Rumors of the death of the Entity have been greatly exaggerated. They are bringing in the lawyers…
Top US securitisation practice Sidley Austin has secured a high-profile instruction to advise alongside rival Mayer Brown on the cutting-edge $80bn (£38bn) ‘superfund’ designed to restore confidence in the credit markets, as firms look to secure roles on the process.
The fund, created by Citi, Bank of America and JP Morgan Chase, was announced at the end of last month and aims to halt a further drop in market prices by offering to buy assets from structured investment vehicles (SIVs), helping them to avoid dumping securities.
Anyone who has worked on a deal of any size must have wondered at some point what all those lawyers could possibly be doing. The bankers put together the deal. The principals negotiate the gritty details and the final economics. So what are the lawyers doing, other than writing all this stuff down.
It turns out that lawyers like to imagine they are actually adding value to the deal, in part by reducing transaction costs. Now the natural reaction to that kind of statement is: wait, aren’t lawyers a transaction cost in themselves? According to the lawyers, however, they are more than a cost center. They are helping make sure both parties have legally enforceable documentation that reflects their business understanding, which in turn reduces transaction costs arising from fears of misunderstandings, renegging and cheating.
But they would say that. Over at our little brother AboveTheLaw there is a slightly less benign view of what happens when the lawyers start carving up the pie. In this case, the pizza pie.
You and a friend go out to eat, and you decide to share a pizza. Each of you hires a corporate lawyer to negotiate its division.
The piping hot pizza is brought out to your table. Before you can eat it, the corporate lawyers tell you and your friend that they must do their “due diligence.”
You sit at the table, watching the pizza cool, while the lawyers muck around in the kitchen. You hear the clanging of pots and pans.
After an eternity, the lawyers emerge. Your lawyer informs you that, based upon his comprehensive review, he has concluded that this pizza is made of dough, tomato sauce, and cheese.
Your lawyer then warns you about the pitfalls of pizza consumption. You might get heartburn or indigestion. If you’re lactose-intolerant, the cheese might upset your stomach. The pizza may contain trans fats.
Your lawyer adds that, if you eat the pizza too soon after it emerges from the oven, you could burn your tongue. Of course, there’s no danger of that now, since the pizza grew cold a long time ago.
Then your lawyer turns to the lawyer for your friend. It’s time to negotiate. They step outside the pizza parlor and argue, in animated fashion, for half an hour.
The oil on the surface of the pizza is starting to congeal. Your stomach is grumbling audibly.
Finally, the lawyers return. They have concluded that you and your friend should divide the eight-slice pie evenly, fifty-fifty. After each lawyer takes out his one-slice fee, that leaves you and your friend with three cold, soggy slices apiece.