Who wants to be a macro lawyer?

LinkedIn will occasionally send me an email with job picks tailored to my profile. Recently, one grabbed my attention—Barclays is looking for a “macro lawyer.” Here’s the ad:

As a Barclays Macro Lawyer you will provide legal support and legal and reputational risk management to the Macro (Rates and FX) business units in EME. You will be responsible for legal coverage for the Macro businesses (and associated workstreams) and you will manage and co-ordinate interactions with other Markets lawyers / product expects (as applicable) for the purposes of leveraging their product experience and expertise.

I posted about this ad on Twitter. Someone who worked in a similar capacity suggested this was just a position for a regulatory lawyer dealing with currency derivatives. Barclays recently combined its European rates and currency business into a new “Macro Hedging” unit, so it made sense to call the legal role at this unit a Macro Legal role.

But should the term ‘Macro Lawyer’ be confined to regulatory lawyers dealing with currency derivatives? Or can we think of Barclays’ ad as a harbinger of a growing demand for Macro Lawyers? The way banks think about their business affects how their law firms think about theirs. In the future, I would not be surprised to see more LinkedIn ads for Regulatory Lawyers dealing with currency derivatives replaced with ads for Macro Lawyers. But then, I do not think that’s likely.

Here, I am more interested in whether it makes sense to use the label to refer to a broader group of lawyers? Who would that cover? One way to answer this question is to say who the label would not apply to – let’s call them Micro Lawyers. Micro Lawyers are lawyers who would benefit from elementary knowledge of microeconomics in their work. For example, antitrust lawyers are Micro Lawyers! You cannot do antitrust law without an elementary understanding of microeconomics.

Transactional lawyers are micro lawyers, too, even though they probably do not think about themselves as such. Years ago, Ronald Gilson and Rainer Kraakman called lawyers “transaction cost engineers.” It’s a good term for Micro Lawyers! They engineer transaction costs when they advise their clients on how to structure their business. Tax optimization would be part of transaction cost engineering. Lawyers also engineer transaction costs by developing and working with standardized contracts. A regulatory lawyer dealing with currency derivatives will rely on standardized contracts, such as the ISDA Master Agreement. To my mind, such a lawyer is a Micro Lawyer. She’s a micro lawyer in the sense that the knowledge of macroeconomics would not help her that much in her work!

But then, there are some lawyers for whom it would be helpful to have such knowledge. I will refer to such lawyers as ‘Macro Lawyers.’ An excellent example of a lawyer who would benefit from a good knowledge of macroeconomics is… Christine Lagarde? She’s a lawyer! She was the managing partner at Baker McKenzie in Paris before becoming the Managing Director of the IMF. Now she is the president of the European Central Bank.

How about Jerome Powell, the chairman of the Board of the Federal Reserve? People know about his investment banking career, but Powell is a lawyer by training, obtained his J.D. from Georgetown and clerked for a federal judge in the Second Circuit. He later worked at Davis Polk and the Treasury under Nicholas Brady, the author of the famous Brady plan of debt-reduction for developing countries. Between 2010 and 2012, Powell was also a visiting scholar at the Bipartisan Policy Center, a think tank in Washington, D.C., where he worked on getting Congress to raise the debt ceiling during the debt-ceiling crisis of 2011. This all sounds very macro, does it not?

Sure, Lagarde and Powell are outliers – few lawyers will end up having such prolific careers in macro. But less prolific macro careers are also possible! I would argue that all legal practitioners that have something to do with money and credit should be thought of as macro lawyers. This would include lawyers involved in central banking, macroprudential supervision, sovereign debt and international trade and capital flows. Typically, lawyers working in those areas, at institutions such as the ECB, the Fed, the IMF, WTO tend to perform legal tasks isolated from policy, but that is a mistake? Macroeconomic policymakers would benefit tremendously from a better understanding of the institutional structure of the financial system and the economy. Lawyers are uniquely equipped to convey such knowledge to them.

Onur Özgöde, a sociologist studying finance, recently made an interesting point on twitter, noting

Nobody saw 2008 coming bc our governing institutions believed there was no need to understanding the institutional structure of the financial system on which econ depended. One Fed economist told me he wanted to study the mortgage market in 06 but wasn’t allowed.

I think this is exactly right, even though things changed a little after 2008. The debate about repo and derivatives safe harbors, which bankruptcy lawyers largely initiated, is an example of Macro Lawyers' potential influence on macroeconomic policymakers. The debate was among the rare instances in which central bank economists showed an interest in the law even though the debate never translated into meaningful reforms.

The research conducted at the IMF’s Monetary and FX division under the directorship of Peter Stella is another excellent example. Stella gave the green light to several economic researchers to focus their work on things like collateral. The work by Manmohan Singh that came out of this mandate is cutting edge and underappreciated. I highly recommend it.

The examples of macroeconomists interested in the law are few, but examples of lawyers interested in macroeconomics are many. Suffices to mention the pioneering work on law and macroeconomics done by Yair Listokin, the scholarly contributions of Morgan Ricks, Robert Hockett, Anna Gelpern, Rohan Grey, Lev Manad and so many others, which, collectively, are indicative of a growing academic recognition of the utility (sic!) of thinking about the law like a macroeconomist (of sorts).

Law students also benefit from exposure to macroeconomic theories (of various kinds). Katharina Pistor, professor at Columbia Law School, perhaps the leading macro lawyer of our time, made that point nicely in her recent provocative interview with my local newspaper, De Groene Amsterdamer (in Dutch). Pistor observes that in contemporary transactional and regulatory practice in her area of interest, finance, the lawyer’s role has increasingly become that of insulating investors from liability, a quintessential microeconomic consideration. No one in transactional or regulatory practice is concerned with the macroeconomic consequences of overleveraged households.

Of course, it would be naïve to think that lawyers active in transactional or even regulatory practice could somehow, through their knowledge of macroeconomics, bring macroeconomic considerations into the view of the parties involved. At the end of the day, we should not particularly care about who staffs finance deals or, for that matter, the legal desk of the Macro Hedging division at Barclays. But we should not be indifferent to the macroeconomic competencies of lawyers active in policymaking, regulation, advocacy, and judiciary.

Crypto and Buddhism

How is your crypto portfolio doing? In the last month, the value of Bitcoin, the most famous cryptocurrency, dropped by 28%, from $42 000 to $32 000. Other crypto assets have also decreased in value considerably. Over the past weeks, tens of thousands of trading accounts got liquidated. Crypto winter is upon us, it seems.

Not all of us, though! It’s always sunny in El Salvador. Nayib Bukele, the president and self-proclaimed CEO of the country who, for months now, has been using the country’s cash reserves to buy Bitcoin, is doubling down on the cryptocurrency. On January 21, Bukele purchased another 410 Bitcoin for $ 15 million. As the price continued to fall in the following days, Bukele changed his Twitter profile photo to an image showing him wearing the uniform of a McDonald’s employee.

Wouldn’t you be all tongue-in-cheek in his position? To Bukele, trading Bitcoin is all game, no skin. Ok, he has some skin politically, I guess, but not financially. He’s trading with other people’s money! Why would he care about crypto winter?!

One reason is… the International Monetary Fund? The IMF is currently contemplating a loan to the struggling Salvadorian economy, which introduced a law making Bitcoin legal tender last year. Last week, the IMF’s Executive Board responsible for the negotiations made a statement stressing that “there are large risks associated with the use of bitcoin on financial stability, financial integrity and consumer protection, as well as the associated fiscal contingent liabilities.” They urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status. (They did not say anything about the Bitcoin trades, though!)

Anyway, the main point I want to make here is that illusional things can have real consequences! Case in point Sandcastles: Buddhism & Global Finance, a 2003 documentary by Alexander Oey. In the movie, Tibetan teacher Dzongsar Khyentse Rinpoche, American sociologist Saskia Sassen, and Dutch economist Arnoud Boot talk money, reality and compassion. The main take away from the film seems to be that capital markets exist within a system based purely on self-interest, in which herd behavior, often based on rumors, can inflate or destroy the value of companies – or whole economies – in a matter of hours. Sassen comments about global capital: ​“It’s not that there are $83 trillion (the figure would be closer to $118 trillion these days-MKB). It is essentially a continuous set of movements. It disappears and it reappears.”

The film came out shortly after the Asian Financial Crisis that gripped much of East Asia and Southeast Asia beginning in July 1997. Thailand was among the countries most affected with the stock market losing 75% of its value in the matter of months. In the United States, the burst of the dot-com-bubble of the early 2000s erased $5 trillion of value in stock market capitalization. A few years after the film was released, the Global Financial Crisis of 2007-08 nearly brought down the global economy following the decrease in value of residential real estate in the United States, which backed trillions-dollars worth of financial instruments.

What does this have to do with Bitcoin? Bitcoin may seem illusional, but also it is not? Goldman Sachs recently noted that the value of digital assets has become corelated with broader economic trends. Bitcoin may seem illusional, but it can have real consequences! We just don’t know yet what they could be.

Dividend recaps recap

Whenever a company seeks financing and approaches bankers to arrange for it, it has to be pretty clear about what it needs the money for. I say 'pretty clear' because the market has developed generic labels meant to describe the purpose of financing. You will find them in the 'use of proceeds' section of offering memoranda or term sheets. So the company can say "we are going to use the money to finance an acquisition of XYZ", which is pretty specific but they can also say "we are going to use the money to finance for general corporate purposes", which is less specific and can really mean anything.

One interesting use of proceeds is for dividend recapitalization. In a dividend recapitalization the money is borrowed, at least in part, to pay dividends on the company's stock. This is an interesting use of borrowed funds because, in theory, dividends are a distribution of income earned. If you're paying out dividends out of borrowed funds or capital, this suggests you're not doing all that well, which is maybe is not the signal you want to send to your investors. But, hey, if that's what you want to do as a company, there is generally nothing to prevent you from doing so.

(I say generally because there are some legal restrictions on paying dividends out of capital and there could be contractual restrictions in your covenants under your other debt instruments, but if you're planning to dividend up some cash out of borrowed money and you have run your covenant analysis through your counsel, then - as the nice British expression goes - Bob's your uncle.)

It looks like this is something that SoftBank’s Vision Fund is trying to do. The FT has a story today about the fund's plans to borrow $4bn against its stakes in Uber, Guardant Health and Slack. The loan will be structured as a margin loan meaning that if the value of collateral drops, the fund will have to put down more cash. While this is a risk, this is pretty much the only risk for the fund. One of the nice things about margins loans is that the banks do not get recourse to the borrowers' other assets. This means the loans are not factored into SoftBank’s credit ratings. And isn't that great.

Now, why is the fund doing this, if this is such a bad signal? There are two answers.

First, in some cases it may not be such a bad signal at all. In fact, in some cases it may actually be a good signal. If you're invested in a high-risk fund, like Vision Fund, and you're getting a decent dividend, even if the underlying assets are not turning a profit, this can be pretty reassuring if you're with the fund for the long-run. For example, while Uber is not a profitable company, the fund, a big shareholder in Uber, still made a profit on its investment after the IPO. However, it cannot access it because prior to Uber's IPOs, Uber's shareholders were asked to sign so-called lock-up agreements preventing them from selling their stocks for a certain period. So the margin loan is really a way of capturing that profit, which certainly appeals to short-term investors in the fund, but I guess also to long-term investors as well?

But if you're with the fund for the long run, you may still be concerned about the prospect of the find if you consider that your nice dividend is really a product of clever financial engineering enable through low interest rates. The loan reportedly carries an interest rate of 150 basis points over Libor. That seems awfully low considering how much risk the collateral carries. While it could be that the rate is low, because the covenants are tight, but, let's face, that's unlikely. Instead, it's just the result of the fact the interest rates are low. Which brings us to the second reason why the fund may want to do this even though it could be interpreted as a bad signal - they do it because they can. If the money is cheap, then why not? In fact, dividend recaps have become a common use of proceeds in this environment, which maybe is good or maybe not but definitely something macroeconomist should look into because it seems to have clear implications for productivity and growth.