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Cut the boxes and arrows

08 September 2014
Richard Kemmish


We are all guilty of it, but lawyers more than most. No roadshow presentation nowadays is complete without an increasingly complex diagram illustrating a ridiculously simple concept via a web of boxes and arrows.
Some of the most gratuitous details that I have seen include,

• showing group companies who have no role whatsoever in the transaction (don’t want anyone to feel left out),
• adding labels to arrows that are so complicated they need several bullet points and at least two foot notes (lawyers and powerpoint are not natural bedfellows), 
• putting a bond trustee in a box of their own (arguably the best place for them), and
• having the same legal entity in the diagram several times (“...in their capacity as mortgage servicer”, “..in their capacity as swap counterparty”)

But surely any primary school teacher would tell you, pictures are better than words at explaining things? Yes, but a) we are not in primary school any more and b) covered bonds are not complicated. The idea of a bond with a pool of security, sometimes in a different legal entity is the crux of it. My daughter (who is in primary school) gets that idea without a picture.

Sure there are plenty of other details, but they are details, so best explained in text. If you really want to use a diagram in the presentation, use it to explain the asset cover test – the spaghetti legal drafting that just happens to be the most important credit element of most covered bonds (and which almost no-one really understands).   One of the most popular slides I ever produced was a diagram decoding the ACT.

Lawyers running (ruining) investor relations departments is of course just part of the general trend to allow them to weasel into all aspects of your life. I received an email yesterday the small print of which detailed what I needed to do with the email if I was a securities based swap dealer as defined in section 23.43(1) of the CFTC regulations (the “Dodd Franck Act”). I wouldn’t have minded but the text of the email was: ‘fancy a beer sometime?’ (In Henry 6th, Part 3 a character announces “the first thing we’ll do, let’s kill all the lawyers”. Every time I’ve seen the play, that line gets a cheer. I wonder why?).

What have I got against using boxes and arrows? Nothing, in the securitisation market where structures generally are complicated. And that’s the point. We are not in structured finance. One of the many false premises of the covered bond/securitisation comparison is that they are both different forms of structured finance. On the basis of that premise comes an assumption that treatment by regulators and others should be on an equivalent basis. 

With structured finance such an unwelcome concept nowadays, the excessive use of overly complex structure diagrams is simply a wrong positioning for our product. And unnecessary.

Lets keep it simple. 

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