The banking world may be plunging ever deeper into chaos, but for banking and regulatory lawyers the times have certainly been tougher.
After ;the ;Government announced last week that it would insure portfolios of loans, the Financial Services Authority (FSA) mooted tighter regulation to force banks to build up capital reserves.
Either scenario will create a raft of legal work, but perhaps most surprisingly it is the structured finance lawyers who could stand to benefit the most.
“One of the strange things about this is that almost everything that’s been done thus far has created work for structured finance lawyers,” says Clifford Chance regulatory partner Simon Gleeson. “The conventional wisdom is that securitisation work has virtually stopped, but these lawyers have been as busy as bees.”
To date, structured finance lawyers have been repackaging loans to be used as part of central banks’ liquidity facilities. Even more work could be generated under the terms of the new Government bailout.
According to one magic circle partner, the bulk of the legal work to come out of the bailout scheme will be manufacturing the pools of assets banks will need to put before the Government for guarantee. For Gleeson, this
can only mean one thing – an avalanche of work for structured finance lawyers. Supposing banks are keen to sign up to the scheme, that is.
“What’s happened here is that the structured finance market has come roaring back to life but with the Government as the only buyer,” argues Gleeson. “There’s a lot of work to be done to build the portfolios. In many respects it’s similar to doing due diligence for CDOs [collateralised debt obligations] because you’ve to go through the assets one by one. On top of that there’s the filter to check if it’s the kind of asset the Government will guarantee.”
Clearly, this is good news for structured finance lawyers, but with FSA chairman Adair Turner claiming that parts of the regulatory system are “seriously deficient”, regulatory lawyers are also gearing up for an onslaught
Herbert ;Smith ;financial services regulation senior consultant Karen Anderson says Turner has clearly set out that the UK agenda will be focused on introducing counter-cyclicality to the banking system by upping capital requirements.
While Anderson believes this is to be welcomed, Gleeson argues that the measures could do little to stimulate the economy in the foreseeable future.
“There does seem to be a dangerous flaw in the FSA’s thinking, in that it appears to be saying the solution to everything is higher capital requirements,” Gleeson says. “It seems obvious that, if the banking sector doesn’t have enough capital now, capital requirements were too low in
“The problem is that the FSA is potentially in danger of making a mirror image of the mistakes the banking sector made: it underestimated the downside it was facing, and so underestimated the amount of capital it needed.
“The FSA may overestimate the risks the banking sector may face in the future, then overestimate the amount of capital required. The problem is that it reduces the banks’ ability to grow and create more assets, and that will reduce the prospects of economic recovery.”
That said, Anderson’s Herbert Smith colleague, regulatory partner Patrick Buckingham, points out that it will be some time before any regulatory changes actually take place.
“At the moment we’re operating at the level of speeches by regulators and are waiting to see what they do in specific terms,” he says. “What’s more real is that, if you’re a large institution regulated by the FSA in London, you’ll be dealing with them every day. They’re very different now to what they were prior to Northern Rock. That’s the day-to-day manifestation of the changed circumstances we now live in.”
In the meantime, for the City’s elite at least, the job of cleaning up the banking disaster continues.