Global Market Turmoil & the Demise of the Hyper-Specialised Capital Markets Lawyer
Ashar Qureshi
Towards the end of the last century, Francis Fukuyama was famously (somewhat mis-) quoted as saying that the end of history had arrived. He was even more famously proven wrong.
Ashar Qureshi
At the beginning of this century, many market participants had convinced themselves that market volatility and the days of boom and bust had come to an end. They were wrong - very wrong.
We are now experiencing global market turmoil unseen since the Great Depression of the 1930s. Almost all market sectors in almost every geographic region are undergoing great stress emanating from the "credit crunch". Key financial institutions such as Lehman Brothers are no more, fraudsters have robbed regulators such as the SEC of their credibility, and governments are finding themselves no longer advocates of privatisation and free markets but both stealth and open nationalisers. Those of us whose livelihoods are tied to the capital markets have seen activity first plummet and then return as episodic frenzy in the interstices of inactivity.
While it is difficult to predict when the capital markets will return to "normal" (I query whether it is ever appropriate to say normal and market in the same breath), reports of the death of the capital markets have been more than somewhat exaggerated. Fundamentally and simplistically, businesses need money, and as long as they need money there will exist an industry that seeks to procure that money for them.
Activity in the capital markets following the crash of 2008 has followed a fairly predictable path. First came the fire sales of collateral and margin stock, often in block trades or other opportunistic transactions and then companies, particularly financial institutions, reverting to their shareholders in rights offerings when no other options - debt or equity - seemed available. Meanwhile, the "very prime" issuers at the top echelons of investment grade sought to raise debt in the public markets, in part to replace credit lines that had disappeared as a natural consequence of bank consolidation.
For small and medium sized enterprises, the capital markets, particularly the debt markets, remain effectively closed. The next wave of activity I would expect would be the return of such issuers to the equity markets, in marketed "old-style" secondary offerings, having determined that meaningful debt access remains closed. While it is dangerous to be a seer, it is hard to see a real return to IPOs or broader credit access until the end of 2009 or early 2010 at best. And even then it is hard to imagine activity returning to the heady days of easy credit, at least not for four or five years, by which time the lessons of the most recent credit crunch may have been forgotten.
Signs of a return to healthier levels of capital markets activity are starting to show but the industry is likely to experience significant change. We are of course going to see a morass of new regulation. Even if one were to take the untenable position that there is no need per se for new regulation, given the events of the past few months, governments must "fix" regulations that appear broken. The new regulatory regimes that will inevitably emerge are likely to share a few universal themes (they do, of course, address some shared problems).
Whether some of the stalwarts of the current regulatory regimes such as the United Kingdom's FSA and the SEC in the United States survive is open to question (I believe that the reports of their deaths are also greatly exaggerated), there will, however, be a renewed enforcement vigour in all regulators dealing with financial institutions and the capital markets. Given the current lack of public affection for the capital markets and financial institutions not only is laxity no longer politically viable but the regimes of light touch regulation are rightly seen as having contributed to our current troubles. Regulators need to be properly resourced in terms of money and personnel; and I envisage greater budgets and greater engagement with regulated institutions.
Regulators and regulation must also address systemic risk. An increase in the capital requirements for financial institutions is an obvious step, but is just one of a several that are necessary. By this I do not mean to suggest that there is a regulatory vacuum that needs to be filled; in fact over regulation remains an omnipresent danger. The current system requires some fine-tuning.
First, we need greater regulatory cooperation both at the national and international level. This requires regulatory unification or consolidation in a single regulatory body. Unfortunately, nationally and internationally the result is all too frequently "lowest common denominator" regulation. Regulators need to adopt a "college of regulators" approach that facilitates the rapid exchange of information and coordinated action.
Second, regulation needs to be driven by substance rather than form. Securities (or other instruments) should be regulated by reference to the risks they pose, and the investors they are marketed to, rather than their notional denomination as, say, loans or bonds or contracts for differences. Similarly, financial institutions or other intermediaries should be regulated according to their function rather than what they call themselves or how they are structured.
The evolution of the regulatory landscape will bring an evolution in the activities of financial intermediaries and lawyers. It is unlikely that we will see a radical restructuring of banks and the banking industry; what we are likely to see is further consolidation, with a small group of dominant "mega" players and the rise of boutique independents. In general, these entities will be more risk averse and certainly more modest in their profit margins.
And as for us lawyers, I fear we too must face muted profits. The route to success necessarily involves continued regulatory oversight. More significantly, while we must serve our clients ever more efficiently, the days of hyper-specialisation and a "commoditised" suite of products are over for both banks and law firms, particularly in the realm of capital markets. As enterprises seek to respond to challenging and rapidly changing conditions, it is "holistic" and not compartmentalised solutions that they will seek.