The history of inhouse legal

The day the eagle squad came to town.

This instalment we’re going in deep with the legal eagles, folks, to look at the rise and rise — and melty wings under a hot sun maybe the forthcoming fall — of the inhouse banking legal eagle.

Prehistory

Once upon a time, there was hardly such a thing as an in-house legal department in a bank at all. There was one, but it was a sleepy area in the basement, rather like a library, populated by a handful of damp introverts who would quietly prepare board minutes and maintain the firm’s register of charges. Their idea of a business trip was an excursion to companies house to be rebuffed when trying to file a Slavenburg.

Now, at the time, banks did big, clunking deals. These transactions — mergers, acquisitions, equity offerings, bond issues, syndicated loans — were big, risky affairs, involving parties who weren’t well acquainted sending each other pots and pots of money: not just millions, but tens or hundreds of millions or, every so often, billions.

Now, if you are regularly funnelling hundreds of millions of dollars around the financial system, things easily can go wrong and, when they do, they go badly wrong.

Also, a very small portion of a couple of hundred million dollars, when you look at it next to, say, a nice house in Surbiton, is still a very large sum of money.

Therefore bankers, who themselves might collect as much as seven percent of the value of those big, clunking, multi-million dollar deals, would quite happily spend say one percent of that value on a decent firm of lawyers to make sure nothing went wrong. Meanwhile, the ashen men and women of the in-house legal team were hardly involved, at least until it came time to have a charge registration rejected.

Lawyers at these firms found they could name a preposterous hourly rate and the banks would not blink.

After all, work needed to be done, and it was the lawyers who would usually do the hard yards, churning out thousands of pages of verbiage, running down every quixotic idea, accommodating every spurious risk factor, war-gaming every nightmare market that the issuer’s finance director could confect. The lawyers regularly worked through the night to meet an artificial deadline imposed by a junior analyst who, when it was met, would ignore the proffered draft for a couple of days before advising, without remorse, that he’d forgotten to mention the deal changed Thursday last, and the document, which had been knocked out in lieu of a long-planned anniversary dinner, wasn’t needed in the first place.

The rise of the magic circle

Forged of these fires was the magic circle of global, originally British, law firms: a secret society¹ which has been with us since at least the time of the First Men and, yea, even unto the primordial pagan era before them when Children of the Forest roamed the Woods of Bretton.

The business model of the magic circle firms was a simple form of intellectual rope-a-dope: we will turn heaven and earth to document whatever you require us to document, whenever you want it, with two considerations: firstly, our legal opinion will disavow responsibility for all the stupid things you made us put in the documents, and secondly you will pay us handsomely, by the hour, without question, for doing so.

Our end of the bargain is our blood, sweat, toil and tears, expended in the pursuit of whatever hare-brained intellectual contrivance should catch your fancy. Yours is to pay, through the nose, for the privilege.

Since, in the context of a two-hundred million dollar deal, whatever we ask you to pay us will be a drop in the ocean, everyone wins.

For many years, this state of affairs was all fine and capital: everyone clipped their ticket, lived prettily and maintained nice homes in the stock-broker belt to and from which they commuted each day in late-model German cars. Inhouse legal barely got a look-in, except to trot along to companies house every now and then to have a Slavenburg rejected. It was the corporate end-clients who paid for it, after all, and since their executives were commuting from the same stock-broker belt in the same sorts of cars as the bankers, they weren’t any more bothered about it than anyone else.

As the roaring nineties wore on, the deal pipeline grew ever fatter. Fortune-seeking young contrarians started pitching up in London from all sorts of far flung places clutching foreign degree certificates and the switchboard number for Robert Walters. Law firms hired them — us — on the spot, rightly supposing they would work like Spartans, expect little by way of pay, and bugger off after a couple of years. A handful stayed, mainly for the cricket.

The rise of the weaponised legal department

Still, as the deals came through ever faster, and the legal bills got ever bigger, the bankers began to wonder whether they could rationalise that legal spend a bit. “Perhaps we could be a bit more economical here,” they reasoned. “And the less we spend on the legals, the nicer our German cars will be.”

An obvious friction-point was the hand-off between the bank and the law-firm. It was clunky: bankers and lawyers don’t really speak the same language: Bankers communicate in spreadsheets, lawyers in turgid memoranda.

“Why don’t we hire some lawyers of our own to manage the legal relationship?” thought the bankers. “If they filter out all our stupid questions, and maybe head off some of the wild goose chases, we won’t burn so much legal expense. And our name will be spelled right on the football team, too: that’s pretty important.”

And so the bankers started to hire lawyers from the law firms. Again, everyone won: the bankers got their bigger cars; the firms could parachute under-performing associates into the banks where they could steer deal-flow back to their almae matres, the associates got investment banking bonuses and got to go home at 6pm.

Heroic associates who liked being beasted till 5am and working weekends stayed at their law firms, became equity partners and cultivated aneurysms etc. But aneurysms are not for everyone. In-house life had its moments, but it was a lot less of a slog, and you got to kick law-firm associates around. Of those who went in-house, few returned to law firms.

So began the modern in-house legal team. This worked well for everyone: deals got done more efficiently, the embarrassing sensation of seeing your firm’s name misspelled in the final prospectus disappeared from the commonplace and banks started to structure ever more elaborate deals, as the cost and capability of legal structuring inside their organisations mushroomed.

The in-house legal eagles, it transpired, weren’t so useless after all. They started to understand their organisations and the business rationales, and found they could do more than just steer instructions back to law firms, translate banking gibberish and check the football team. They started to add value. Banks hired more legal eagles.

But now the banks’ legal departments started to get really big. This was a direct consequence of the wish to reduce external legal spend. The better staffed you were, the less you spent. Within ten years, in-house teams that had numbered a handful were running into the hundreds.

Here come the management consultants

All good things must die, and as the encroaching modernist orthodoxy of managing to margins gripped the city, bean-counters turned their attention to the scale of these legal activities. Which, by 2005, was colossal.

The sunk cost of legal — pay and perks for four hundred internal lawyers, and the external legals on your massive pipeline of mergers, IPOs and CDOs going out the door, was in the high hundreds of millions of dollars. By the early 2010s, rocked by litigation and regulatory action in the wake of the financial crisis, most global banks’ legal overheads were running into the billions.²

Remember our obvious observation above: a very small portion of a colossal number is still a very big number. If you can knock even five percent out of a billion dollar run-rate, you are going to look like fifty million bucks of hero.

Some business analysts arrived, intent on becoming heroes.

“We seem,” they noted, “to be spending a ton of money on lawyers, and it doesn’t seem to have done us much good. We took a bath on Russia, Enron, WorldCom, and now half the known financial universe has imploded. We seem to have an internal team of three hundred legal eagles, and 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?

Thus began Zarathustra’s down-going.

When you’ve been spending money like it comes out of a tap, it isn’t hard to look like a hero: you just turn off the tap. It helps when deal flow is flat-lining and the litigation portfolio is winding down by itself, but still: credit where it is due: the consultants cut the legal spend by twenty-five percent, annually, over four or five years. That’s a lot of hero.

The role and influence of these analysts grew: at first, it was an MBA with the title “chief of staff”. Then she became “legal chief operating officer”. Now the team has its own budget and the same kind of hiring mandate the legal department itself had fifteen years earlier, and calls itself “legal operations”.

It is a deft re-brand: “chief of staff” sounds like, and was, a kind of retired military adjutant who ran the CPD program and no-one took seriously. “Chief operating officer” sounds a more organised attack on the freedom and profligacy of the professional class. But “legal operations” sounds like a factory: a long-term industrial undertaking that is intended to displace the artisanal weavers and will be here for good.

In this way the great retrenchment of in-house legal began, and for ten years kept pace. Much low-hanging fruit was picked. But eventually, legal spend was collared, and opportunities to eek out cost dried up.

Next time: Can legaltech save the day?

Interludes

The “Slavenburg”

Proof that the kids of today are lucky.

The practice of modern financial law may be inane, tedious and confusing, but at least you don’t get sent to Companies House to file something with the express intent of having it thrown back in your face because you didn’t need to file it. This was a work-a-day experience for a young clerk in the last — and by that I do mean the 20th —century.

Successive UK Companies Acts required those benefiting from security interests granted by UK companies to be register them at Companies House. You had exactly 21 days from the date of delivery of the deed creating the charge to do it, on pain of your security being rendered finally, fatally, and irrevocably void. Should you have been the one so lacking in the fastidious qualities all solicitors must have as to forget, your own sorry hide would be summarily executed by the staff partner, after a brief show-trial. All excellent fun.

Now before about 2011, you also had to register charges against foreign business with a UK “place of business”. Since no one knew what that meant and, by any lights, it could change over time, stripling clerks were shunted off to Companies House weekly to register charges against any foreign company, including those without a hint of a UK dimension, and indeed those (UK tax-sheltering espievies for example) that owed their utter, abject existence to not, in their weakest moment, having the merest fleeting conception that they might one day have a place of business in the UK.

This was also a tremendous jolly, and articled clerks would come home gleefully clutching a letter from matron politely explaining that registration of the charge wasn’t needed, wasn’t wanted, but nonetheless acknowledging young sir had made this foolhardy attempt to do it all the same, and had been stoutly rebuffed at the door.

By way of plausible deniability, Companies House ran an ad hoc register of these failed charges, just in case anyone — a staff partner in urgent need of letting off steam, for example — should later challenge such a charge as being unregistered without good cause. The vibe was this, for poor young Dodger, back at the dosshouse: I TRIED TO REGISTER THE DAMN THING. WHAT ELSE WAS I SUPPOSED TO DO?

Sadly all now defunct — the Slavenburg met its Waterloo in the UK Overseas Companies (Execution of Documents and Registration of Charges) (Amendment) Regulations 2011 and, if that didn’t do it, for we financial markets folk, the Financial Collateral Regulations had, since 2003, rendered it a dead letter anyway.

The Children of the Forest

As you know, we like to explore the mythical origins of banking every now and then.

The Synthæse, or Children of the Forest, were a prehistoric proto-civilisation of woodland sprites and hippies; a kind of peaceable pre-derivative, banking people, largely unconcerned with material wealth but blessed with a preternatural gift for option pricing. They roamed the moors and fens of England semi-naked in the time before the alliance of men and elves, eschewing all earthly rancour, regarding physical settlement of disputes as sinful and instead voluntarily exchanging their differences in a standardised, non-physical, “synthetic” terms³ across a centralised marketplace.

Alas, they modeled their delta by using profoundly flawed value-at-risk techniques and wildly miscalculated their exposure to the First Men, a marauding race of mercenary derivatives salesmen from the ancient doomed cirty of Salomoné, who it is said, wiped them out in the late 1980s in one big bang, but not before they left behind traces of their enlightened methods of exchange which the First Men hungrily adopted when, in the fires of the Iron Mountain, they forged the One Agreement out of the remnants of the 1985 ISDA Code and an old LMA template and the Cross Default clause, which still afflicts the ISDA Master Agreement to this day.

In other news

Farewell

Mikis Theodorakis, prolific Greek composer credited with over 1,000 works, none more memorable than slowly accelerating bouzouki theme from Zorba The Greek, surely, with Hava Nagila and Come On Eileen, among the great folk tunes to get a party started.

Angry Goats

As you know we like footage of misbehaving ruminants, so thanks to our regular correspondent Elizabeth de Stadler, for bringing this grumpy goat to our attention. Our kind of goat.

That’s all for this instalment folks — we’ll be back next time to look at how legal technology is transforming the legal landscape in legal departments.

I bet you can’t wait!

Olly

1. It isn’t a secret society.

2. The CPP research firm estimated global banks spent a combined $200 billion on legal fees in just four years, between 2010 and 2014. That buys quite a few chicken dinners.

3. The greek word συντίθημι, from which is the root of the name Synthæse, means “to bring together in one place” (from συν- (“together”) + τίθημι (“set, place”)).