Live, From Tsinghua University, It’s Saturday Night!
Okay, just about everything in the title is false, except that I have been at Tsinghua University, in Beijing, to present a talk entitled “Enron Rerun: The Credit Crisis in Three “Easy” Pieces.” [ Download file]
Every year, Tsinghua, which partners with Temple’s China LLM program, puts on an international conference on corporate or commercial law. This year’s theme: Corporate Restructuring. Speakers from around the world (but mostly Asia) gathered to talk about everything from bringing the ineffable elegance of the reverse triangular merger to China to the scourge of needless transactional complexity.
Organized by Tsinghua Professors Wang Baoshu and Zhu Ciyuan, speakers included Helmut Kohl (University of Frankfurt); Professor Chih-Cheng (Spencer) Wang (National Chung Cheng University (Taiwan)); Professor Len-Yu Liu (Chengchi University, Taiwan; Professor Alain Couret (Sorbonne); Jennifer Hill (Sydney University); Daniel Ohl (Orleans); Nicholas Howson (Michigan) and Daniel Kleinberger (William Mitchell).
Kleinberger’s paper was especially interesting to me, as it was on the problems inherent in what he considers needless transactional complexity. His examples of this complexity involved things like dual entity citizenship and the phenomenon in LLC law of permiting “series” to subsist as distinct legal entities (at least for certain purposes) within a larger LLC. He could, of course, just as easily have talked about the role that arguably needless complexity played in the current credit crisis.
Fortunately for me, he didn’t, so I had something to talk about.
My talk was pretty much what it sounded like. Today’s crisis can be seen as Enron writ large, as both have been dominated by (1) needlessly complex trsactions, (2) regulatory and investor complacency; and (3) unchecked conflicts of interest. The affirmative claim—and this is the hard part—is that complexity played a material role in facilitating the complacency and complexity that produced both debacles. The talk as presented doesn’t get into this question in detail (I had only 10 minutes). But the basic point is that we’ve used complex contracts and entity structures to facilitate (or mask) all sorts of bad behavior, for a variety of reasons.
If I get a real paper out of this, it will have to address some of the following problems:
(1) What do I mean by “complexity”? Contracts with lots of words? Deals with lots of contracts? Lots of choices (options) embedded in the deals? Lots of entities?
(2) Assume for the moment it is possible to define complexity: What’s so bad about it? Don’t parties willingly choose it? And doesn’t complexity really just represent the advance of legal technology? Concerns about complexity might be equivalent to concerns about the development of the microcircuit.
(3) Even if I am correct that complexity was a screen to mask self-dealing, what exactly would we do about it? Even if you could distinguish a (bad) complex transaction from a (good) simple transaction, what would you do to alter it? What is the regulatory response to complexity?
(4) If it is a problem, won’t excess complexity cure itself? We know that this is not the first time in history that transactions and structures were comparatively complex. The trusts that grew up around the railroads and the rapid development and aggregation of assets and rights throughout the late 19th and early 20th century reflected tremendous complexity. The ultimate response was, in part, a drastic reduction in deal activity generally (the Depression). This produced much simpler transactions. Won’t the market for legal technology correct itself here, as it (arguably) did in the past?
(5) If complexity is a problem, what besides disclosure is the solution? If disclosure is the cure, isn’t it really just more of the disease? After all, there is no claim (at least not yet) that MBS/CDO issuers were concealing the real risks of loss. From what we know, the securities disclosures were likely to have been adequate. The deals may have been too complex to fully understand (or investors over-relied on ratings, etc). But would more information have made them less complex? Arguably not.
In any case, I’d welcome comments on this.