle law firm|magic circle]]====
So was born the [[Magic circle law firm|magic circle]], which has been with us since at least the time of the [[First Men]], and even before them to the primordial pagan era where the [[Children of the Forest]] roamed the [[Bretton Woods|Woods of Bretton]]. The game was this: we will over-turn heaven and earth to document whatever you require us to document, by whenever you want us to document it, with two considerations: firstly, our opinion will disclaim all practical responsibility for any of the stupid things you made us put in the documents, and secondly, and more importantly, you pay us handsomely, by the hour for doing so. Our service is blood, sweat, toil and tears in the pursuit of whatever entertains you. Yours is to pay us through the nose for it.  
So was born the [[Magic circle law firm|magic circle]], which has been with us since at least the time of the [[First Men]], and even before them to the primordial pagan era where the [[Children of the Forest]] roamed the [[Bretton Woods|Woods of Bretton]]. The game was this: we will over-turn heaven and earth to document whatever you require us to document, by whenever you want us to document it, with two considerations: firstly, our opinion will disclaim all practical responsibility for any of the stupid things you made us put in the documents, and secondly, and more importantly, you pay us handsomely, by the hour for doing so. Our service is blood, sweat, toil and tears in the pursuit of whatever entertains you. Yours is to pay us through the nose for it.  


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As the roaring nineties wore on, the deal pipeline grew ever fatter. [[The Jolly Contrarian:About|Aspiring young contrarians]] started arriving in London from all sorts of far flung places, wanting a piece of the action. Law firms hired them without question, supposing (for the most part rightly) that they would work like Spartans for a couple of years, expect a pittance in [[compensation]], and bugger off home to spend the rest of their lives pleasure-boating on Auckland harbour and kicking the crap out of the rest of the world at Rugby Union.  
As the roaring nineties wore on, the deal pipeline grew ever fatter. [[The Jolly Contrarian:About|Aspiring young contrarians]] started arriving in London from all sorts of far flung places, wanting a piece of the action. Law firms hired them without question, supposing (for the most part rightly) that they would work like Spartans for a couple of years, expect a pittance in [[compensation]], and bugger off home to spend the rest of their lives pleasure-boating on Auckland harbour and kicking the crap out of the rest of the world at Rugby Union.  
 
====The weaponised legal department====
The bankers did start to wonder whether they couldn’t rationalise that legal spend: “the less we spend on legals,” they reasoned, “the nicer our German cars will be.”  One obvious touchpoint was the hand-off between the bank and the law-firm. “Why don’t we hire some lawyers to manage that legal relationship? If they filter out all the stupid questions, and head off the wild goose chases, we won’t burn so much in legal fees. We will encourage them to work for us by paying them an investment banking bonus, and letting them go home at 6pm.”
The bankers did start to wonder whether they couldn’t rationalise that legal spend: “the less we spend on legals,” they reasoned, “the nicer our German cars will be.”  One obvious touchpoint was the hand-off between the bank and the law-firm. “Why don’t we hire some lawyers to manage that legal relationship? If they filter out all the stupid questions, and head off the wild goose chases, we won’t burn so much in legal fees. We will encourage them to work for us by paying them an investment banking bonus, and letting them go home at 6pm.”


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But at the same time, the [[Legal|legal department]] started to get really ''big''. Teams that had numbered a handful in 1995 were running into the hundreds ten years later.
But at the same time, the [[Legal|legal department]] started to get really ''big''. Teams that had numbered a handful in 1995 were running into the hundreds ten years later.
 
====Here come the management consultants====
With the encroaching modernist orthodoxy of management by margin grew, it was inevitable that the bean-counters would get involved. And so they did, a bit tentatively after the dot.com bust and the [[Enron Corporation|Enron]] collapse, but they started to find their line and length in the wake of the [[global financial crisis]].  
With the encroaching [[modernist]] orthodoxy of management to margins grew, it was inevitable that the bean-counters would get involved. And so they did, a bit tentatively after the dot.com bust and the [[Enron Corporation|Enron]] collapse, but they started to find their line and length in the wake of the [[global financial crisis]].  


“We seem,” they wryly noted, “to be spending a ''shit''-ton of money on lawyers, and it doesn’t seem to have done a lot of good. We now have an internal team of three hundred legal eagles costing us one hundred million dollars all told and, added to that, we are spending half a billion on external legal firms. And everything still seems to be blowing up. Can we not ''do'' something about this?
“We seem,” they wryly noted, “to be spending a ''shit''-ton of money on lawyers, and it doesn’t seem to have done a lot of good. We now have an internal team of three hundred legal eagles costing us one hundred million dollars all told and, added to that, we are spending half a billion on external legal firms. And everything still seems to be blowing up. Can we not ''do'' something about this?
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