The energy industry directly provides a significant source of revenue for many law firms, particularly for the “go-to” firms in the energy sector, such as DLA Piper, White & Case, and Vinson & Elkins. However, the growth of the global economy and of virtually all other sectors is interlinked with energy to some extent, meaning that all law firms will be impacted by the success or demise of the energy sector. The future of the energy industry is now uncertain, as a result of the Covid-19 pandemic and potentially the worst global recession since the Great Depression. This article will explore whether this pandemic will be the death knell for the oil and gas industry and the trigger of a boom in renewables, and will investigate the impact that the crisis will have on business, the global economy generally, and law firms specifically.
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Oliver Gilliand
Oliver GillilandTCLA Writer


Early in April, financial markets were shocked by an unprecedented drop in the price of oil, which crashed into negative territory for the first time in history, reaching a price of -$40 per barrel — meaning that suppliers were effectively paying buyers to take oil off their hands.

The oil industry had already been struggling, coincident with the early stages of the pandemic, due to an ongoing price war between Saudi Arabia and Russia.
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Peace negotiations in early April were initially promising. These negotiations led to the signing of a historic supply agreement between Opec+, the US, and some G20 nations to reduce global supply by 10%. The resulting restriction in supply would normally force a price increase, but this pricing factor was outweighed by a devastating 30% fall in global demand for oil and gas that resulted from the pandemic.

Prices initially reached negative territory due to technicalities regarding storage issues and how oil is traded through futures contracts for each month. The price eventually stabilised at around $20 per barrel, which is still incredibly low.

In order to fully appreciate the implications of rapidly declining oil prices, it is paramount to understand both the history of oil prices and to understand how oil prices affect the economy more generally.
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Oil is one the most crucial commercial commodities, as it provides more than one-third of the world’s energy and directly impacts the transportation and production costs of many businesses. Its uses also go beyond that of fuel, as it is utilised in plastics, clothes, ink, solar panels, and many more products.

In normal circumstances, a fall in oil prices would be great news for consumers and many businesses. When oil prices fall, consumers find themselves with an increase in discretionary income, as they are spending less on fuel and will generally increase spending on other goods. Meanwhile, businesses become more profitable as their production and transportation costs are reduced. The big commercial winners, in theory, should be those in the aviation industry, whose profitability is hugely dependent on oil prices. While businesses that are in the oil and gas industry will suffer as revenue and profits fall and there is less investment and exploration due to lower profitability.

However, because this specific fall in oil prices has been caused by expectations of a global recession and by the slowdown of all travel due to Covid-19, the drop in prices is unlikely to be accompanied by any overall offsetting positive economic effects: many consumers will be furloughed or lose their jobs, thus experiencing a decline in income, meaning that any decrease in transport costs will have a limited effect on their capacity to spend. In terms of the impact on business, despite falling production costs these will be offset by a reduction in demand (due to lower consumption) and by falling investment, as an economic recession creates uncertainty, and many investors will therefore be holding off on making investments until the global economy is more stable.

The unusual effect of this current fall in oil prices is best demonstrated by the dramatic impact it’s having on the aviation industry. Instead of becoming the expected big winners from an oil price fall, the industry has seen global demand come to a standstill due to travel bans, and their profits have plummeted; the S&P Supercomposite Airlines Industry Index is down 28% between February 2019-May 2020. However, it is important to appreciate the commercial reality for many firms impacted by falling oil prices is very different to the economic theory. The high levels of volatility surrounding oil prices mean that many companies, particularly airlines, hedge their fuel requirements in order to avoid sudden price moves – which means that these companies have already bought huge stocks of oil, and are paying hedged prices rather than today’s oil prices. Therefore, the cost-saving implications of record-low oil prices are less significant in practice than they are in theory.

On a basic macroeconomic level, oil-importing countries such as the UK, Germany, or Japan would normally greatly benefit from low oil prices. As the current account deficits (difference between export and import revenues) of these countries will fall, this will indicate that their economies are, on balance, globally competitive and an attractive investment. Although once again, such benefits will likely be offset by the global recession and reduced investment, as explained above. Meanwhile, oil-exporting countries such as Russia will greatly suffer, as they are heavily reliant on the tax revenue from oil exports in order to fuel government spending. In fact, it is estimated that Russia loses $2 billion in revenue for every $1 fall in oil price. Such a loss in oil-tax revenue can be anticipated to increase the Russian government budget deficit and to be either compensated for in higher taxes to its populace and/or to be reflected in reduced government spending, both of which actions would reduce the country’s economic growth.
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From 1999 to 2008, the price of oil soared to never-before-seen heights, peaking at $160 per barrel, due to a combination of rapidly increasing demand from emerging economies such as China, paired with production cuts by OPEC. The oil landscape radically changed after the financial crisis, which led to huge decreases in oil and gas demand and to falling prices, eventually reaching $53 per barrel. As the world’s financial system recovered, oil prices began to rise until, in 2014, the date of the previous most significant oil drop in modern history, oil prices plummeted once again — from $125 per barrel to as low as $30 by January 2016. This descent was caused by several factors: first, China’s rapid economic growth had begun to slow, and with it global demand also slowed; second, a price war between OPEC and the US erupted, one in which OPEC hoped that its refusal to cut production would result in a continuing collapse in prices that would make the extraction of oil in the US unprofitable and would put many of its competitors out of business. So, if the oil and gas industry could survive all this, what makes the Covid-19 situation any different?
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Even prior to the Covid-19 pandemic, the oil industry was plagued with serious issues, namely climate change and the ensuing shift in global environmental policy. At the time of this writing, 194 countries have signed the Paris Agreement, including oil giants such as the US and Saudi Arabia. This is a commitment to keeping global temperature changes below 2°C, by means of carbon budgets. For purposes of compliance with this Agreement, it is estimated that 41% of global carbon is useable, and the rest would have to be left in the ground, thus becoming effectively worthless. The commitments created by this Agreement has serious cost implications for oil companies, estimated to cost up to $900 billion through the “stranded asset phenomenon”, in the “worst-case scenario” if temperature levels changes of 1.5°C are achieved (although it seems unlikely that even a 2°C change will be achieved by 2030). The stranded asset phenomenon essentially means that many investments that have already been made by oil companies — such as investments in explorations or infrastructure — will never see a return and thus are wiped off their balance sheets. The severity of the cost implications depends on whether the 2°C target will be met; the economic impact would be severely reduced, for instance, under the “best-case” scenario of 3°C per year, as in that scenario 96% of remaining carbon could be burnt.

Equally, there has been a shift in investor sentiment, as many investors are growing to see the value of investing in projects with “social value,” and see the oil industry as increasingly low-return and high-risk. This shift in sentiment is reflected by the rise of “green funds” such as Climate Action 100, which owns $35 trillion in assets and which puts pressure on companies in their portfolios to reduce emissions. Ultimately one needs to ask themselves, what is the point in investing in a company with falling profits, that reflects poorly on your portfolio in terms of Corporate Social Responsibility (CSR), and which by definition has only a finite amount of time left to even be able to produce an end-product?

The oil industry has already seen $400 billion wiped from its market value since 2017, so it may be premature to say it could not survive a $900 billion write-off, but its survivability looks more tenuous when coupled with the dramatic effects of the Covid-19 pandemic. The damaging impact caused by writing off a company’s assets will be explained more fully below.
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As previously mentioned, the combination of Covid-19 and the aftermath of the oil price war has resulted in global oil demand falling by 30% and in the price of oil currently trading at $20 per barrel. The main impact of this is a tremendous imbalance between global supply and demand. On the supply side, global production has rapidly declined, with many oil wells completely shutting down and the US cutting back production by as much as 25% because there is not adequate demand to meet the supply, nor adequate storage to handle excess, as global oil storage capacity is only around 600 million barrels. (Global consumption was about 93 million barrels per day pre-Covid.)

Low oil prices have had a serious impact on profits, with the oil giants such as BP seeing a 67% fall in first-quarter profits. Investment is also expected to plummet: Wood Mackenzie offered an analysis in which it determined that an oil price of $35 per barrel would mean that 75% of projects do not even cover the cost of capital; and HIS Markit have also estimated that global capital expenditure (funds used to purchase new assets, or to upgrade or maintain current assets) in oil will fall by 20%. A reduction in revenue from falling oil prices and reduced investment, combined with the large write-offs previously mentioned from “stranded assets”, is particularly troublesome for oil companies, as they are generally very high-geared (borrow more than their income). To put this into perspective, the industry’s debt is a mind-boggling $1.9 trillion ($300 billion in bank loans) — in contrast, the value of US sub-prime mortgages before the 2008 financial crisis was $1.3 trillion. A large asset write-off coupled with falling revenue means that investors will be reluctant to put money into a company (as it is less likely to make a return), thus exacerbating the global reduction in capital expenditure; a company thus affected may be unable to meet its liabilities (debt) and will struggle to obtain further financing (using debt to pay off debt, otherwise known as “refinancing” or issuing bonds) and will likely need to pay a significantly increased interest rate, due to the inflated risk of default. The accumulation of these adverse conditions increases the risk of insolvency (when a company’s debt is greater than its assets). In 2019, there was already a 50% surge in US oil bankruptcy, and this trend of default is likely to be even more severe in 2020.
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The anticipated outlook for the renewable energy sector subsequent to the global pandemic has been a much brighter picture, compared to the hellscape of oil and gas. In fact, there have been many success stories: Orsted (a wind developer) reported a 27% first-quarter profit, and Iberdrola (a Spanish clean-energy group, which recently produced Europe’s largest solar plant) also reported a rise in first-quarter earnings of 5.3%. The International Energy Agency has also produced a report stating that the renewable sector will be the only energy source to see growth in 2020, albeit at a rate lower than that of previous years.

The success of the renewables industry is due to the fact that it is far more resilient than oil and gas. Unlike oil, which is finite in supply and controlled by a few big players, renewable energy is far less influenced by geopolitical relations, cartels, and supply agreements – meaning there has not been any price wars putting downward pressure on revenue. Equally, demand is protected in times of unprecedented demand-side shocks such as the Covid-19 pandemic, as many national grids are legally required to purchase renewable energy first. While there has not been a surge in green investment during the last month, renewables remain an AAA investment (whilst oil companies such as Apache Corp have seen their rating lowered from BBB to BB+), and many investments are still going ahead.

Not everything is sunshine and rainbows for the sector, as the Covid-19 pandemic will create some short-term difficulties. But unlike the situation for oil and gas, in the long run there is serious opportunity for a green transition and boom in growth. It should be noted that contrary to popular belief, falling oil prices will have a limited effect on the renewables sector. This is due to the current limitations of renewable energy, as they are rarely a direct substitute for oil. Oil is predominantly used for transport and heating, and also provides hydrocarbon gas liquid for the petrochemical industry (production of natural products such as natural gas and rubber). On the other hand, renewables are predominantly used for generating electricity, and oil is competitive here only at $15 per barrel, a price that would be unprofitable for producers. This sentiment around oil prices is shared by Barclay’s Head of Impact Investment Banking, who recently explained that “renewables are facing an economic, not oil price slowdown”.

The first short-term issue facing the sector is that of investment. Many energy companies will not have the funds available to diversify and invest in the current climate, as there is increasing pressure from shareholders to maintain dividends in the face of falling revenue and to maintain cash to survive the period of low demand. The lack of private investment from energy companies however, will be of limited impact, as this only accounts for 2% of renewables investment. Equally, there may be some minor indirect effects. As oil prices can influence the production of natural gas, which is a more effective substitute for generating electricity, meaning cheap natural gas could temporarily reduce further investment in renewables. More significantly, there may be diminishing global government funding, which accounts for 75% of investment in the renewable sector, either directly or indirectly, as funds are re-directed to preserving the economic well-being of their countries in the face of the Covid-19 pandemic.

Wood Mackenzie recently produced a report highlighting the impact of diminishing government support that suggested if there is a global recession extending beyond 2020, this could lead to 150GW of projects in the Asia-Pacific area (an area that is the global leader in wind and solar capacity projects) being cancelled or delayed over the next five years. The projected cancellations/delays are due to the reliance of renewables on government subsidies to remain competitive with coal-power stations, subsidies that may be slashed in order to re-focus the economy on a recovery. Other factors negatively affecting the renewable sector include the potential of increased financing costs if lenders are unwilling to provide favourable credit during a crisis, as well as lack of direct government investment.

The second short-term issue facing the sector is that there are significant supply-chain difficulties creating delays for many projects. This is primarily due to the industries’ high reliance on China, where manufacturing has not fully recovered. Wood Mackenzie has predicted that in a worst-case scenario, the US solar market will see 5GW of utility-scale markets pushed backed into 2021. (To help quantify the scale of this, it is useful to note that the entire UK solar capacity is 13GW.)

The long-term effect of this pandemic presents an unprecedented opportunity to accelerate investment into renewables, leading to a potential boom in green energy. In the private sector, energy companies will no longer be able to ignore the need to diversify their portfolios, as the combined effect of stranded assets and Covid-19 will effectively force them to adapt or fail. Once their revenue streams return to pre-crisis levels, it would make no sense to make further investments into high-risk oil and gas, where the rates of return at low oil prices are equal to those for energy products, and where asset life is extremely limited due to the finite nature of the assets. In Asia and the US, the consensus on government spending post-crisis appears to be ignoring renewables and a focus on an immediate recovery. However, there is a glimmer of hope in the EU, which has officially backed a “green transition” as part of it is one-trillion-Euro stimulus package. In practice, this means that EU governments will be investing in green energy as part of their plan for economic recovery, putting policies in place to boost demand for green alternatives (such as subsidies or requiring operators to use electric vehicles, etc.) and refusing to bail out businesses that cannot operate in a low-carbon economy, unless the businesses can commit to transitioning to net-zero. In the UK, the Labour party has also recently announced that it intends to put pressure on the Conservative government to facilitate a similar green transition as part of its Covid-recovery plan. Across the globe, Saudi Arabia’s Crown Prince Mohammed bin Salman has acknowledged the inevitability of a green transition and is keen to diversify his country’s heavily oil-dependent economy as soon as he can. This crisis may accelerate the country’s plan to diversify, which has already committed $30 billion in investment, as well as to cash out its oil reserves.
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Many commentators have suggested that, just as oil survived the financial crisis, oil will also make it through this pandemic. However, such a sweeping statement is a simplification of the scale of the issues and fails to acknowledge the key differences between the two crises. The fall in energy demand that the market is currently facing is seven times greater than that in 2008; pressure to facilitate a green transition is far greater; and, unlike in 2008, oil wells have actually shut down, putting the future oil supply into question. Ultimately, the survival of the oil industry depends on a mixture of geopolitical factors, consumer behaviour, the real impact of net-zero targets, and investment.

The most significant problem that oil currently faces, and the key to its survival, is that of demand. On the one hand, some analysts believe that the aftermath of the Covid-19 pandemic will fundamentally change consumer behaviour forever. For instance, if virtual working becomes commonplace, thus causing commutes to be drastically cut, and if business trips are no longer seen as essential, these changes will prevent the transport industry and subsequent oil demand from fully recovering. This demand problem is exacerbated by the global rush to net-zero, as countries actively try to cut down their carbon emissions and subsequent oil consumption. Under this view, it is believed that the peak demand for oil was already reached in 2019, three years ahead of schedule, according to analysts at Carbon Tracker, and that we are now entering an inevitable decline in demand. This view has recently been supported by the CEO of BP, Bernard Looney, who warned, “we may have already seen peak oil demand”. In contrast, BP’s earlier forecast back in 2019 predicted that oil demand would not drop off until 2030. Whilst analysts at Goldman Sachs predict that oil demand will not recover to pre-crisis levels until late 2022, primarily due to falling demand in the aviation industry (which accounts for 7.8% of global oil demand) and subsequent lack of demand to build new aircrafts.

On the other hand, some believe that there will be a surge in demand once lockdown measures are eased, as consumers will be in a flurry to travel again and will take advantage of cheap oil. Equally, it is debatable just how viable current green alternatives are, meaning that political momentum to reduce consumption of oil may be limited in practice, if renewables cannot fill the gap.

Equally, there will be significant supply issues resulting from a combination of oil wells shutting down, a huge decline in capital expenditure, and increasing difficulty for oil companies in obtaining financing – due both to their debt position and to their unattractive future investment outlook. This view is supported by analysts at Goldman Sachs, who predict supply will demonstrate an “L-shaped recovery” (slow). This means that even if there were a surge in demand, there would not likely be sufficient supply to capitalise on it.

Oil companies cannot stay profitable for long given such extremely low prices; US shale’s break-even price (where total costs = revenue) is $48 per barrel; Saudi Arabia’s is $83; and Russia’s is $42. If oil’s demand does not pick up, thereby forcing prices to remain low, at around $20-35 per barrel, the industry’s survivability will rest mainly on the geopolitical response to both the pandemic and the oil crash specifically.

Although the historic OPEC+ supply deal early in April went some way towards reducing the impact of collapsing demand on the industry, there is still much more that oil-producing nations need to do. The response of the US and Saudi Arabia will be pivotal here, as they are the two largest global oil producers. I have highlighted multiple options that governments may try to pursue in order to save the industry:

Pressure OPEC+ and other G20 nations to create further supply curbs: restricting supply even further will put upward pressure on prices. An oil powerhouse such as the US could use the threat of foreign oil tariffs to facilitate this, as it has done in its ongoing trade war with China. But this risks undermining US refineries that process foreign oil. Ultimately, this would be difficult to agree to in practice, and does not address the underlying demand problem.

Create artificial demand through issuing government bonds to buy up oil and store it until the price picks up. Mr Trump has in fact already proposed this solution, but his plans are unlikely to have any significant impact. The US can store only 75 million barrels, and globally there is only a 1.8-billion-barrel extra storage capacity, which means that any storage solution would account for only just over two weeks’ of global oil demand (93 million barrels per day).

Governments could also create artificial demand in a different way: by buying oil currently in the ground. Once prices recover, oil producers can then extract this pre-purchased oil and pay back the government with interest (the purchase thus acts effectively as a de facto loan) and can sell the oil on for a higher price. This would ensure that oil companies have adequate cash flows to meet their liabilities and would prevent any oversupply from forcing prices down even further.

A large-scale government bailout or provision of emergency financing. While this may save the industry in the short term by providing instant cash, this is generally an undesirable solution. Simply giving a company “free” or cheap money does not create any incentives to increase productivity (the oil industry being consistently criticised for lacking productivity and producers being unwilling to diversify their portfolios into renewables) and may reflect poorly on a government that provides such significant resources to an industry with such damaging externalities.

Simply let market forces take control. Arguably, by doing nothing, the weakest and least-efficient companies will be wiped out, and the more-efficient and larger companies will be forced to make productivity gains through investment, diversification, or buying up failing competitors in order to increase economies of scale (The larger the company generally means costs will fall.) This approach of course has the short-term downside of producing significant bankruptcies and significant unemployment, and it would almost certainly wipe out all small-scale oil producers who do not have the resources to adapt.

It is not entirely clear what action global governments will take, but Mr Trump is insistent that he will not allow US oil to fail, and other global governments are likely to follow suit. Mr Trump has already removed the “mercury emission rule” in order to alleviate costs within the industry, and he recently instructed the Energy and Treasury Departments to make funds available for oil companies through an emergency loan programme. A similar approach has been taken in the UK, where the Bank of England has agreed to buy oil companies’ debt as part of its £200 billion Covid-19 stimulus package via quantitative easing. While the EU has expressly excluded any fossil-fuel-related bailout, this represents only a small fraction of the global market. Ultimately, the oil industry is currently too big to fail for the key players, as their economies cannot cope with such huge-scale unemployment and are too reliant on oil as a tool of diplomacy (such as its use in the US-China trade war). However, while the oil industry may “survive” this pandemic, unlike the situation for oil following the financial crisis, oil will not return to business as usual this time around. Small oil producers will not have the cash reserves to withstand such a substantial shock in demand and will most likely be forced to file for bankruptcy and be acquired by the larger players. The oil giants that remain will likely become zombie businesses (un-profitable and reliant on government support for their survival), especially if cheap oil is the new normal. Irrespective of how quickly (if at all) demand recovers, as investment dries up, as the viability and cost-competitiveness of renewables improves, and as pressure increases to transition to a net-zero economy, it will no longer make sense to keep reviving an industry that cannot operate in a carbon-free world. In the long run, the Covid-19 pandemic will most likely accelerate the green transition by bringing forward peak fossil fuel demand, unleashing a surge in investment from governments such as the EU stimulus package, and putting increasing pressure on energy companies to diversify: those that fail to do so will not be able to survive in the long run.

For more on the problems of zombie companies, see my previous article: The Horde of the European Zombie Banks
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The dramatic fall in oil prices and the shock to the energy industry will affect many law firms, even those that do not specialise in the sector.

Corporate: In general, as the decline in oil prices is part of a larger global recession there is likely to be a decrease in demand for M&A, as investment is reduced during times of uncertainty. However, many large oil companies may be looking to acquire failing smaller oil companies in order to reduce costs through economies of scale, or looking to acquire new businesses with renewable assets, as part of a diversification strategy.

Anti-Trust/Competition: If there is a significant consolidation of the oil market in the aftermath of the Covid-19 pandemic, there are likely to be significant competition law issues, and energy companies will be seeking advice in order to reduce these risks in their transactions, or to deal with claims from competition authorities. The main issue here is the potential for the abuse of monopoly power, as when a few large companies dominate the market they can influence the price as consumers have no viable alternative, or because due to their size and excessive cash reserves these companies are able to drive prices down (predatory pricing) in order to force out remaining competitors.

Litigation: Disputes are almost inevitable in any merger or acquisition, so as M&A activity increases in the energy industry there is likely to be a parallel increase in energy-related disputes. Equally, climate-change litigation, which is predominantly used to influence government policy, is likely to dramatically increase in the aftermath of the Covid-19 pandemic. Many climate groups will be wanting to put pressure onto governments to seize this unprecedented opportunity to facilitate a green transition.

Finance: In order to facilitate any M&A activity to either consolidate or diversify an energy company’s business, finding a favourable financial arrangement is key – so, many energy companies will be seeking advice on how to finance their responses to this crisis and to structure their deals. Equally, energy companies may be looking to privately invest into renewables or utilise government schemes/policy, so there will likely be a rise in project finance work. This is where lawyers create an arrangement that allows for the revenues of the project to pay back the debt rather than their balance sheet.

The immediate effect of the pandemic’s aftermath will likely be that many energy companies will be looking to law firms to facilitate re-financing arrangements (as mentioned above), as they are incredibly high-geared and will need new loan arrangements to stay afloat in times of reduced revenue.

Insolvency: It is likely that the fall in oil prices will mean many small oil producers will be unable to survive and will be forced to file for insolvency and that there will be a resulting increase in demand in insolvency-related legal work, such as negotiating corporate voluntary agreements or advising on whether to file for administration. Equally, companies on the brink of insolvency may be looking to restructure (sell off un-profitable parts of the business and re-negotiate debt to reduce costs) in order to avoid such a drastic situation, and such companies may seek legal advice in order to create a contingency plan.

Specialist Energy Firms: As the need to transition into renewables increases, many companies will be looking to energy industry leaders to utilise their deep industry knowledge for strategy and assistance with specialist matters. In particular, many companies will want law firms to draft Power Purchase Agreements (PPA), to facilitate their investment projects into renewable energy. These are contracts for generating, and selling to the grid, energy that your own assets have produced and offering the company the best price. A PPA will often be used when a company invests in a new energy project such as a solar farm and wants to utilise the energy generated from it.
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Oliver is a member of TCLA\’s writing team. He is a recent law graduate from the University of Nottingham.
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[vc_row][vc_column][vc_custom_heading text=”A Decade And A Year On: Revisiting The Financial Inferno of 2008″ font_container=”tag:h1|text_align:center” use_theme_fonts=”yes”][/vc_column][/vc_row][vc_row][vc_column width=”2/3″][vc_column_text]When deciding what topic would form centrepiece of my next article, I asked myself the usual questions:

  1. What topic is currently relevant?
  2. Is it a topic that everyone talks about?
  3. Paradoxically, is it also a topic which very few truly understand?

Having recently read Bernanke’s, Paulson’s and Geithner’s “Firefighting the Financial Crisis And Its Lessons”, I convinced myself that the global crisis of 2008 provided a solid “yes” to all of the above.[/vc_column_text][/vc_column][vc_column width=”1/3″][vc_single_image image=”4914″ img_size=”medium” add_caption=”yes” alignment=”center” css=”.vc_custom_1579271699126{border-top-width: 5px !important;border-right-width: 5px !important;border-bottom-width: 5px !important;border-left-width: 5px !important;background-color: #0c2f4e !important;border-left-color: #0c2f4e !important;border-left-style: solid !important;border-right-color: #0c2f4e !important;border-right-style: solid !important;border-top-color: #0c2f4e !important;border-top-style: solid !important;border-bottom-color: #0c2f4e !important;border-bottom-style: solid !important;}”][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”Its relevance:” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]On a pure “curiosity” level, I thought that it would be interesting, a decade (and a year) on, to analyse and understand how our economy and its regulations have evolved since the heyday of the crisis. Do we live in a safer (financially speaking) environment today, compared to the one of 2008? If so, how have we gotten here?

On the other hand, on a more specific, “commercial awareness” related level (which is realistically the real reason why most of you have chosen to put yourself through this article), the financial crisis and questions surrounding it could very well come up in interviews. The ups and downs of the economy, as well as its inner workings, directly affect the work that law firms do, and interviewers want to see that you understand this. I remember that at my first ever interview, the partner straight-up asked me “How did the financial crisis happen? Do you think our economy could potentially face another one?”.

Basically, no punches pulled.

At the time, I remember my brain turning to mush as I attempted to piece together a somewhat coherent answer. Needless to say, I failed, and the feeling of complete cluelessness I felt back then, stung so bad that I still remember it today. What I’m trying to convey is, if you don’t want to be me circa 2017, then read this (very long) article.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”Its popularity:” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]People love to talk about the financial crisis. Whether its interviewers who enjoy prying you, or whether its FT column writers who constantly regurgitate the topic in whatever shape, way or form, what happened in 2008 was so unprecedented, so complex and so completely detached from the realm of anyone’s imagination that people are still fascinated with it. So again, if you want to delve into the magic world of securitisation, CDOs and credit default swaps, keep on reading.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”How well the topic is understood:” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]Just like the word “private equity” (see my other article), this is a buzzword that is constantly thrown around and which needs demystifying, the “financial crisis” of 2008 is also a topic which is very talked about but, as I found, not very understood. If we think about it, not even the people who at the time arguably caused the crisis (the bankers) could fully explain to themselves how and why that whole mess had come to be. Most of us, or at least me before this article, have a pre-prepared vague explanation that we blurt out every time we get asked so that we don’t sound dumb. But really, what do we actually know?

This article will first explore the various macro-economic, regulatory and human factors which triggered the crisis. It is important to note that whilst alone each of these may have been relatively harmless, when they met and collided together the way they did back in 2006-2008, they created a recipe for disaster.

I’m then going to take a step back to look at the bigger picture, and attempt to explain how the workings of a market as small as the mortgage one (when we think in global terms at least) was able to have such a catastrophic domino effect across not only other markets and sectors in the United States, but across various other continents too.

I will then discuss the heavily debated government intervention which quickly followed suit. Indeed, still today loads of questions linger:

Why did they save AIG and not Lehman?

Why were the credit rating agencies and the bankers allowed to walk whilst millions of people were left without houses, jobs and confidence?

Was this all moral hazard or common sense?

In a world which is already heavily unequal and dominated by big financial players at the apex of the socio-economic food chain, was it right to bailout the very institutions which caused the crisis? Or should policymakers just have let the hand of free-market capitalism push them off the edge of the cliff they were hanging from?[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”Macroeconomic factors & Irresponsible mortgage lending” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]If you ask anyone what the biggest trigger of the crisis was, they are likely to tell you “the irresponsible lending of subprime mortgages”. Subprime mortgages are mortgages where the borrower has low income relative to the size of the loan and possesses few assets other than the house being bought.  So essentially, the likelihood of the loan not being repaid is higher than normal.

But how, you may ask, could a bunch of shitty mortgages bring down the whole financial system? Well, the answer is that there weren’t few, but millions. Also, these subprime mortgages were everywhere, quietly brewing in all sectors and corners of the global economy, meaning that when the US housing bubble burst, the whole financial world imploded with it. But again, we’ll get back to that later.

Ok, lets pause and go back a second. It is in fact necessary to understand why this toxic lending trend existed in the first place. In order to do this, we need to look at the former economic climate.

The years before the crisis, saw an unprecedented level of debt-build up in the United States, particularly in the household market where ordinary people and families started to become dangerously overleveraged. This happened because back in 2006, in the US, short-term interest rates were lower than long-term interest rates. As the name suggests, the difference between the two lays in their repayment schedule; short-term loans are repaid quicker (usually within a year) whilst long-term loans run their course over a longer period of time. As a result, lenders view short-term loans as less risky than long term loans, as the former enables them to be repaid quicker. The interest placed on each of these loans thus reflects this risk-reward scenario; short-term loans have lower interest rates whereas long-term loans have higher interest rates as lenders have to bear the risk of their longer-term investment[1].

This meant banks were borrowing short-term in order to lend long-term and reap the profits from this opportunity, and one particularly lucrative long-term loan they focussed on were mortgages.

This opportunity came at the same time of the housing boom, which started in 2002-2003 as home construction was rapidly increasing in the US. As a result, speculation in the housing market ensued. This meant that as prices rose, people bought more houses (both because the lending terms were favourable and because they might have also had the intention of selling it a higher price somewhere down the line). This trend was more than welcomed by the banks who, as mentioned above, wanted to benefit from the higher interest rates on long-term loans and gave out a lot of mortgages, even to people with questionable finances (but again, we’ll get back to this later).

As a result, from 2001-2007 the mortgage debt level per household rose 63% faster than household incomes (essentially meaning that people were borrowing money at a way faster rate than they were earning it). Liquidity seemed limitless and asset values (in this case house prices) seemed destined to keep rising, so banks just kept on giving out mortgages. It is in this manner that bubbles start forming.

Just like gambling and the adrenaline rush that comes with it when you’re on a winning streak; it becomes impossible to just walk away. This is the psychological explanation at the heart of this lending and borrowing mania which permeated the mortgage market.

But how did it all get so bad?[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”A Brief Detour Into The World of Banks: ” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]As mentioned before, banks borrow short term in order to lend long term. This process is called “maturity transformation” and usually tends to be very beneficial for the economy. Indeed, banks lend out money for legitimate purposes, ie to people in order to buy houses, or to companies to allow them to grow. And if the bank has done its job and has lent money to financially sound people it will eventually be repaid and reap further profits through the interest repayments. However, this process of maturity transformation can also be very fragile. Imagine you are a bank and you lend out more money than what you own (ie you lend out a lot of money that is actually borrowed money) to certain people or certain companies. What happens if one day your creditors wake up, decide they have lost confidence in the markets and demand their money back? Well, you have no money to pay them back with. In the financial world, word spreads fast and other creditors will soon be banging at your doors. Actually, that’s a lie. Whereas before, if they wanted their money back, they literally had to walk to the bank and bang on its doors demanding their money, with digitalisation now they can get it back with a “click”.

This is a classic example of a “run on a bank”.

Now that you understand maturity transformation and its downsides, think about this: banks were lending out far more money than what they had. Stats seem to suggest that a whooping 36 trillion worth of borrowed money was used by banks to finance activities of ordinary people seeking mortgages.

To give you an idea, banks are required by law to have assets – called bank capital – which total up to at least some fraction of the money they lend. This provides a security mechanism for lenders who know they’ll get at least some of their money back if the bank defaults on the loan. Without getting too deep into the details, all you need to know is that, pre-financial crisis, the capital requirements that banks had to comply with were far far far lower than what they are today.

Further, another issue was that it wasn’t only banks who were lending out far more than they should have, but other institutions were joining in on this borrowing-lending frenzy too;  loosely regulated insurance companies, mortgage companies and finance companies all around the world were providing this credit in the mortgage market. Inevitably, all these institutions became highly leveraged.

In a way, this over-borrowing and over-lending would not have been so catastrophic had it been only confined to banks and/or other lending institutions. What I mean is: imagine that banks borrowed short term and then lent out long-term mortgages to a lot of people who then defaulted on their debt and then STOPPED THERE.  Sure, the situation would have been bad, but this tragedy would have only affected the parties directly involved (ie those lending to the bank, the banks and those borrowing from the banks to finance their mortgage).

What actually allowed a small sector of the economy to bring down the rest of it is a phenomenon known as “securitisation”.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”How Mortgages Became Tradeable ” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]Once upon a time, banking was not the be all end all job. People who worked in that industry did not even dream they could make the amount of money that every aspiring investment banker today expects. Like the script writers of “The Big Short” like to point out, “in the late seventies banking was a good stable profession, like selling insurance or accounting….and if banking was boring, then the bond department at a bank was downright comatose.” Essentially, banking and bonds were for losers.

Around the same period of time (1960s) mortgage lenders and government officials were desperately trying to attract capital to the mortgage market as mortgage lenders were struggling to meet the growing demand for housing and the mortgage sector would often go through what is known as “cycles of funding shortages”. This happened because each cycle interest rates increased, consequently creating the expectation that they would only keep rising. As a result, this very much disincentivized potential investments in the mortgage market as investors did not want their money locked-up in long-term, fixed rate mortgages which, after interest rates went up, would not pay out as much.

So basically, mortgages were not an attractive investment and no investment bank really wanted to deal with them. That is before Lewis Ranieri, Salomon Brother’s most famous bond trader, took the concept of securitisation, and applied it to mortgages.

Securitization works like this: you take an illiquid asset or group of assets[2] and you transform them into a “security”. A security is a tradeable financial instrument which derives its monetary value from an underlying asset. Various types of securities exist, but the most common are equity securities (eg shares in a company) and debt securities. Here we will only focus on debt securities.

Investopedia tells us that “a debt security represents money that is borrowed and must be repaid, with terms that stipulate the size of the loan, interest rate and maturity date…and generally they entitle their holders to the regular payment of interest and repayment of principal”[3].

What became really popular in the years preceding the crisis were “mortgage-backed securities” (MBS) which, as you can guess, were securities which derived their value from mortgages the claims that lenders had against the mortgagor’s assets.

After the security is created, (and each MBS was created by pooling thousands of mortgages together) shares of MBS’ could be sold to participants in the secondary market. Unfortunately, before I continue, it is time for another brief, yet fundamental detour into the world of…[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”Primary and Secondary markets” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]If we are to understand how MBS’ and similar securities were able to affect and bring down the whole financial system, the distinction between primary and secondary market needs to be clear. The primary market groups all the “first-time transactions” such as stock issuing (IPOs) or bond issuing which see investment banks selling/interacting directly to investors. In the primary market investors are usually large institutional buyers who purchase millions of shares at a time. For example, during an IPO, the primary market transaction is between the purchasing investor and the investment bank who underwrites the IPO. Any money made from the sale of shares to investors on the primary market will go to the company. If, however, after a while, the initial investors in the company decide they want to sell their stake, they can do so on the secondary market. Indeed, the secondary market is the place where investors buy and sell securities they already own, and it hosts all transactions of securities which take place post initial offering.

The key differences are:

  1. Any transactions on the secondary market occur between individual investors (as opposed to an investment bank and purchasing investors) meaning that the proceeds of each sale go to the selling investors and NOT to the company who initially issued shares or to the investment bank who originally underwrote them.
  2. In the primary markets, the initial price is set by the banks who determine at what price each share will be offered to investors when the company floats. In secondary markets, the price of securities is purely determined by supply and demand of buyers and sellers. All this makes the secondary market far more dynamic and harder to track, less transparent and more volatile. However, most importantly, the secondary market allows for a huge range of participants to join in. (so keep in mind that these MBS’ were starting to make their way in portfolios of investors from all around the world).

So what Lewis Ranieri did which was genius, was that he took 30-year-mortgages and made them into MBS’ which were being sold in the secondary markets to investors as if they were 5 and 10 year bonds. Essentially, he was the first one to make mortgages TRADEABLE.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”“Tranching” ” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]Now that I’ve explained the difference between primary and secondary market and how MBS’ became tradeable, I will touch upon the complex topic of tranching which is, in hindsight, what made the crisis even harder to foresee.

Once the MBS, which combined millions of mortgages, was created and placed in one portfolio, the banks started slicing and dicing up these really big mortgage pools in smaller, more specific mortgage classes called “tranches” with each tranche representing a different risk level. We call these individual tranches “CMO’s” (collateralized mortgage obligations) and the whole process of breaking up an MBS into these smaller CMOs was done by an SPV (a special purpose vehicle).[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”How SPV’s work” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]SPV’s are created by investment banks and other corporations who then sell off their assets (in this case mortgages and the subsequently created MBS’ bank) to the SPV.

Then, the SPV (which is still owned by the investment bank but is legally separate from its activities) becomes an indirect source of finance for its “parent” as it attracts independent investors who want to purchase these MBS’.

By doing so, the banks simultaneously take the MBS’ they created off their balance sheets and also get rid of the inherent risk associated with the mortgage as they don’t own the MBS’ anymore.

So, once the SPV purchases the assets (MBS’) from its parent company, it then starts “tranching” them, ie chopping them up and grouping them on the basis of how risky they are.

Each tranche has a different level of risk exposure. The most secure tranches will be the triple rated “AAA” tranches, which will then be followed by double A’s, A’s, double B’s, B’s and so on…

This slicing up via the “tranching” mechanism is done so that specific risk preferences of different types of investors are catered to. So, for example, pension funds will typically invest in triple A rated tranches whilst private equity or hedge funds who conventionally seek out the higher returns will invest in the lower rated tranches. In any case, the investors would receive a proportionate amount of the mortgage payments as their return on investment.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”CDO’s” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]Last, but definitely not least in terms of importance, come the “CDO’s” aka “Collateralized Debt Obligations”. CDO’s have been defined by some as “a mortgage-backed security on steroids”. In fact, whereas MBS’ are securities just made up of mortgages, and CMO’s are just individual tranches of those mortgages, CDO’s are made up of different types of debt (these include corporate bonds, mortgage bonds, bank loans and even car loans!). Like the mortgages, they are then pooled together and bundled into a security which is then sold onto the market as a bond.

In the words of Steve Carrell, whereas MBS’ were “dogshit”, CDO’s were “dog-shit wrapped in cat-shit”. This is because, leading up to the crisis, most investment started creating CDOs that included just the lowest rated tranches of MBS’.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”A Quick Summary” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]Because the last paragraphs were probably the most complex you’re going to get from this article, I believe a quick bullet-pointed recap of how mortgages were dealt with would be useful before we proceed:

  1. Potential homeowners apply for mortgages at banks or at quasi-government agencies like Freddie Mac or Fannie Mae.
  2. These institutions grant these loans.
  3. These loans are then securitized (become MBS’) and pooled together with thousands of other mortgages.
  4. Sometimes MBS’ are sold to investors as a whole.
  5. Other times, these MBS’ then get sold to the SPV’s which then chop the MBS’ into smaller tranches.
  6. These tranches are called CMO’s and are allocated different ratings based on how risky they are.
  7. Once this happens, then CMO’s are sold to different investors as if they were bonds.
  8. Investors will choose whether to invest in a more or less “risky” tranche based on their strategy.
  9. Each month, when people pay down their mortgages, the cash is sent to the investors who purchased the bonds.
  10. CDO’s are debt securities which unlike the two above, pool together different kind of debt. They were sold on the market in the same manner; like MBS’ and CMO’s were divided by their risk class and were meant to provide regular payments to their investors.

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”Greedy investment bankers” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]It’s clear that mortgages were being traded and a lot of people in the financial system held them. So what? Well, most of these mortgages were, bad, very bad. In fact, some of the loans given out were so low quality that someone out there was creative enough to rename “NINJA” loans (No Income, No Job, No Asset Loans). They reflected the fact that lenders were greenlighting almost every credit request, regardless of how shady the borrower’s credit history seemed to be. On top of this, these NINJA loans had “teaser rates”. This meant that they initially required low interest rate repayments which then sky-rocketed after a couple of years. It’s kind of like when you see free subscription for 3 months and really want to sign up for it but, upon zooming into the teeny-tiny letters at the bottom of the screen you see that you will then be charged 60 pounds monthly after the trial period if you don’t cancel your subscription.

But why, you may ask, were banks okay-ing such mortgages, and even more importantly, why were investors prepared to buy them??

Well the answer is that “no one was paying attention”. Banks could afford not to care and investors had no idea these were bad investments. This is because once the banks securitized the mortgages and sold them off to investors, they not only were able to record a “plus” on their balance sheets, but they also got rid of the risk. What this means is that although they might have known these mortgages were not good, this didn’t really affect them because even if the homebuyer defaulted somewhere down the line, they lost nothing. All the risk was shifted onto those buying these MBS’, CMO’s and CDO’s. Indeed, by buying into the security, investors were effectively take the position of the lender.

What made all this worse was how the remuneration system in banks worked; employees would get bonuses based on how many loans they could generate, regardless of the loan’s characteristics. You know the saying “quality over quantity”? It definitely did not apply in this case.  This is why these loans that banks were creating, came to be known as “originate to distribute” loans. The more of these they created and got off their balance sheets, the more of these they could underwrite (this goes back to the whole issue of capital requirements we discussed before).

Now onto the second part of the question: why did investors accept to buy these loans off the institutions? Well, because they didn’t realise how risky they were.  On the face of it, over 90% of these shitty mortgages were “triple a” rated, meaning that they were deemed by the market to be as secure as treasury bonds! At this point, another inevitable question arises.

Who rated these mortgages??[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”Lack of regulation and supervision” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]Agencies such as Moody’s, Fitch and S&P are in charge of assigning credit ratings, which rate a debtor’s ability to pay back debt. This is why they are called, “credit rating agencies”.

Had they done their job properly, most of these MBS’, CMO’s and CDO’s would have received the grading they deserved (AKA C or below) which basically would have placed them in the “junk” category, thereby ensuring that (almost) no one would have bought them.

However, credit rating agencies turned a blind eye to transparency because they wanted to ensure they were paid their fees. Their fees came from investment banks who were the ones asking to rate these securities in the first place. The logic was the following: if, for example, JP Morgan went to Moody’s and asked for a rating and Moody’s came back to them with B’s, C’s and D’s, JP would ditch Moody’s and go to Fitch. And no one likes to knowingly lose out to their competition. This is why the market was flooded with triple A rated securities.

Further, the situation was even more complex because banks mixed “bad mortgages” with slightly better mortgages or other loans (like in the case of CDO’s), which meant that the risk was sliced and diced up so thin that it became almost undetectable and this whole process made it harder to accurately rate securities.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”What made it all worse: Short-Selling, and Credit Default Swaps” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]In short (pun), when someone “shorts” a security (eg a stock or a bond) it means they are betting on the price/value of that product going down in the future. If they end up being right, they make money from this.

In order to “short”, people bought “Credit Default Swaps” (CDS), which are basically insurance contracts that allow purchasers to be protected if any of the securities they own default. CDS’ were sold by insurance companies like AIG who for a small, regular fee paid to them, ensured that investors who bought CDS’ would still get a certain amount of money back in case one of their securities collapsed.

In the Big Short, the protagonists who had foreseen the crash before everyone else, began shorting these toxic securities, with a particular focus on CDO’s. Some say that even the same bankers who created and sold the toxic securities in the first place started shorting these CDOs.

Because the housing market was considered so secure, the returns offered by insurance companies on these CDS’ were huge! If the bonds went bust, shorters could make up to 20:1 returns.

Furthermore, the twist here was that a lot of the people who were doing the shorting didn’t actually own CDO’s, they just wanted to speculate against them because they knew how bad they were.

To give you an idea of just how obviously bad these CDO’s were, when Ryan Gosling is explaining CDS’ to Steve Carrell and his colleagues he screams :“I am literally standing in front of a burning house and offering you insurance”.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”A game of Jenga: How it all came crushing down” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]Usually, because cashflows come in from different loans (CDO’s/MBS’/CMO’s) and are paid by different borrowers, any single default should be redundant when it comes to the stability of the overall portfolio. However, “somewhere along the lines, these B’s, double B’s and C’s went from a little risky to dogshit”. This meant that even the A’s, double A’s and triple A’s were a scam. Basically, the financial markets were inundated with systemic risk and eventually the apocalypse came.

Around the end of 2007, the teaser rates kicked in, causing thousands and thousands of homeowners to default on their loans. This in turn meant that, initially the subordinated tranches of the CDO’s and CMO’s were absorbing all the losses whilst the upper-level tranches remained unaffected. However, pretty quickly the defaults became so many that the subordinated tranches were unable to cushion all the losses, and  the higher rated tranches went to 0 too.

As a result, CDO and CMO portfolio managers did not have any cash flow with which to pay their bondholders.

This shocked everyone as nobody had foreseen that the default rate would be so high. However, as stated before, no one was paying attention. Banks were so focussed on making mega fees that the amount of subprime loans present in the market was disregarded. Everyone had the utmost belief that the real estate market was as solid as they come. Because at the end of the day, who the hell doesn’t pay their mortgage?

So what happens when even what is supposed to be the most secure investment in the system turns out to be worthless? Well panic ensues. In turn this means investors and creditors become wary and scared of the financial system and the product it sells.

Banks were getting almost no income from their loans, which meant their bank capital decreased and they had to refrain from lending out even more money to people and businesses. On top of this, they had so much leverage hidden away in complex derivatives and off-balance sheet SPVs that they looked far better capitalized than what they actually were.

All this meant uncertainty amongst investors and banks spread. No one knew what they were holding or who they could trust.

In a way, the economy was coming to a halt.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”BNP Paribas, Citigroup and Merril Lynch : The first dominoes to topple” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]Curiously, it was a European bank who started the panic. On 9 August 2007, the French bank announced it had frozen three of its funds (worth 1.6 billion euros) which held securities backed by US subprime mortgages. When a bank “freezes” an account, it is effectively preventing any transaction from occurring in it: any open transactions will be cancelled, and checks presented to it will not be honoured.

Then, Citigroup and Merril Lynch announced two of the biggest write-downs of troubled assets in history. A write-down happens when an asset’s market value has fallen below the value it has on the company’s balance sheet. The company’s income statement has to then be adjusted to reflect these losses and net income is reduced. As a result, because both of them held so many mortgage securities, they found themselves having to write down so many troubled assets that they basically went insolvent.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”AIG, Fannie Mae & Freddie Mac: Too interconnected to fail” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]Three of the institutions which were famously saved by the Fed and Congress were AIG, Fannie Mae and Freddie Mac.

Once the mortgages started defaulting, AIG very quickly found out that it just did not have enough capital to repay all the people who had bought CDS insurance and had now come to claim it. Some argue that the Fed should not have bailed them out. But what would have happened to all the people who had given their money to AIG in good faith? Why should they be affected by bad decisions and gambles some people took in the mortgage sector?

On the other hand, Fannie Mae and Freddie Mac were government sponsored mortgage powerhouses who had lent out more than 5 trillion dollars worth in mortgages. Allowing them to collapse would have meant a complete halt in the origination of mortgages which would have completely crushed an already very unstable housing market, which would have also led to the failure of more firms on Wall Street. So they ended up getting nationalised at great expense.

As explained by Bernanke & Co: “systemic crises are not the time for free market absolutism or moral hazard pluralism because of the serious risk they pose to lending, jobs and income”

Sure, they could have just let the crisis run its course and refused to bail out anyone. But this approach would have actually benefitted no-one.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”Lehman Brothers” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]Lehman was the one investment bank that is famous simply because it did not get saved (for example, Bear Stearns was saved by JP Morgan who bought it and guaranteed for its obligations). In their book, Bernanke & Co are keen to dispel the common misconception that Lehman was made to fail on purpose. I mean, after AIG,Fannie Mae, Freddie Mac AND Bear Sterns had been saved, so why not Lehman?

Congress authorized the Fed to save Fannie and Freddie, whereas it was JP Morgan and Jamie Dimon that came to the rescue of Bear Sterns when they agreed to buy the bank and guarantee for its obligations

On the other hand, AIG had enough solid collateral for the Fed to lend against in conditions the market would accept.

By contrast, no buyer was willing to step in for Lehman and no Congressional authorisation for its rescue was given either. Basically, Lehman was just very, very unlucky[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”The Role of Law firms in all this:” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]As aspiring lawyers, it would be easy to fall into the trap where we convince ourselves that the legal profession is immune to recessions. It is technically true that when things go bad, firms put M&A, private equity and the mega deals aside as lawyers are asked to turn their attention to litigation, restructuring, insolvency, bankruptcy or refinancing. This is why full-sector law firms (like W&C, DLA Piper, Slaughter and May) with diverse practice areas and geographies are better set to face these manic situations.

For example, Weil Gotshal & Manges took the lead in the Lehman bankruptcy (the workload was so huge that some say the firm are STILL working on today) and it is said that one the firm’s superstar bankruptcy partners billed up to $950 per hour!

On the other hand Cleary Gottlieb’s litigators defended Bank of America in the very high-profile lawsuit filed by the SEC. One article even said that the firm was so deeply involved with the aftereffects of the financial crisis that its website featured different resources for dealing with the crisis in different, specific regions. Cleary also stepped up for BofA when it came to negotiating the investment bank’s repayment schedule for the TARP funds. Another big US heavyweight who became involved as the lead advisor for the government (specifically the US Treasury) with relation to the TARP programme was Simpson Thacher. So overall, it looks like handsome compensations will always be available for big city lawyers, regardless of the state of the economy.

Nevertheless, in today’s legal market, we would be wrong in believing that every time a crisis comes around, the big law firms will automatically get a big piece of the compensation pie.

In fact, with the rising prominence of alternative legal service providers who are able to offer an army of professionals to carry out low-cost services, big companies are increasingly choosing to spread their work-load across multiple law firms and alternative providers instead of going for the pricey, more traditional options. ALSP’s are able to use automation and AI-powered tools to offer tasks ranging from drafting to project management at a more affordable cost. This is why big law firms should start to invest more in legal-tech and in their relationships with these ALSP’s. This would ultimately enable them to simultaneously enhance the value of their services and justify their prices. De facto, if low-skill, high-volume tasks are able to be off-loaded, lawyers will be able to fully focus on the most complex issues for clients where their expertise is really needed, thus adding value.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”Government intervention and TARP” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]After Lehman went bankrupt, in order to somewhat stabilise the financial system, restore consumer confidence and economic growth and avoid further foreclosures, the US Treasury implemented a full bailout plan known as “TARP” (The Troubled Asset Relief Program). TARP’s primary purpose was to increase liquidity in the now-dried-up markets by buying equity in banks and other financial institutions. The total budget for TARP was 475 billion and it was spent in the following ways (information from the Treasury website):

  • Approximately $250 billion was committed in programs to stabilize banking institutions ($5 billion of which was ultimately cancelled).
  • The U.S. government bought preferred shares in eight banks: Bank of America/Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, State Street, and Wells Fargo.
  • Approximately $27 billion was committed through programs to restart credit markets.
  • Approximately $82 billion was committed to stabilize the U.S. auto industry ($2 billion of which was ultimately cancelled).
  • Approximately $70 billion was committed to stabilize American International Group (AIG) ($2 billion of which was ultimately cancelled).
  • Approximately $46 billion was committed for programs to help struggling families avoid foreclosure, with these expenditures being made over time

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”Are we safer now?” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]What made the situation even more explosive was that many of the institutions who were borrowing short term and lending long term and therefore acting like de facto banks, were not technically banks. This means they operated outside the investment banking system with no regulation, oversight or safety nets.

Investment banks like Bear Sterns and Lehman, mortgage giants like Fannie Mae and Freddie Mac, insurance companies like AIG and corporate finance branches,  “all engaged in the fragile alchemy of maturity transformation but without effective regulatory constraints on their leverage and without the ability to turn to the Fed if their financing evaporated”.

To rectify this, numerous financial reforms were passed which regulated institutions, forcing them to up their capital requirements and decrease their leverage exposure.  These include the Dodd-Frank and Basel II, III and IV. If you want to read and learn more about them follow these links:[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”The great global de-regulation?” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][vc_column_text]Despite all the rules and regulations in place, the Financial Times recently published an article alerting us to the fact that a global deregulation could have begun. For instance, in the Brexit realm, a very heavily debated topic is whether UK financial services will retain complete access to EU clients post Brexit. Brussels has stated, time and time again, that access will be granted only if post-Brexit UK rules remain “equivalent”, or at least very closely aligned to those of the EU 27. We will have to wait and see what Boris Johnson and his government choose to do. Will they comply with Brussel’s demands or will the UK embark on a de-regulatory agenda?

On the other side of the continent, in the US, the Fed governor in charge of financial regulation and the head of the global regulatory oversight body, are reported to have attended a Congressional meeting and to have stated that, in complete disregard of Basel IV, the overall capital levels at US banks should not rise. The FT quotes them saying they “don’t believe that the aggregate level of loss absorbency needs to be increased”.

The last red flag they pointed out was actually quite an interesting one. Apparently, banks like Deutsche and HSBC, with the blessing of European regulators, are giving a lighter capital treatment to environmentally friendly investments. Sure, tackling climate change is important, is this really the way to do it?

On a more general level, some suggest that endless rounds of QE and ultra-low interest rates have over-inflated the value of everything, from houses straight to PE targets.

Overall, yes banks are safer and sounder now than what they were back in 2008; Credit rating agencies are actually doing their jobs and banks and investors are actually verifying the quality of the products they create and sell. However, although history doesn’t repeat itself, it often rhymes; and because the global meltdown was really the result of carelessness, lets hope that this time round PEOPLE ACTUALLY PAY ATTENTION.

I hope that now, having gotten to the end of this odyssey, you can appreciate why, a decade and a year on, the necessity to revisit the financial inferno which brought various continents, economies and sectors to their knees is stronger than ever.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text][1] Note: this does not mean that interest on long-term loans were extraordinarily high. They were just higher than interest on short-term loans and this created an opportunity for banks to borrow whilst also not dissuading ordinary people from borrowing. (This kind of mechanism is at the heart of the banking system.)

[2] Illiquid basically means it’s hard to sell the assets because there is no market for them. In this case as discussed there was no real market for mortgages.

[3] Investopedia[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_separator color=”custom” accent_color=”Ginny is a member of TCLA’s writing team. She is Italian, having lived in Milan until the age of 16. Ginny recently completed a Combined Honours in Social Sciences at Durham University.”][vc_column_text]Ginny is a member of TCLA’s writing team. She is Italian, having lived in Milan until the age of 16. Ginny recently completed a Combined Honours in Social Sciences at Durham University, and she is now a future trainee solicitor.[/vc_column_text][/vc_column][/vc_row]

The Big 4’s (KPMG, Ernst & Young, Deloitte and PwC) traditional accounting services have become increasingly commoditised and less profitable. They\’ve experienced slower growth and face greater legal risks. In order to respond to this market shift the Big 4 have been fighting a constant battle over the last 30 years to become major players in the legal industry to diversify their business. Throughout the 1990’s the Big 5 (as it was known back then) rapidly expanded its legal arms to the scale of the largest international law firms at the time. However, they suffered a heavy defeat following the ‘Enron scandal’ and subsequent collapse of accounting firm Arthur Anderson in 2001.
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Oliver Gilliand
Oliver GillilandTCLA Writer

In the aftermath of this there was a surge of intense regulation and many assumed their legal ambitions were dead in the water, as the lid had been blown on the potential for conflict of interest systemically arising from a business with huge legal and auditory divisions. However, it seems this was only the first clash in what will prove to be an on-going campaign to revolutionise the legal industry.
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The Rise of The Big 4

A surge of liberalisation across the legal industry has enabled the Big 4 to start rapidly rebuilding their legal arms (see table below for a comparison to the largest global law firms as of 2018) and set their sights on seizing a substantial share of the lucrative £700bn global legal services market. This is most evident in the UK following the introduction of the Legal Services Act in 2007, which allowed licenced bodies to launch an ‘alternative business structure’ to offer legal services. PwC was the first of the Big 4 to take advantage of this in 2014 with the launch of PwC legal, but since then all of the Big 4 have their own legal services offering (Deloitte being the last to join in 2018).
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Big Four headcount
Headcount of the Big 4 and the largest global law firms in 2018

The Current Threat – Key Stats

The Big 4 are poised to exploit one of the biggest problems currently facing the legal industry, what Richard Susskind describes as the “more-for-less problem”. This is where many of law firms’ largest clients are demanding a better service at a lower rate (up to 50% less) due to budget constraints. However, traditional law firms have struggled to shift their pricing models from the classic hourly rate (often any ‘shift’ in pricing model is in fact simply a re-packaging of fixed/hourly rates that results in no real cost saving) or innovate to the extent that this is commercially viable. The Big 4 on the other hand do not have the same rigidity when it comes to pricing and are far better position in the technological arms race to increase efficiency. The Big 4 have three main weapons in their arsenal that pose a threat to international law firms and can be used to overcome the more-for-less problem:
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2. Capital Reserves

One of the most formidable weapons in the Big 4’s arsenal is their huge revenues. For context on just how disproportionate this is, KPMG’s revenue in 2019 was $29bn, compared to the world’s largest international law firm by revenue Kirkland & Ellis at a relatively minor $3.7bn (see Bloomberg Law infographic below for a visual representation from 2017).

This means that the Big 4 have far more capital at their disposal than traditional law firms to invest in game-changing legal tech and become market leaders in the technological arms race. This puts the Big 4 in a far better position to address the “more-for-less” problem than traditional law firms, as technology is at the core of increasing efficiency to enable the low-cost legal billing. For instance, the use of AI can automate commoditised legal work and remove the need for trainees to bill for more administrative-based work (for instance see ‘Smarter Drafter’ – an AI capable of drafting documents in a matter of minutes or Kira Systems which can automatically identify and extract key provisions from a contract, required for due diligence). One only needs to take a look at some of the recent headlines to see that the Big 4 mean business when it comes to legal tech:
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This means that the Big 4 have far more capital at their disposal than traditional law firms to invest in game-changing legal tech and become market leaders in the technological arms race. This puts the Big 4 in a far better position to address the “more-for-less” problem than traditional law firms, as technology is at the core of increasing efficiency to enable the low-cost legal billing. For instance, the use of AI can automate commoditised legal work and remove the need for trainees to bill for more administrative-based work (see ‘Smarter Drafter’ – an AI capable of drafting documents in a matter of minutes or Kira Systems which can automatically identify and extract key provisions from a contract, required for due diligence).
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One only needs to take a look at some of the recent headlines to see that the Big 4 mean business when it comes to legal tech:
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Headlines Big 4

3. The One Stop Shop Model

The Big 4 are by no means simply trying emulate leading law firms by offering a shinier and cheaper service, but instead are responding to changing market demands and offering ‘fully integrated solutions’ or a ‘one-stop shop’ model. As Jürg Birri, KPMG’s Global Head of Legal Services, said, “Our approach is different. We’re not a traditional law firm, and we’re not copying the approach of a traditional law firm. We focus on offering our clients integrated legal advice and technology-led solutions and methodologies, in combination with a range of alternative legal managed services.” In other words, the Big 4 can offer to single-handedly complete an entire transaction for their clients through the uses of deep industry experience, a global network and integrated businesses. For instance, PwC recently completed the entirety of tasks associated with the sale of Darrell Lea and were duly awarded Mid-Market M&A Financial Adviser of the Year in Australia. The streamlined integrated service not only allows for cost savings, but is also desirable from a project/matter management perspective, as it is much easier for a client to be guided by a single trusted advisor from start to finish.
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Regulatory Challenges in the UK

However, the Big 4’s legal ambitions in the UK may soon be thwarted following the Competition and Markets Authority\’s (CMA) recommendation of an ‘operational split’ between the Big 4’s accounting practice and their other non-audit professional services (including the increasingly growing legal services). The recommendations are intended to address what the CMA described as ‘serious competition problems in the UK audit industry’. The purpose behind this recommendations to increase competition in the audit market, by removing the Big 4’s ability to share profits with their other professional services businesses (which enables the benefits of economies of scale – creating barriers to entry for smaller businesses) and to prevent business decisions being influenced by their other professional services. While this has not yet been put into law, this could seriously curtail the Big 4’s legal ambitions in 12-18 months as the newly split business would no longer be able to benefit from their audit counterpart’s large war chest. However, it is questionable how much this recommendation would prevent the rise of the Big 4 (if it’s even ever implemented), as they will still be able to offer clients a one-stop shop. Plus, in the long term, it is highly likely that the market will follow the general trend of deregulation and the floodgates will be opened once again (one only needs to look at the rise and fall of the Big 4 in the US legal market).
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Equally, it must be remembered that the Big 4’s legal ambitions are on a global scale and, while they may be facing regulatory challenges in the UK, the opposite is occurring across the pond. Several western US states are pushing to relax State Bar Rules to provide more access to justice, and, in doing so, they are inadvertently opening the floodgates to the Big 4 which have previously been held back by the Sarbanes-Oxley-Act (which currently prohibits audit firms from providing certain non-audit services to clients). Moreover, Alternative Business Structures have been legal in Australia for years and many other countries across the globe are actively heading towards liberalization, such as Canada, South Korea, Singapore and Hong Kong.
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EY Big Four
Willy Barton /

Concluding Thoughts – Is the threat of the rise of the Big 4 a ’Trojan Horse’ or is it overstated?

The big question is: should traditional law firms be worried or is the threat overstated? There are two main misconceptions surrounding the Big 4 leading to a sense of complacency across some of the legal industry:

Limited Practice Area Capability

Many firms are under the impression that their specialist practices need not worry as much of the Big 4’s current focus is on developing their existing strengths in areas such as Immigration, Tax and Cyber-Security. Indeed, PwC created a strategic alliance with Fragomen in 2017, an international immigration law firm and Deloitte undertook a similar arrangement with U.S immigration law firm Berry Appleman & Leidan. However, law firms need to look beyond the headlines, as the Big 4 may be focused on consolidating their strengths at the moment, but in the long term their sights are set higher. Indeed, they have already been on a hiring rampage acquiring both litigators and transactional lawyers as part of their long term strategy – highlighted by Deloitte who recently hired senior Magic Circle M&A partner Michael Castle.

Mid-Market Focus

Equally, there is a belief that clients value the expertise and reputation of the top law firms so highly, that only mid-market work is in contention. But it is questionable whether reputation and expertise alone will be enough to retain clients for high end work in the long term. As the Big 4 are becoming increasingly attractive alternative providers – laterally hiring top talent and making greater strives to effectively address the “more-for-less” problem. Denton’s CEO Elliot Portnoy warns against this complacency, describing what he calls “the myth of legal exceptionalism” – the belief that the work of top law firms is so specialised that an accounting firm could never compete at that level. Ultimately, although the Big 4 may not be competing for high-end work right now, top law firms should still be warry as Fieldfisher managing partner Michael Chissick warns: “They’re not going after the top 20 law firms, because they audit many of them and have close referral relationships, so they’re going after the mid-tier strata of work with the view to – once they’ve conquered and dominated that space – going after the space dominated by the big firms”.
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Ultimately the threat is real and regulation will likely only serve as a temporary hurdle. In the long term, the Big 4 will be moving beyond Tax, Immigration and Cyber-Security and the mid-market into a completely integrated and full service offering capable of competing with the leading firm’s in their respective fields. Even now the Big 4 are already winning work from law firms – a 2017 Thomson Reuters report highlighted that 23% of laws firms surveyed had already competed and lost work to the Big 4 within the last year. While there will always be some demand for specialised legal services, in order for law firms to survive and successfully compete with the accountants they must adapt – either through increased collaboration (e.g. Allen & Overy\’s collaboration with Deloitte to create Margin Matrix) or through innovation and alternative billing structures
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Oliver is a member of TCLA\’s writing team. He is a recent law graduate from the University of Nottingham.
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Recently, you may have seen news reports paying considerable attention to the ‘yield curve inversion’. This metric was widely reported in the financial press as an inverted yield curve is considered by some economists to be a strong indicator of a forthcoming US recession.

For example, according to the economist Campbell Harvey, an inversion of the curve has accurately forecast the last seven US recessions. In finance, where foreshadowing signals can be influential, but ultimately ambiguous, this trend is noteworthy.

Matthew Dow
By Matthew Dow

But, what does the jargon of an inverted yield curve actually mean? What is meant by yield? What specific yield is being referred to? Why do some treat this change in a curve as a soothsaying statistic? Finally, how does this changing curve impact the legal sector?


The first thing to consider is that the yield curve inversion relates to the bond market. In particular, the market for US government bonds, colloquially known as treasury bonds, T-bonds or US treasuries.

The Investopedia definition of a bond is a ‘fixed income instrument that represents a loan made by an investor to a borrower”. Investopedia enriches this definition by portraying a bond as an IOU between the lender and a borrower.

More often the borrower, known as an ‘issuer’, will be a large corporation or a government that desires capital for its investments and its daily expenditure. After all, governments have costs for providing healthcare, education, infrastructure, national defence etc that are rarely covered by tax income alone. The issuer will create their IOUs to provide this funding.

In return, investors will hope to receive the IOU value/principal of the bond back, plus some interest. For investor clarity, each of these bonds or IOUs includes the key details of the agreement and any future payments.

The Key Details of Bonds

The important details to pay attention to in any bond are:

The price of the bond.
The par value of the bond.

This is the amount of money that bond issuers promise to repay investors at the bond’s end date. This amount does not change in most circumstances and is typically $100 or $1000.

The rating of the bond by ratings agencies – an indicator of the risk of non-payment.

The end date when the principal (IOU) is to be paid to the lender/bond owner, known as the bond’s ‘maturity’ date.

The terms for interest payments made by the borrower at regular intervals, often referred to as the bond’s ‘coupon’ payment.

NB. These coupon payments are fixed payments of a set value, say $10 or $50. They are not an % interest as would be the case with your savings account. The payments do not change as the market value of the bond changes.

This fixed income aspect is important because as the bond’s price changes, the bond’s coupon payments stay consistent. However, the de facto rate of interest that investors receive from the bond changes as a result.

Fixed Income and Investor Demand

It is important to realise with any bond, the coupon payments that you receive are fixed in advance. Further, the ‘par value’, or the payment that you obtain upon the bond’s maturity date (the end date of the bond), is predetermined. This information will be explicitly expressed to investors from day 1.

The exception to this certainty arises when the bond issuer defaults on their agreed payments. As a result, to encourage investors, the bonds with a higher risk of default will typically have higher ‘interest’ payments, than say a perceived less risky bond like a US government bond.

Following a short-prescribed period after being issued, the bond becomes a tradeable asset. This means that the bond can be sold between investors on the secondary market. Therefore, the market price of the bond may change over time depending on the levels of supply and the investor demand.

Varying Investor Demand

The investor demand for bonds varies for multiple reasons. A feature of the demand is the notion that bonds, especially from the US government, are typically seen as safer assets, than say equities.

Bonds are perceived as being able to better retain their value in tougher economic times. This is because bondholders are paid out before shareholders in the event of any company’s insolvency.

Additionally, the most secure investment is considered to be US government bonds. The reason being that governments can almost always borrow money if required. Further, the US government has historically honoured its financial commitments to its bondholders. In contrast, shares, commodities, funds and real estate assets can all plummet in value during a recession.

Consequently, when investors are looking for security, rather than capital growth, such as during recessions – they tend to reallocate more of their investment portfolio to government bonds.


Terminology wise, the bonds that are issued by governments are called sovereign bonds. Furthermore, in financial jargon, most US government bonds with maturities of a year or less are known as ‘bills’, rather than ‘bonds’. Those with 2 year to 10-year maturity dates are called treasury ‘notes’. Longer term bonds with maturities of over 10 to 30 years keep the name ‘bonds’. However, ‘bond’ or ‘fixed income’ nomenclature is widely used for all of these assets.

In terms of the recent ‘yield curve inversion’, investors are comparing the yields/rates of two closely watched bonds that mature on 2 distinct dates. The bonds that are compared are the 2 year and 10-year treasury notes.

Sovereign Bond Example – Higher Interest Rates for Longer Term Investment

Let us imagine then that we wanted to lend $1000 to the US government for 2 years.

Rather than slip our deposit into Trump’s wallet, the US government creates an IOU for 2 years. This IOU is better known as a 2-year treasury note. We would purchase this 2-year note directly off the US government on the primary market at an auction, or buy it from somebody else on the secondary market.

Now, if we left $1000 in our savings account at the bank, we know that we would get an interest payment of a few percent. Therefore, to compensate us from losing out, we would also demand to be paid interest for our IOU by the US government.

This interest payment is necessary because unless we sell our bond, we will not have any access to our money until it is repaid in two years’ time. Therefore potentially, losing out on some great investment opportunities during this period.

In addition, we know that could invest our money elsewhere for a much higher rate of interest in a corporate bond. However, we cannot be certain that we will be paid back in 2 years’ time.

Instead, feeling pretty confident that the US government will not run off into the sunset in 2 years, we settle for a lower rate of return on our investment – say 1.5% return each year. As bondholders, we receive our ‘interest’ payment in the form of a fixed-sum ‘coupon’ payment every six months. This payment will be around $15 a year, each year.

But, what if we wanted to lend to the US government for longer, say 10 years instead of 2 years?

Well, the alteration of that date, fundamentally changes our investment outlook. The interest rate that we would demand is probably higher than the yearly 1.5% that we get for the 2-year treasury note.

This higher rate is to do with the risk and the return of our bond investment. After all, if I tie my money up for 10 years and higher returning, non-risky investments emerge, I will lose out.

Opportunity Cost

For example, say the economy starts booming and businesses everywhere want new loans. The bank is happy to oblige these loans, but it has limited money to lend. Therefore, to meet its additional loaning needs, the bank has to attract more depositors. To do this, the bank offers a competitive interest rate.

If the bank offers to pay 3% interest on my savings account, whilst I am stuck being invested in a bond paying a coupon rate of only 1.5% – I could be losing 1.5% extra interest on that $1000 of mine every year for 10 years. Also, bank savings are relatively low risk of being suddenly lost. Therefore, the security benefit of the bond investment is negligible.

At least, with the 2-year bond, I get my $1000 par value/principal back after 2 years. I can then put this money in the bank for the 8 remaining years and acquire the improved bank interest rate.

Additionally, I can be reasonably assured that I will be paid the principal back by the bond issuer in 2 years. However, over 10 years anything can happen – the risk of the bond issuer’s default is much higher. For me, there is 8 years’ worth of additional risk in holding the 10-year bond.

Therefore, typically, I want a more generous interest rate from a 10-year note, compared to the 2-year note. Otherwise, assuming prices do not change, I will just buy the 2-year note, 5 consecutive times – mitigating my exposure. This example is indicative of a broader trend. In general, the longer the date until maturity, the greater the yield/rate of return that investors will demand.


What we are discussing above is the yield that we expect to receive.

The current yield is the coupon rate earned on our bond, divided by the current market price of our bond.

Therefore, if our 2-year bond (with a par value upon maturity of $1000) has a coupon payment of $15 each year, it can be said to have a coupon rate of 1.5%. If the bond sells for the market price of $1000, then the current yield is 1.5%.

However, if the bond sells on the market for only $500, then its current yield is 3% (15/500). If the bond’s price rises to $1500, then the current yield of the bond lowers to 1.0% (15/1500).

In short, as the bond’s price rises – yields go down. The higher the yields the better the return for investors. In addition, the higher the cost of borrowing for governments.

So far, we have assumed that our 2 year, 10 year and even 30 year bonds cost $1000. Furthermore, we believe that they all pay back the $1000 principal/IOU upon their respective maturity + some fixed interest as a coupon payment throughout the lifetime of the bond.

However, the market value of the bond rarely matches the amount to be received upon maturity. In fact, it tends to only closely resemble the final amount to be repaid upon maturity as you reach the maturity date. This is logical. No investor will pay $1500 for a bond that they know will only be worth $1000 tomorrow at the bond’s maturity date.

In fact, on the secondary market, bonds can be traded daily and the bond’s market price reflects investors’ concerns and expectations.

For instance, investors may be worried about the issuer’s risk of default and price this in. As evidence, investors factored this default risk into the Greek government’s bond prices from 2008 onwards. Investors feared that they would not be paid back in full, therefore they continuously sold these bonds, reducing the bond’s price and raising its yield.

Furthermore, the prices of bonds also vary due to inflation fears, the time value of money and the relative bond value. For example, higher returns may be available elsewhere for similar risk levels.



In addition, bond prices may drop due to arbitrage, (circumstances where the same asset has differing prices).For instance, say for the last 12 months, you have possessed, a 2-year US government bond paying a fixed coupon, equivalent to an interest rate of 2%. Therefore, in this example, there is now only 1 year left until the bond reaches maturity.

If a new 1 year maturing bond is issued by the US government paying a coupon rate equivalent to 3% yield, then the price of your bond will decline to match this new yield. Your 2% fixed payment will have to mirror the 3% yield now on offer elsewhere.

The only way to do this with a fixed interest payment, is by reducing the bond’s market price. The alternative, is that there will be no demand for your bond at all on the secondary market, as there is an exact duplicate treasury note on the market paying 1% more a year.

Prices and Yield

As the market value of the bond drops, the coupon payments received by the investor still remain fixed. So, anyone purchasing the bond once the price has dropped will be getting a higher return. Therefore, the yield of the bond actually increases as the price falls.

We can plot the yields of US government bonds that mature at different dates on a graph. The y axis features the % ‘yield to maturity’ of the bond. The ‘yield to maturity’ is the yield the investor would get if they held the bond until maturity. In contrast, the current yield is the yield at the present moment. For instruction purposes, we will stick with the idea of current yield.

The x axis presents the bond’s maturity date, usually ranging from a few months to over 30 years. This graph is known as the yield curve.


If we plotted the yields of bonds at different maturities we should see a curve emerge. Usually, the yield curve will slope upwards. This normal yield curve occurs as investors demand higher yields for longer term investments, eg a few % points higher interest rate return for 30 year bonds, than 3 month bonds.

Inverted Yield Curve


However, as demand rises for longer term bonds, the prices of longer term bonds will increase. Imagine our 10-year bond going from a market price of $1000 to $1500, but still paying $15 a year as a coupon. As a result, the respective yield of longer term bonds will change.

The coupon payments (remaining the same as before the demand increase), will now be divided by a larger market value of the bond (due to the price increase caused by the sudden demand). Consequently, these longer-term bonds’ yields will shrink.

This will change the slope of the graph. Yields for bonds at shorter maturities like 2-year bonds will be greater than the yields for longer maturing 10-year bonds. If this trend continues, this can lead to an inversion of the curve.

Screenshot 2019-09-12 at 08.36.48

So, what happened with the recent inversion?

Treasury Yields since may 2019

What we saw in August, was the slope of the yield curve change. Rising trade tensions between the US and China, negative/low yields in long term bonds in much of the Eurozone, combined with uncertainty over the federal reserve’s interest rate change meant that international demand for 10-year treasury note rose.

2-year treasury notes did not see the same level of demand increase. So, prices and therefore yields remained about the same there.

The result was that that the price of the 10-year treasury note rose. Consequently, the 10-year treasury note yield reduced. Indeed, the yield on 10-year treasury note reduced to 1.453%. – slightly below our hypothetical example.

The significance of this metric is that this meant that the 10-year bond was trading 4 basis points or 0.04% lower than the 2-year treasury note. This is completely contrary to typical expectations.

This means that investors were prepared to receive a lower rate of interest for their US bond for 10 years, than 2 years. The 2-year treasury bond yield point on the y axis, was higher than the 10-year treasury bond yield point. The yield curve after flattening for a long while now, briefly inverted.

What does this inversion mean? What explains it and recession ahead?

A yield curve inversion traditionally means that investors suspect that economic fortunes for the US in the short term will not be as favourable. This inversion often precedes a recession by 12-24 months.

The theory suggests that investors are predicting a low growth economy. Financiers contend that companies’ profits will not grow as fast in the future. Furthermore, businesses lacking confidence, will not invest as much as before. Moreover, employees may lose their jobs and have less income to spend, reducing economic growth elsewhere in other sectors.

Therefore, the return from shares or commodities may not be as strong for investors compared to the last few years. Hence, stockholders are prepared to switch to safer assets such as bonds, rather than equities.

In addition, interest rates play a huge role in causing the curve change. Interest rate increases are the tool of central banks to combat inflation during a growing economy. In contrast, central banks tend to artificially lower interest rates to encourage economic growth during recessions.

Government bond yields respond to these central bank inspired interest rates. This is because safe assets like government bonds are often benchmarked by what interest rates you can receive from central banks. A low interest rate lowers the return on government bonds.

This low return on these bonds is evident worldwide. Since the financial crisis of 2008, government bond yields have been incredibly low – in some places such as Germany bond yields are even negative. In Japan, negative rates have been the norm for decades. This means that you actually receive less money than the amount you originally gave in your government IOUs.

Consequently, fearing recession and uncertain of the future rate changes, investors anticipate that future US bond yields could also experience this yield reduction.

Therefore, investors are prepared to pay for the privilege of having a reasonable yield secured for 10 years. The expected declining economic situation leads them to believe that next year’s yields will ultimately be lower than those currently available.

After all, why would you secure a positive yield for only 2 years, if you genuinely believed in 2 years’ time that the yield would be significantly lower?

Well, regulation also factors in here.

A lot of demand for sovereign bonds comes from institutional investors. These institutional investors often legally have to hold a certain amount of ‘safe’ reserves that they can quickly sell. This checklist includes cash, bonds and central bank deposits.

These ‘safe’ government bonds are primarily used by these investors for liquidity (easy to sell) purposes as they are tradeable assets. In contrast, real estate assets take months to sell.

Therefore, if you expected yields to reduce or even become negative in the future due to a possible recession. Furthermore, knowing that other banks may charge you to hold idle cash too. The wise choice to fulfil your legal obligations may be to buy longer term bonds and get locked in to a positive return. Inverting the normal yield curve in the process.

What does this inversion mean for law firms?

Overall, the inverted yield curve is just one influential metric within the financial markets. It is unlikely that this inversion alone will cause a significant change to law firms’ business strategies.

For example, professional investors disagree as to the inversion’s value or meaning. After all, the yield curve has been flattening for a while due to the unique low interest, low growth monetary policy environment will now live in. Furthermore, there is a suggestion that the inversion was specific context driven, rather than an obvious sign of attitudes towards the US’s recession prospects.

Nonetheless, the metric has been a reliable indicator to many businesses before. Repeated coverage of it too may affect business’s confidence on certain investments.

For example, boards of directors may be more cautious about going ahead with certain larger ventures or cross-national expansion. Instead they may scale back, choose fewer jurisdictions to concentrate on, or delay their investment.

A more bearish outlook in the financial markets may eventually impact law firms directly too. This is apparent as a growing trend has seen law firms IPO to secure capital for needed personnel, technology investment and overseas office expansion. A market with less faith in the economy’s growth prospects may not be able to provide the desired finance to make such a strategy worthwhile.

Elsewhere, the suggestion of a recession within the next 24 months could impact corporate law firms’ key practice areas. Mergers with other companies may be delayed. Acquisitions in the US may be re-evaluated. This is particularly the case in sectors that are hit harder by recessions, such as construction and manufacturing.

Likewise, major infrastructure projects relying on project finance or asset finance may be reconsidered. For instance, companies in emerging markets may become more favourable for investments. This change in focus could lead to innovative international partnerships for firms in these sectors. Alternatively, it could lead to lawyers with better levels of knowledge about particular regions growing their teams.

A recession may strengthen the case for larger international firms with diverse practice areas, hundreds of lawyers and international exposure. Alternatively, it may lead to praise for the US firm model of lean management and concentration on high margin work.

Finally, a recession often correlates with increased levels of restructuring and litigation. This is because the benefits of the dispute are worth fighting for more. Thus, clients may negotiate the contractual details in the event of a dispute or insolvency with more vigour. Additionally, there may be more security demanded for certain projects.


Ultimately, the yield curve inversion is one financial statistic. There are many other statistics, such as employment trends, manufacturing data and share price highs, that depict opposite economic fortunes for the US.

Nonetheless, the yield curve inversion impact is discussed by the financial sector. Therefore, it is worth corporate lawyers considering its implications as well.

Matthew completed his undergraduate in History and Politics at Oxford in 2014. He has pivoted to law after spending the last few years working in mobile marketing for King. He obtained his LLB from the University of Law, Bloomsbury and now works as a paralegal for Kingsley Napley.

 Mergers and Acquisitions Case Studies and Interviews

A Guide for Future Lawyers

Enjoyed this post? Check out our new Mergers and Acquisitions Course, which covers exactly what you need to know about M&A for interviews at top commercial law firms. Free access to this course is given to all premium subscribers.

If you don’t know what commercial law is or what commercial lawyers do, it’s hard to know whether you want to be one.

I’m going to discuss one aspect of commercial law: mergers and acquisitions or “M&A”, and with any luck, convince you it can be exciting.

I’ll also cover many of the aspects of mergers and acquisitions that you need to know for law firm interviews and case study exercises.

Let’s begin with an example, which highlights the impact of mergers and acquisitions. In 2017, Amazon bought Whole Foods and became the fifth largest grocer in the US by market share. This single manoeuvre shed almost $40 billion in market value from companies in the US and Europe.

The fall in value of rival supermarkets reflected fears over Amazon’s financial capacity and its potential to win a price war between supermarkets. Amazon the customer data to understand where, when and why people buy groceries, and it has the technology to integrate its offline and online platforms. When you’re in the race to be the first trillion-dollar company, acquisitions can take you a long way (Edit: In August 2018, Apple managed to beat Amazon to win this title).

Amazon Mergers and Acquisitions Plan
Jeff Bezos, Amazon’s founder and CEO, now the world’s richest man

But not all companies share Amazon’s success. In fact, out of 2,500 M&A deals analysed by the Harvard Business Review, 60% destroyed shareholder value.

That begs the question:

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Why do firms merge or acquire in the first place?

I’ll use law firms as an example. You’ll have seen that they often merge, or adopt structures called Swiss vereins, which allow law firms to share branding and marketing but keep their finances and legal liabilities separate.

In the legal world, it can be hard to find organic growth or organic growth can be very slow. Clients like to shop around, which can make it hard to retain existing business. It’s competitive: other law firms can poach valuable partners and bring their clients with them. And whilst entering new markets is an attractive option, it’s expensive, often subject to heavy-regulation and requires the resolve and means to challenge the existing players in that market.

Consolidation can help law firms, which are squeezed between lower-cost entrants and the global players, to compete. This is why we’ve seen many mergers in the mid-market. A combined firm is bigger, less vulnerable to external shocks, and has access to more lawyers and clients. The three-way merger between Olswang, Nabarro and CMS is a good example of this. The year before its merger, Olswang had revenues below £100m and a 77% fall in operating profit. Now, under the name CMS, it’s one of the largest UK law firms by lawyer headcount and revenue.

But mergers aren’t only a defensive move. They can allow law firms to speed-up entry into new markets. For example, were it not for its merger, it would have been difficult for Dentons to open an office in China. Chinese clients, especially state-owned enterprises, are often less likely to pay high legal fees, while local expertise and personal relationships can play a bigger role. There’s also regulation, which prevents non-Chinese lawyers from practicing Chinese mainland law, and plenty of competition from established Chinese law firms. That helps to explain Dentons’ 2015 merger with Dacheng, a firm with decades of experience and an established presence in the Chinese market. Now Dentons is positioned to serve clients investing in China, as well as Chinese clients looking for outbound work at a fraction of the time and cost.

Mergers can also synergies, or at least that’s one of the most frequently used buzzwords to justify an M&A deal. The idea is that when you combine two firms together, the value of the combined firm is more than the sum of its individual parts.

Sainsburys asda merger synergies
Sainsbury’s identified £500m in synergies from its proposed merger with Asda

Synergies for a law firm merger could come from cutting costs by closing duplicate offices and laying off support staff. It could also be the fact that a combined law firm could sell more legal services than the two law firms individually, which may be bolstered by the fact that they can cross-sell their expertise to each other’s clients and benefit from economies of scale (e.g. better negotiating paper due to their size).

Finally, mergers can offer reputational benefits. Branding is an essential part of the legal world and combinations gain a lot of legal press. Mergers may allow fairly unknown firms to access new clients and generate far more business if they partner with an established firm. Very large global firms often pride themselves as a ‘one-stop shop’, pitching the fact that their size allows them to service all the needs of a client across any jurisdiction.

The benefits of Synergies in M&ABut that’s not to say mergers are necessary. Many law firms have grown just fine by organic means. Some attract new clients by developing their sector expertise; for example, Bird & Bird is renown for its intellectual property team and Withers for private client work. Some firms achieve a global reach by opening up their own offices. Others, like Slaughter & May, operate best friend groups, and refer work to a select group of law firms to serve their international clients.

While it’s true that Swiss vereins have led the likes of DLA Piper and Baker McKenzie to develop very strong brands, collaboration hasn’t always worked out and some law firms have paid the ultimate price. Internal problems and mismanagement plagued the merger of Dewey & LeBoeuf, which, at the time, was called the largest law firm collapse in US history. Bingham McCutchen collapsed for similar reasons. Most recently, King & Wood Mallesons made the mistake of merging with an already troubled SJ Berwin. Poor incentive structures, defections and a fragile merger structure later led to the collapse of KWM Europe. Only time will tell whether Dentons’ 31 plus combinations, as well as the aggressive use of Swiss vereins by other firms, will be a success.

So that’s the why, I’ll now go through the how. Note, in this article, I’ll discuss the mechanics of acquisitions rather than mergers: you can see the difference in the definitions section below. As lawyers, you’ll find acquisitions are more common and you’re more likely to be asked about the acquisition process in law firm interviews and assessment centres.

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Mergers & Acquisitions Definitions

  • Acquisition: The purchase of one company by another company.
  • Acquirer/Buyer: The company purchasing the target company.
  • Asset purchase: The purchase of particular assets and liabilities in a target company. An alternative to a share purchase.
  • Auction sale: The process where a company is put up for auction and multiple buyers bid to buy a target company.
  • Due diligence: The process of investigating a business to determine whether it’s worth buying and on what terms it should be bought.
  • Debt finance: This means raising finance through borrowing money.
  • Equity finance: This means raising finance by issuing shares.
  • Mergers: When two companies combine to form a new company.
  • Share purchase: When a company buys another company through the purchase of its shares. An alternative to an asset purchase.
  • Swiss verein: In the law firm context, this is a structure used by some law firms to ‘merge’ with other law firms. They share marketing and branding, but remain legally and financially separate.
  • Target company: The company that is being acquired.

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Kicking off the Acquisition Process

The buy side

Sometimes the acquirer will have identified a company it wants to buy before it reaches out to advisers. Other times, it’ll work closely with an investment bank or a financial adviser to find a suitable target company.

Before making contact with the target company, the acquirer will typically undertake preliminary research, often with the help of third-party services to compile reports on companies. They’ll look through a range of material including:

  • news sources and press releases
  • insolvency and litigation databases
  • filings at Companies House
  • the industry and competitors

The aim is to better understand the target company. The company’s management will want to check for any big risks and form an early view of the viability of an acquisition. Then, if they’re convinced, the first contact may be direct or arranged through a third party, such as an investment bank or consultant.

Note: In practice, lawyers – especially trainees – spend a lot of time using the sources above. Companies House is a useful online resource to find out about private companies. It’s where you’ll find their annual accounts, annual returns (now called a confirmation statement) and information on the company’s incorporation.

The sell side

Sometimes, a target company wants to sell. The founders may want to retire, the company may be performing poorly, or investors may want to cash out and move on.

If a target company wants more options, it may initiate an auction sale. This is a competitive bid process, which tends to drive bid prices up and help the target company sell on the best terms possible. For example, Unilever sold its recent spreads business to KKR using this method.

But, an auction sale isn’t always appropriate. Sometimes the target company will enter discussions with just one company. This may be preferable if the company is struggling, so it can ensure speed and privacy, or the target company may have a particular acquirer in mind. For example, Whole Foods used a consultant to arrange a meeting with Amazon. That was after reading a media report which suggested Amazon was interested in buying the company.

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Friendly v Hostile Takeovers

In the UK, takeovers are often used to refer to public companies. While we’ll be focusing on acquisitions of private companies, I’ll cover this here because they’re often in the news and sometimes come up in law firm interviews.

The board of directors are the people that oversee a company’s strategy. Directors owe duties to shareholders –  the owners of the company – and are appointed by the shareholders to manage a company’s affairs.

If a proposed acquisition is brought to the attention of the board and the board recommends the bid to shareholders, we call this a friendly takeover. But if they don’t, it’s a hostile takeover, and the acquirer will try to buy the company without the cooperation of management. This may mean presenting the offer directly to shareholders and trying to get a majority to agree to sell their shares.

Sometimes, it’s not too difficult; Cadbury’s board first rejected Kraft’s bid and accused the company of attempting to buy Cadbury “on the cheap”. Later, when Kraft revised its offer, the board recommended its bid to shareholders.

In other situations, hostile takeovers can be messy, especially if neither party wants to back down. This was the case in 2011 between the infamous activist investor Carl Icahn and The Clorox Company.

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Icahn and the Clorox Company

Cartoon showing Clorox Company using poison pill

In 2011, Carl Icahn made a bid to buy The Clorox Company (Clorox), the owner of many consumer products including Burt’s Bees. In his letter to the board, Icahn also tried to start a bidding war, inviting other buyers to step in and bid.

Clorox’s board rejected Icahn’s bid and quickly hired Wachtell, Lipton, Rosen & Katz, a US law firm, to defend itself. Wachtell wasn’t just any law firm. Icahn and Wachtell had been rivals for decades. In fact, between 2008 and 2011, Wachtell had successfully defended two companies from Icahn.

This was round three.

Clorox adopted a “poison pill” strategy, a tactic that allowed Clorox’s existing shareholders to buy the company’s shares at a discount. This made the attempted takeover more expensive. Martin Lipton, one of the founding partners of Wachtell, had invented the poison pill to prevent hostile takeovers in the 80’s. It was “one of the most anti-shareholder provisions ever devised” according to Icahn. Now, Clorox was using this weapon to stop the activist investor.

But that didn’t stop Icahn. In a scathing letter to the board, he raised his bid for the company.  A week later, the board rejected it again.

Icahn made a third bid. This time his letter threatened to remove the entire board. But the board didn’t back down.

Eventually, Icahn did.

The war between Icahn and Wachtell didn’t stop there. In 2013, Wachtell successfully defended Dell from Icahn. A few months after that, Icahn tried to sue Wachtell. In response, the law firm said:

Icahn takes his bullying campaign to a new level, seeking to intimidate lawyers who help clients resist his demands by making wild allegations and threatening liability. Those tactics will not work here.”

Remember when I said corporate law could be exciting?

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What are the ways a company can acquire another company?

This is one of the most common questions in law firm commercial interviews.

There are two ways to acquire a company. A company can buy the shares of a target company in a share purchase or buy particular assets (and liabilities) in an asset purchase.


Cartoon showing share purchase



Cartoon showing asset purchase


Share Purchase

In a share purchase, the acquirer buys a majority of shares in the target company and therefore becomes its new owner. This means all of the company’s assets and liabilities transfer automatically, so, usually, there’s no need to worry about securing consent from third parties or transferring contracts separately. This is great because the business can continue without disruption and the transition is fairly seamless.

However, as the liabilities of a company also transfer in share purchase, it’s important the acquirer investigates the target really well. It’ll also want to try protect itself from known risks when negotiating the acquisition agreement.

For example, suppose three months after the acquisition has completed, a former employee brings an unfair dismissal claim against the acquirer. If this was something they had known about pre-acquisition, they’ll want to be indemnified for those costs (we’ll come back to this later).

Conversely, if they didn’t know about it at the time of the acquisition and they didn’t protect themselves in the acquisition agreement, they’ll have to pay out. That’s one of the risks of doing a share purchase. (Although as we’ll discuss later, there are certain things you can do to reduce the risks of this happening.)

Asset Purchase

Disney Acquisition 21st Century FoxSometimes, an acquirer only wants to buy some of the assets of a company. This was the case with Disney’s recent acquisition of 21st Century Fox, which involved Disney buying the majority of 21st Century Fox’s assets.

We call this an asset purchase. It means that the acquirer identifies the specific assets and liabilities it wants to buy from the target and leaves everything else behind. That’s great because the acquirer will know exactly what it’s getting and there’s little risk of hidden liabilities.

However, asset purchases are less common and can be difficult to execute. Unlike share purchases, assets don’t transfer automatically, so the acquirer may have to renegotiate contracts or seek consent from third parties to proceed with the acquisition.

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Preliminary Agreements


Confidentiality Agreements

Before negotiations begin, the target company will want the acquirer to sign a confidentiality agreement or a non-disclosure agreement.

This is important because the seller will provide the acquirer with access to private information during the due diligence process. Suppose the acquirer decided not to proceed with the acquisition and there was no confidentiality agreement in place; the acquirer could use this information to poach staff, better compete with the target or reveal damaging information to the public.

So, lawyers for the acquirer and the target company will negotiate the confidentiality agreement. They’ll decide what counts as confidential, what happens to information if the acquisition doesn’t complete, as well as any instances where confidential information can be passed on without breaching the contract.



Exclusivity Agreements

If an acquirer is dead set on buying a particular target company then, in an ideal situation, it will want to be the only one negotiating with that company. This would give the acquirer time to conduct due diligence and negotiate on price, without pressure from competitors. It also ensures secrecy.

If the acquirer has some bargaining power, it may try to sign an exclusivity agreement with the target company. This would ensure, for a period of time, the target company does not discuss the acquisition with third parties or seek out other offers.

While it’s unclear whether an exclusivity agreement was actually signed, Amazon was clear during early negotiations with Whole Foods that it wasn’t interested in a “multiparty sale process” and warned it would walk if rumours started circulating. That was effective: Whole Foods chose not to entertain the four private equity firms who’d expressed interest in buying the company.


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Heads of Terms

The first serious step will be the negotiation of the Heads of Terms (also called the Letter of Intent) between the lawyers, on behalf of the parties. This document details the main commercial and legal terms that have been agreed between the parties, including the structure of the deal, the price, the conditions for signing and the date of completion. It’s not legally binding – so the acquirer won’t have to buy and the target company won’t have to sell if the deal doesn’t go through – but it serves as a record of early negotiations and a guideline for the main acquisition document.

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Due Diligence

An acquirer can’t determine whether it should buy a target without detailed information about its legal, financial and commercial position. The process of investigating, verifying and reviewing this information is called due diligence.

The due diligence process helps the acquirer to value the target. It’s an attempt at better understanding the target company, quantifying synergies and determining whether an acquisition makes financial sense.

Due diligence also reveals the risks of an acquisition. The acquirer can examine potential liabilities, from customer complaints to litigation claims or scandals. This is important because underlying the process of due diligence is the principle of caveat emptor, which means “let the buyer beware”. This legal principle means it’s up to the buyer to fully investigate the company before entering into an agreement. In other words, if the buyer failed to discover something during due diligence, it’s their problem. There’s no remedy after the acquisition agreement is signed.

So if the problems uncovered during the due diligence process are substantial, the acquirer may decide to walk away. Alternatively, it could use this information to negotiate down the price or include terms to protect itself in the main acquisition document.

In an asset purchase, due diligence is also an opportunity to identify all the consents and approvals the buyer needs to acquire the company.

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Due Diligence Teams

The acquirer will assemble a team of advisers, including bankers, accountants and lawyers, to manage the due diligence process. The form and scope of the review will depend on the nature of the acquisition. For example, an experienced private equity firm is likely to need less guidance than a start-up’s first acquisition. Likewise, a full due diligence process may not be appropriate for a struggling company that needs to be sold quickly.

Due diligence isn’t cheap, but missing information can be devastating. In a Merger Market survey, 88% of respondents said insufficient due diligence was the most common reason M&A deals failed. HP had to write off $8.8 billion after its acquisition of Autonomy – which was criticised for being a result of HP’s ‘faulty due diligence‘. Few also looked into organisational compatibility in the merger between AOL and Time Warner, which led to the “biggest mistake in corporate history”, according to Jeff Bewkes, chief executive of Time Warner. In 2000, Time Warner had a market value of $160 billion. In 2009, it was worth $36 billion.

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Types of Due Diligence


Financial due diligence 
This involves assessing the target company’s finances to determine its health and future performance.



Business due diligence 
This involves evaluating strategic and commercial issues, including the market, competitors, customers and the target company’s strategy.


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Legal Due Diligence

Legal due diligence is the process of assessing the legal risks of an acquisition. By understanding the legal risks of an acquisition, the acquirer can determine whether to proceed and on what terms.

The acquirer’s lawyers have a few ways of obtaining information for their due diligence report. They’ll prepare a questionnaire for the seller to complete and request a variety of documents. This will all be stored in a virtual ‘data room’ for all parties to access. They may also undertake company, insolvency, intellectual property and property searches, interview management and, if appropriate, undertake on-site visits.

The Report

Lawyer working in virtual data roomIt’s important that departments and advisers coordinate to prevent overlap and save costs when compiling the due diligence report.

Law firms tend to have a system to manage the flow of information and trainees are often very involved. They’ll review, under supervision, much of the documentation and flag up potential risks.

Legal due diligence reports are typically on an ‘exceptions’ basis. This means they’ll flag to the client only the material issues. You can see why this is valuable to the client; rather than raising every possible issue, they’ll apply their commercial judgement to inform the clients about the most important issues.

The report will propose recommendations on how to handle each identified issue. This may include: reducing the price, including a term in the agreement or seeking requests for more information. If the issue is significant, lawyers will want to tell their client immediately, especially if what they find is very serious.

Due Diligence Options

Note, due diligence is a popular topic for interviews. You may be asked to recommend possible solutions to issues uncovered during the due diligence process or asked to discuss the issues that different departments may consider (see examples below).

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What are lawyers looking for during due diligence?


What might Corporate investigate?

The group structure of the target, including the operations of any parent companies or subsidiaries

The company’s constitution, board resolutions, director appointments and resignations, and shareholder agreements.

Important details from Insolvency and Companies House searches

Copies of contracts for suppliers, distributors, licences, agencies and customers.

Termination or notification provisions in contracts

What do they want to know?

Whether shareholders can transfer their shares (share purchase)

Whether shareholders need to approve the sale and the various voting powers of shareholders

Any change of control provisions in contracts

Whether the target can transfer assets (asset purchase)

Any outstanding director loans, director disqualifications, or conflicts of interest



What might Finance investigate?

Existing borrowing arrangements including loan documents and any guarantees

Correspondence with lenders and creditors

Share capital, allocation and employee share schemes

Assets and financial accounts

The company’s ability to pay current and future debts

Any prior loan defaults, credit issues or court judgements

What do they want to know?

Details of ownership and title to the assets

Any liabilities which could limit the performance of the target

Whether borrowing would breach existing loan terms

Whether the loan agreements have any change of control clauses

Whether security has been granted over the target’s assets to lenders


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What might Litigation investigate?

Details of any past, current or pending litigation

Disputes between the company, employees or directors

Regulatory and compliance certificates

Any judgements made against the company

Insurance policies

What do they want to know?

The risk of outstanding or future claims against the company

Details of any regulatory or compliance investigations

Potential issues or threatened litigation from customers, employees or suppliers in the past five years



What might Property investigate?

Documents relating to freehold and leasehold interests

Inspections, site visits, surveyors and search reports

Health and safety certificates and building regulation compliance

Leases and licences granted to third parties

What do they want to know?

Whether the property will be used or sold

Property liabilities

Title ownership and lease/licensing terms

The value of the properties

Details of regulatory compliance


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What might Employment investigate?

Director and employee details, and service contracts

Pension schemes and employee share schemes

Pay, benefits and HR policy information

Information in relation to redundancies, dismissals or litigation

What do they want to know?

Plans to retain key managers, redundancy and compensation

Pension scheme deficits

Termination or change of control provisions

Compliance with employment law and consultation

Risks of dismissal claims

Evaluate post-acquisition integration



What might Intellectual Property investigate?

List of any trademarks, copyright, patents, domain names and any other registered intellectual property

Registration documents and licencing agreements

Litigation and related correspondence

Searches at the Intellectual Property Office

What do they want to know?

Current or potential disputes, claims of threatened litigation in relation to infringement

Whether the seller has renewed trademarks

Who has ownership of the intellectual property

Whether they can transfer licenses and gain consents

Details of critical assets, confidentiality provisions and trade secrets

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The Acquisition Agreement

The main legal document is the sale and purchase agreement or “SPA”. It sets out what the acquirer is buying, the purchase price and the key terms of the transaction.

Purchase Price

A company will usually pay for an acquisition in cash, shares, or a combination of the two.

Cash is a good option if an acquirer is confident in the acquisition. If it believes the shares are going to increase in value (thanks to synergies), paying in cash means it can soak up the benefits without having to give up ownership of the company. It is, however, expensive to pay in cash. The buyer must raise money if it doesn’t already have enough cash reserves by issuing shares or borrowing.  Most sellers also want cash. It means they’ll know exactly how much they’re getting and don’t have to worry about the future performance of a company.

Other times, an acquirer will want to use shares to pay for an acquisition. The target’s shareholders will get a stake in the acquirer in return for selling their shares. If the value of the acquirer’s shares increases, the shareholders may get a better return. Often, this option will be more attractive for an acquirer as it doesn’t use up cash. Receiving shares can also be valuable for the seller if they’re gaining shares in a promising company. Conversely, however, they must bear the risk that the value of the acquirer falls.

Key terms of the transaction

Both parties will make assurances to each other in the form of terms in the SPA. These terms are heavily negotiated between lawyers.

Warranties and representations

Warranties are statements of fact about the state of the target company or particular assets or liabilities. For example, the seller may warrant that the target isn’t involved in any litigation, that its accounts are up to date and that there are no issues with its properties. If these warranties turn out to be false, the acquirer may claim for damages. However, there are limitations: the acquirer will have to show that the breach reduced the value of the business and that can be hard to prove.

During negotiations, the seller will try to limit the scope of the warranties. It’ll also prepare a disclosure letter to qualify each warranty. For example, the seller may qualify the above warranty with a list of outstanding litigation claims. If the seller discloses against a warranty, they won’t be liable for a breach. Disclosure is also useful for the acquirer because it may reveal information that was not found during due diligence.

The acquirer will want some of these statements to be representations. Representations are statements which induce the acquirer to enter into a contract. If these are false, the acquirer could have a claim for misrepresentation. That could give the acquirer a stronger remedy, including termination of the contract or a bigger claim for damages. This is why the seller will usually resist giving representations.


Indemnities are promises to compensate a party for identified costs or losses. This is appropriate because the acquirer may identify potential risks during due diligence; for example, the risk of an unfair dismissal claim or a litigation suit. The acquirer can seek indemnities to be compensated for these particular liabilities arising in the future. This is a way to allocate risks to the seller: if the event occurs the acquirer will be reimbursed by the seller.

Conditions Precedent

The SPA may be signed subject to the satisfaction of the conditions precedent or “CPs”. These are conditions that must be fulfilled before the acquisition can complete. That could mean, for example, securing consent from third parties, shareholder approval or merger clearance. Trainees are often responsible for keeping track of the conditions precedent checklist, and they’ll need to chase parties for the approvals to ensure all conditions are satisfied.[divider height=”30″ style=”default” line=”default” themecolor=”1″]

Being stressed when signing as a trainee lawyerSigning and Completion

This is the big day. Signing can take place in person or virtually. Each party will return the SPA with their signature in accordance with the relevant guidelines. It’ll be the trainees responsibility to check that the SPA has been signed correctly and to collate the documents.

Final Thoughts

If you’re reading this to prepare for an interview, I’d suggest you explore the “acquisition structure”, “legal due diligence” and “warranties and indemnities” sections – these are common case-study questions. We cover this in more detail and with practice interview answers in our mergers and acquisitions course, which is free for TCLA Premium members.

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How I Secured Six Vacation Schemes

successful vacation scheme student

A conversation with Lewis Malkin

Lewis Malkin is a trainee at Baker McKenzie. He also secured six vacation schemes.

Yes, you read that right. Six.

We caught up with Lewis (LinkedIn) one month before he began his training contract to talk about how to write successful law firm applications, how to deal with rejection, and how to stand out during a vacation scheme.

We hope you enjoy listening to it as much as we enjoyed recording it.

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Listen to the full interview using the SoundCloud player below.

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We’ve reproduced excerpts from our interview with Lewis, below.

How I Secured Six Vacation Schemes

[…] In my third year, I thought: “Okay, now is probably the time to think about getting a job.” And, as the panic set in, I went along with my friend to a competition that Pinsent Masons was running at my university.

This is where the first part of my story probably begins.

It was a competition called the “Deal Perspective Competition,” and it was designed to introduce law and non-law students to what it would be like to work at a commercial law firm. It was run by two future trainees at Pinsent Masons, and it was a well-designed competition because the firm have put a lot of investment into running it at Bristol University.

Teams of about five individuals would come together and you had to deal with three scenarios that would arise over the course of an M&A deal: (1) merger control thresholds you had to research; (2) any employment issues; and (3) particular litigation and product default issues.

You had to go away and research what the law was in this area and then respond to an email from a client. They would mark the quality of your answer based on whether the answer was correct; how you structured your advice; and whether you factored commercial issues into your answer.

The competition was really good because, while I was working with people who had studied law – and, obviously, I didn’t have much legal experience — that didn’t mean I wasn’t able to bring something else to the table that they wouldn’t be able to think of. It was a nice example of how even if you don’t study law, you still have a lot to bring to the table.

The hard part was that after giving the final piece of advice, I had to turn around to my teammates and say: “Actually, if we do go to the final…” (which was held at Pinsent Mason’s office and where you had to present a presentation to the client). I actually got a vacation scheme interview and I had to say: “Sorry, I’m not actually going to be able to attend!”

Who was that vacation scheme interview with?

That was at Hogan Lovells. It was my first-ever vacation scheme interview and it was an absolute car crash. I don’t know whether it was blissful ignorance or sly arrogance – it was probably a mixture of the two — but I didn’t really do much research about what would be asked. I thought: “You know what, I don’t even need to look at that. I’m going be myself and I should be able to walk in there and do it.”

Interview with confidence vacation scheme

So, I went in there. I think we had a Watson Glaser Test, and then the second part of the day was an interview with an associate, which was just asking me about who I am and why I was interested in law. And all that was fine.

And then it got to the partner interview and it started with the same kind of questions, like: “Why law?” But when they really started to grill me down on why I was applying to Hogan Lovells, I couldn’t really reel off a decent answer, because the follow-up question to that was what firms I’d chosen to apply to. And I think they saw from the variety of firms that I had applied to, that there was no consistency whatsoever.

How did you work out the differences between law firms?

I sometimes feel that law firms have a set amount of phrases that they all choose to use, whether it be “global,” “commercial,” or “cutting edge.” Every cliché you can imagine is probably pulled upon.

But I think, firstly, it came from applying to different firms. Obviously, in most applications, they say: “Why do you want to apply to us?” I ended up researching firms in-depth through websites like Chambers and Partners and Chambers Student. Those websites are quite good at telling you what they’re not good at and where they specialise, and I think once you start to understand that, you are able to see how, for example, a magic circle law firm may differ from a firm like Berwin Leighton Paisner, which specialises in real estate. You start to pick up those kind of things.

Secondly, it came from going to law fairs. When you start to speak to people from the firm, they are very willing to give you information, and they are very willing to be quite direct with you about what makes their firm unique. Once you have the person in front of you, you’re able to quiz them. You could ask them, for example: “Where did you apply to?” and “Why did you choose X?” And I think that’s quite a good way of just seeing how other people separate firms and make that decision.

You did a number of different vacation schemes, didn’t you?

Yeah, I did six vacation schemes.

The first one I did was at King & Wood Mallesons. Unfortunately, I didn’t get the training contract because it was basically all placed on my final interview — which was a bit of a shame, because I felt that the people at the firm really did like me, and I felt I was a good fit there.

I think they had very much a good-cop/bad-cop approach. I still reflect on that day, and they definitely wanted to challenge me — and perhaps, I should say, I fell for the bait, and I didn’t perhaps keep my cool as well as I could have.

I learned a lot in that situation. But I remember from that first vacation scheme thinking: “Oh, God, this is my one shot I’ve completely blown it!” But, no, like London buses, I think vacation schemes can come around quite quickly, once you get the knack of it.

So, I went on to do a winter vacation scheme with Shearman & Sterling, which was in winter 2015. And then in the summer of 2016, I did four vacation schemes.

I was determined to not end that summer without a training contract. I couldn’t face the thought of that. I was studying the GDL at the time and I had time to do it, so I was like: “Okay, let’s make as many as I can.”

If some students are listening, they might think: They’re struggling just to get one vacation scheme, and you managed to get six. What do you think it was about your applications that converted very well to interview?

Law firms will always say things like: “Do not repeat the same application twice.” But whenever I hear that, I take that with a bit of a pinch of salt, because I feel like once you apply to a few firms, you find that there’s usually some questions like “Why this firm?” Answers that obviously take a bit more time and obviously require me to do quite a lot of research. For these questions, I’d usually have a tactic of explaining whether it was the culture that stood out for me or whether there were specific departments or a specific deal that really caught my eye, and why that really interested me. And whether I met them at a law fair: that was really key. I think that would automatically stand you out. But, then, for the other, broader questions, like “Why commercial law?” that is a question that you will always get asked, and I think that is a set answer you can pretty much give most of the time.

So, by that point, you were getting lots of interviews. Did you start getting offers shortly after that?

Well, Hogan Lovells happened in 2014. So, it has been quite a long process. It got to the King & Wood Mallesons interview, and this was the third and final one of that series of applications for the 2015 summer. And — what changed that day? That’s a tough one to pinpoint. I think what I did is I reflected on the first two interviews and I thought about what really went wrong, which was obviously the fact that I couldn’t justify what firm I was applying to at that moment in time.

So, I thought: “I need to think of a list of firms which really make sense. And in all honesty, I probably hadn’t applied to all these firms, but I was like: “Okay, I need to come up with a set number of firms that make it clear why I applied to KWM, to the interviewer.” Then I start to hone in, I started typing out and repeatedly typing out answers to “Why the firm?” and “Why commercial law?”

I started looking on The Student Room to see if there have been any set questions. I think my research just started to ramp up a bit more. I put in a lot more effort into preparing for these interviews, and I found that with preparation, you can prepare in enough detail to pretty much guess 45 minutes of an hour interview. And I found that by doing that, it suddenly changed that day and that interview, because the person was asking me questions that I’d pretty much already prepared. I already knew what the questions were. I think what I started to realise was that you can start to navigate that interview process a bit more. I think that day I realised that it was possible to actually prepare a lot more for these interviews than I’d actually previously let on.

I agree I think there’s a certain list of questions like: “Why law?”, “Why this firm?”, “What are your strengths and weaknesses?”, and competency questions – for which you can write out practice answers and just practice — not necessarily scripting them — but just rehearsing what you’d like to say. And then it allows you to steer control over a lot of the interview. It’s like having an exam where you get told half the answers beforehand to practice. You don’t know the actual format of the question, but you know the topic on which it’s based, so you can practice how you’d formulate an answer.

Succeeding on vacation schemeYeah, I found that by having almost that 50% or 75% already prepared, when it came to getting a bit more of a curveball, I was more confident in saying: “You know what? Can I take a minute just to sit down just to think about my response?” And it just gave me a bit more, like, a spring in my step. And I think that radiated across the table to the person interviewing me, because they could see: This guy is confident. He knows this stuff and he’s not afraid to take time to really think about his answer.

How about the commercial awareness or case study-type questions? I know you mentioned you had one at the King & Wood Mallesons vacation scheme. How did you stay on top of commercial awareness to answer those questions?

It was just reading up the F.T. and looking up deals. But you can be can be a bit more savvy when you’re doing it, and you can really pick deals that actually do interest you or that you have some relation to. Fortunately, when I was going into the KWM interview, there were loads of transatlantic deals going on, and there were some agreements taking place between China and Australia at that time, and, obviously, for a firm that is still headquartered in in China, I had an interest in those kinds of stories. That helps. And when they asked me in an interview about something like that, it related automatically back to them.

But I would say, going back to the original question, I think it is just about finding something you find interesting. I would never recommend anyone just to read something for the sake of it, because I don’t. I find you don’t really take it in, it will just show that you’re not actually that interested in it.

So after, well, KWM, how did you feel after not getting the training contract?

I feel that was probably one of my lowest points in the whole process. I’m more than willing to openly say I think it was it was really tough, because I think self-doubt started to creep in. I pretty much put my eggs in one basket. And I thought, you know, this is the firm for me. And I’m being told: Even though you think this the firm for you, that it’s not, in their eyes. And that can be quite hard to hear.

Rejection is hard, kids! And you’ll get it over your life. I think that was the first time I felt like I’d been — really been — rejected by something. And so, what I did was I took a couple of days to sit down. You know, just process it. I reflected on it a bit. I spoke to my dad, who was really helpful, because we talked through the interview and I think we started to realise perhaps where I had gone wrong. Perhaps I had risen to the bait they’d given in my interview. And, you know, there was a tough lesson to learn.

At that point, I had a decision to make: whether I wanted to go to start work to try to get some legal experience or to do the GDL.

I had a job lined up with this online dating app in South America called Badoo. It’s one of the most popular online dating apps in South America. It was a really good interview with them, because it was run by two in-house counsel who just wanted an extra pair of hands to help out three days a week, which would have given me the flexibility of also applying to law firms.

I got offered a job there, but I thought the best way to learn about law is to start studying it. And it’s a big financial decision to fund a GDL self-funded. It’s a huge amount of money. It was a big decision for me to make. I was in the position lucky enough where I did I have a bit of money myself so that I was able to fund it. But not — as I say — not many people, not everyone, is able to do it. That’s completely understandable as well, and there’s different ways of learning. But I found that once I got involved with the GDL, I was able to start to just get my head around basic law. And you kind of get this, like, team spirit together. I was put in a group full of no one who had a training contract – in: “We’re all in it together.” You know, different people getting interviews and helping out each other. Like, that’s it; that helped a lot. I think you realise that you are not just… you’re not alone in this long journey.

You mention self-doubt after KWM, and then you go on to invest in the GDL. How did you decide whether it was worth carrying on applying to law firms, rather than just saying: “I’m not good enough. I have to pack it in”?

That’s a very good question, because I think everyone has to have an element of confidence about them, and you have to believe that you are right to do this. I think there will be various times along the way where doubt will creep in. But what the key for me was, was taking those three days to step back and really assess. And I sat down and I thought: “You know what? Just because I’ve been rejected by one firm, it doesn’t mean that I’m not right for any other firms. I also spoke to a few of the trainees at KWM who were really helpful, and they said: “Look, it was one interview. It’s not the end the world. Like, we think you would have been perfect for it.” And they’re in the position of being trainees themselves, so they have some knowledge as well. And I’ll admit using some of that rejection to fuel me on. You spin it and you turn it into a bit of an incentive to prove people wrong.

Keeping calm vacation scheme through meditation

But, I think it’s natural for everyone to take it personally; that’s the way we’re programmed. And I’d be surprised if anyone didn’t. But, as you say, if you’re able to reflect on it for a bit, you can spin it into real incentive. And, look, everything happens for a reason, in my opinion. And now that I could have ended up with a training contract at KWM, and I would have been at a position that other people unfortunately were in, where they had a training contract and then, little do you know, the next day it’s absolutely gone. So, I think, I mean, I don’t know whether to put people in this position of having divine hope in a powerful being, but my mom actually, I remember she said after the interview: “You know Lewis, everything always happens for a reason.” And at the time I was like: “Oh, just shut up.” That’s the worst thing to say to me at that moment in time.

And yet the firm collapsed!

And, you know what, my mum would be like: “I told you so!” And I have literally nothing to reply with to that.

So after KWM, what was your next vacation scheme?

That was at Shearman & Sterling in the winter 2015.

Did I meet you before or after Shearman?

I think you met me just before. Listeners, if you don’t know: I reached out to Jaysen and I was at a stage where I’d been to a few interviews and it just wasn’t working. I don’t know really what it was at that moment in time. I think it was just a bit of fine-tuning that was required. I was trying to remember what I had done in my King & Wood Mallesons interview, but it was so long before that I just needed to speak to someone. I think you were perfect just to sit down and give me a bit of realisation about this position I was in, and guide me on a few pointers.

It’s all well and good having your family around you or your friends telling you. But I had a position where you’d already had a training contract, and I was able to see you had reached the end goal that I wanted to be at. And you also knew about the struggles I was facing at that moment in time. So, I think that it was useful to have that really specific advice from someone who had been through it.

Anyway, yeah, my interview with Shearman & Sterling was quite a good one. I found for the vacation scheme, they really just wanted to get to know who you were. It was with an associate and just a woman from HR who was absolutely lovely, and she really just made me feel at ease. I did the classic questions, really, like: “Why law?”, “Why Shearman and Sterling?” And I think I had a little practice with you before I went. I had applied to a few for the winter vacation scheme, but I think winter seems always a tough one. If there was anyone I knew was applying, I’d always try and make them realise that you’re almost going for an even more concentrated pool of people, because you’ve got graduates as well as those people who are working, as well as your year two, year three students at university, so that always meant I had to take to those applications with a pinch of salt.

But it came to Shearman and Sterling and that was my last one, and I was thinking that this is now time to shine. So, I think, we, in our first discussion, we just went through the classic questions, and you gave me a bit of advice about how your interview went. And they asked a question that you referred to earlier about how you would structure a deal. And I think when we discussed that I had pretty much a clear idea of what and how an M&A deal really takes place. But I am sure you provided these listeners with ample material to  understand how a deal works!

Yes, actually, before we started this episode I published the M&A article.

Oh, yeah, so read that and read that back and you’ll be fine. I think we talked through basically the advice that you give in that. And I referred it once again back to them. I said: “Well, you’d use a Shearman & Sterling project finance department for this” or “Your M&A department or your employment team.” And I think they liked that I was I was able to not only just give the hypothetical deal or scenario, but I was able to apply it about Shearman & Sterling and say how. I think one of the follow-up questions they gave was: “So what would you think a trainee would be doing in this situation?” And that’s the next level of an answer that you can give to a basic M&A deal. You can say: “Well, OK, I’ll be obviously involved in due diligence.” And if it’s a publicly traded company, you’ll be doing share transfers or you’ll be involved in the litigation side or we’ll be bundling these all-very-general tasks. If you’re able to list a few, and you’re able to show that level of understanding of where you will fit into it, then that is able to differentiate you even further from the competition.

And how did the Shearman & Sterling scheme compare to the King & Wood Mallesons scheme?

I sat in the project finance team and I had a really good trainee buddy with me. I was involved in helping an associate over from New York with a project they were constructing in Mozambique, and they were helping with the sponsor’s side of it. It was really interesting, because I’d never really considered project finance before, and I liked the tangibility of the projects that you’re doing, and actually realising that you’re involved in something that’s actually material.

People often talk about U.S. firms as being very different to UK firms. Did you feel there was a difference in the culture or atmosphere, during the scheme?

There’s this belief for some reason that there is a massive difference in culture. That you’ll be at a US firm you’ll be worked like a dog, and whereas other people in a silver circle firm are going back home at seven. But when there’s a deal that’s going on and there’s people on both sides, there’s always someone opposite you from perhaps a UK-based firm who will be doing the same hours that you’re doing. So, that was the first realisation I had that these US firms weren’t as bad as everyone made them seem.

I think the culture was also very open. They were all really willing to help out. The same as it was at King & Wood Mallesons. I didn’t notice a massive cultural difference. I think the only slight difference I found was that the departments weren’t as big, so they had smaller teams and they knew what they were focusing on. So, Shearman’s employment team was about two associates, whereas at King & Wood Mallesons, they had one of the biggest employment teams in the City at that time.

So it wasn’t that they were a satellite office. Far from it. They developed all their own work and they weren’t just there to service the U.S. needs. But they were more strategic in in how they structured their departments and they knew where they wanted to bill the most from or where they wanted to offer the client service.

So were Baker McKenzie and Vinson & Elkins your final two vacation schemes?

Yes, they were, thankfully, my final two vacation schemes!

By that point, you’d had enough experience of vacation schemes to have an idea of what to expect. What do you think you did in those schemes to help you get offers?

The funny thing is, if I went back and I compared my King & Wood Mallesons vacation scheme with my Vinson & Elkins and Baker McKenzie schemes, I don’t think I’d have been that different. I think I was keen to get involved. I asked questions. I did good work. I developed rapport with partners. But the difference?

I think it was partly that when it came to my Baker McKenzie interview, they really put an emphasis on how I performed in the three-week scheme by speaking to trainees and getting work through them, and just getting involved and really just focusing on how I was performing and not being too worried about how everyone else was doing. I think I impressed them.First day at work after vacation scheme

When it came to, like, the final exit interview, mine was about six to seven minutes long, whereas most people had interviews that were 30 minutes long. And it was really refreshing, because the partner sat down and said: “Okay, let’s go through the work you’ve done.” We talked a bit about my feedback, and he was, like: “You know, this speaks for itself.” And I was, like: “Speaks for itself in a good way or in a terrible way?”

Then I asked a few questions, and he said, “You’re free to go.” I was just, like: “Oh, God, either it has gone absolutely terribly and there is no way in hell that I’m going to get an offer, or they really like me.”

So, to go back to your question of what I thought made my offer: I think you just ask interesting questions. You find a way to engage with as many as possible. And just continue to show an interest in what you’re doing, even if the most menial task. I think lawyers really appreciate if you hand it back and say: “Oh, can I just spend two minutes with you just talking about what how this fits in and how this relates to a wider deal?” for example. And most lawyers are absolutely willing to sit down and give you time, and I think it just shows that extra level of interest.

I would say: Don’t worry too much about what everyone else around you doing. If they’re all asking questions, that’s absolutely fine. Don’t feel the need to fill silences at all. Say they do an open talk, you don’t have to ask questions if you don’t have any questions. I think most lawyers will actually realise that you haven’t got a genuine interest.

So, you’re going to start at Baker McKenzie, is it next month? How are you feeling?

I am really looking forward to it! As you can tell from this whole podcast, it’s been such a long road, but it has been a fulfilling one. It gives me the confidence to think: “You know what? On the first day, I’m not going to be nervous. I’m going to take every single chance I get to learn as much as I can.” I think some things in life, they’re almost that much sweeter when you have to put that much extra effort to get them. So, I’m hoping it’s everything I imagined it to be. Of course, there will be low points, but I just can’t wait to be going.

Finally, any final words of wisdom?

When it comes to interview, practice makes perfect. I think from my earlier interviews what I showed was that if you’re just willing to put in that extra bit more time, and prepare, you can control most elements. And that’s one of the big takeaways people not only need to understand, but it’s something once you realise, you can really get the knack of how these interviews can go — and I’m sure you’ll see your success rate rise dramatically.

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Resources Mentioned:

175 Training Contract Interview Questions

Mergers and Acquisitions Guide


Training Contract Applications: 2019 Guide to a Successful Application!

by Jaysen Sutton 

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This guide has now been updated for 2019 training contract applications! Get your training contract application reviewed here.

When I first applied to law firms, I received few interviews and many rejections.

I blamed those rejections on lots of things. My grades. My lack of legal work experience. My generic extra-curricular activities.

I asked myself, was I good enough for this?

Stand out training contract applications

After that first round, I spent a lot of time learning about application technique. So when it was time for my second round of applications, the process went better.

In that second round, I secured interviews with 13 law firms.

I’m writing this guide to teach you everything I’ve learned, both from my own experience, and from personally reviewing over 500 applications.

In short, the aim of this post is to teach you how to write a successful training contract application.

Did you know we offer a thorough application review service, tailored to the firms you apply to? Check it out here.

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Why is application technique so important?

If you’re reading this, then I’m sure you know how competitive the process is.

Many commercial law firms receive over 1,000 applications for vacation schemes and training contracts, every single year. And only a handful secure interviews.

For example, take a look at the application to interview ratio for the sample of law firms below.

Vacation scheme and training contract applications
Data from Lex 100 Firm Profiles, figures are approximate

Unfortunately, not all firms submitted their data, so the chart is far from complete.

But it does give you an idea. On average, of the 21 law firms listed above, 12% of applicants were interviewed for vacation schemes and training contracts.

Why so few?

Well, as I’m sure you know, law firms have a relatively fixed number of training contracts to offer each year. For example, let’s look at how many training contract places are expected to be available in 2020.

Training contract places 2020
Data from Lex 100 Firm Profiles, figures are approximate

Now, if we tried to combine the figures above onto a single chart, as below, you can barely make out the blue, which now represents the ratio of available training contracts to total applicants.

Vacation scheme and training contract applications 2020
Data from Lex 100 Firm Profiles, figures are approximate

This is exactly why you need to perfect your application form.

With so many applications and so few available places, the only way you’ll be invited to interview is if you learn how how to write excellent applications. Good grades and varied experiences simply aren’t enough.

The good thing, however, is that application technique is a skill. A skill that everyone can develop with the right knowledge and lots of practice. By developing this skill, you’ll understand how to persuasively sell your experiences and turn your story into a compelling narrative. You’ll understand how to convince recruiters of your genuine interest in commercial law and how to clearly distinguish your interest in a specific firm.

This guide will walk you through the steps in detail, but here is the short version, a checklist that we use to provide feedback for our advanced application reviews:

Training contract application checklist


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What are law firms looking for?

Most commercial law firms will ask a variant of at least one of the following questions in their application form (and if it’s a cover letter, you’ll be expected to cover these questions):

  1. Why do you want to be a commercial lawyer?
  2. Why are you applying to our firm?
  3. Tell me about a time you did XYZ… (competency questions)
  4. What current news article has interested you?

With that in mind, we can break down what law firms are looking for into four areas:

Four points about what you need to show in your application

You’ll see the competency questions vary because different firms will look for different qualities in their trainees. For example, Norton Rose Fulbright have historically asked in their application form how you work in a team and how you work under pressure. Whereas, Baker McKenzie want to know your opinion about diversity.

Law firms may also test multiple areas in one question. For example, Shearman & Sterling ask you to explain how they maintain a competitive advantage, and Reed Smith asks how they differentiate themselves from their competitors. In answering these questions, you will need to show your understanding of the law firm (which ties into #2 above, your motivation) and you will also need to demonstrate your commercial awareness (your knowledge of how law firms operate as a business).

So, let’s examine each of the above application questions.

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How do you answer: “Why do you want to be a commercial lawyer?”

Recruiters can learn a great deal from the way you answer this question.

  • Do you understand what commercial lawyers do?
  • Which aspects of law interest you?
  • Which aspects of business interest you?
  • Do you have legal experience to back up your interest?
  • Do you find the nature of the work interesting?
  • Will you stay in the profession for the long term?

Most law firms ask this question in their application form and then again in vacation scheme and training contract interviews.

We find candidates often underweight the importance of this question, possibly because it’s such a common question and because it can seem straightforward compared to some of the more challenging commercial questions. Be careful of this; it’s one of the most important questions in an application form.

Law firms ask this question because they know how tough the job can be. And they need to be convinced that you’re going to survive the long hours. That you will be willing to cancel weekday plans or to work until 2 a.m., according to a firm’s needs.

They need to know that you have a genuine interest in the role of a commercial lawyer that’ll keep you at the firm when it gets tough. They need to know you’ve explored it properly, that you aren’t just picking this job at random, but that you have gone out of your way to understand what the role entails.

And you don’t want to leave them uncertain. If your answer leaves them with doubt, you’ll be rejected.

Now, let me run through two common mistakes I have noticed in answers to this question.

Common mistakes

  • A failure to answer the question

Why you want to be a commercial lawyer training contract application

In your “why commercial law?” question, make sure you are directly explaining why you are interested in commercial law and not describing what commercial lawyers do. Recruiters already know what commercial lawyers do, so you don’t need to tell them again in your application. Instead, you want to demonstrate your understanding of what commercial lawyers do implicitly: allow the recruiters to infer your understanding of the profession by writing about why you want to be one.

Sometimes, you can get around this problem without having to completely change your answer. Instead, try adding a few words to the start of your sentence, such as “I find it interesting how lawyers do XYZ…because….”.

  • You tell me which aspects of commercial law interest you, but you don’t expand on why they interest you.

Training contract application tell me why you want to be a commercial lawyer

In order to turn your answer to this question from good to great, each of your points need to be fully developed. A good test for this is to review each of your points and ask yourself: “Why?”. If your answer to: “Why?” isn’t covered in the body of your answer, you should rethink. Have you fully explained your points? Are you assuming the recruiter will understand the reasons behind your points? So, for example, if you want to mention a firm’s new performance-based bonuses, don’t just say how you were impressed by the bonuses. Explain why. Think carefully: what does it mean to you? Does it show something about how the firm rewards hard work? Is it another demonstration of how the firm uses innovation to attract the best lawyers?

Likewise, back up your points with specific reasons e.g., “I became interested in the business side of commercial law when [I learned about XYZ when running my university society. These elements of business interested me because XYZ…”

So, what should you do?

Well, I can’t tell you why you want to be a commercial lawyer. But I can give you a few ideas.

Examples to encourage you to think why you want to be a commercial lawyer

You can substitute work experience with competitions or societies, or anything you were involved with that introduced you to the practice of commercial law.

Or maybe you want to talk about the aspects of commercial law you find interesting. And that’s also  fine if you are clear on which aspects interest you and why they interest you.

The more you think about this answer the better. Your answers will come across as genuine and they’ll stand out because they’re personal to you. Trust me, I can’t tell you how many applications start with: “I want to be a commercial lawyer because I am interested in law and business.”

You can use our fillable PDF below to help you to think about this question.


Fillable PDF for why you want to be a commercial lawyer
Click to open the PDF in a new tab

In my experience, strong applicants answer this question with two to three points. In each point, they use evidence to explain why they are interested in commercial law. At no point am I left asking: So what? This is because the applicant clearly links the evidence to his or her interest in commercial law.


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How to answer: “Why are you applying to this law firm?”

You’ll see this question on almost every vacation scheme and training contract application form. There are two things that you must make clear here:  1) You understand this law firm; and 2) You want to work at this law firm.

Many applicants fall down because they don’t answer each part of the question evenly.

Some applicants spend too much time telling the firm about itself. And while it’s crucial to show you’ve researched the firm, your demonstration of research doesn’t answer the question of motivation. Why do you want to be there?

Other applicants are clearly very motivated. They are “passionate”, “interested in M&A”, and “want to work on cutting-edge deals with international clients.” But that evidence of motivation doesn’t fully answer the question, either. Many, many commercial law firms employ M&A lawyers whose international deals hit the front pages. Recruiters don’t want to know why you want to work at a law firm; that’s what the other question is for. They want to know why you want to work at their law firm.

There’s a quick way to determine whether you’ve sufficiently tailored your application. Ask yourself: Could your description of the firm apply to another commercial law firm? If the answer is yes, then your answer is too generic.

Let me give you some examples.

Training Contract Application Screenshot

Most law firms offer “interesting and exciting opportunities”, “international secondments” and “complex work”. The applicant needs to identify which specific opportunities and secondments they are interested in, and then explain why these interest the applicant.

Training Contract Application Screenshot common mistakes

This is better. The applicant has identified the firm’s M&A practice and international reach as a reason for applying. However, many firms specialise in M&A and being “attracted to the challenges” in M&A deals is too vague. What challenges?  The same goes for mentioning the number of offices a firm has. Many commercial law firms have 20 or more offices; what makes this firm unique? Why do you want the exposure to different jurisdictions and a diverse team?tailoring training contract application to a firm

The last paragraph is more tailored.  It is clear the applicant has read about the firm and the information he provides could not be applied to another firm. The problem is the applicant spends too much time describing the firm without explaining why it interests him. The last sentence is then too generic and does not follow from the rest of the paragraph. This is why you want to be careful of how you tailor your application. Some candidates are so keen to show that they’ve researched a firm that they include all sorts of facts about that particular firm in their application. But showing that you’ve read about some esoteric deal or a series of awards doesn’t make your application any stronger.

So, what makes a good answer to this question?

The strongest candidates find an effective balance between these approaches. They lead with their reasons for applying to a particular firm and weave in their understanding of the firm to back up their answer.

Venn diagram to show why applying to our firm


They are also specific with their reasons. I read countless applications along the lines of: “Firm X does interesting deals/headlining transactions/advises prestigious clients. For example, XYZ advised on [insert deal]. I would like to be involved in transactions at the top of the market/I would like to work alongside prestigious clients like this clients“.

This is a good example of an average answer. It may be good enough for many firms, especially if you’ve backed it up with other reasons about the training/meeting the firm, but best case scenario, it won’t make your answer stand out, and at worst, it’ll come across as very generic. I don’t consider it to be a tailored answer – even if you’ve thrown a deal in there – because the firm could easily be replaced with a variety of other firms.

Likewise, if I’m picking this out, no doubt recruiters are seeing many more answers like this.

Now, you don’t necessarily need to scrap the answer. I do actually think it’s a genuine reason – you want to work at a big international firm because you’ll be involved in exciting deals. Just try to think about how you can be more specific. We’ll explore that below.

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Did you know we review vacation scheme and training contract applications? We’ll benchmark your application against those of the 500+ applications we reviewed this year. Get your application reviewed here.

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How do you tailor your training contract application to a specific law firm?

It’s tricky. Many law firms use similar language to market themselves, so it’s often a struggle trying to differentiate a law firm.

But law firms are very different. They do different work, run their businesses differently, invest in different future strategies and train their trainee solicitors differently.

Here are some examples of the ways you can distinguish a law firm:

  • International reach
  • Practice area strengths
  • Culture
  • Financials: size/profits per equity partner/growth
  • Important deals
  • Clients
  • Management structure or management change
  • Partner promotions
  • Leadership strategy
  • Recent mergers
  • Training or development
  • Lateral moves and recent partnership moves
  • Growth (internal and external)
  • Recent profit figures
  • Innovation
  • Mergers
  • Brand reputation
  • Trainee retention
  • Technology
  • Alternative service delivery: offshoring/nearshoring
  • Size of intake
  • Competitors

You can also check out this fantastic list from our forum moderator, Alice Gossop:

What makes law firms different?

Let me run through two areas to explain what I mean.

Comparing international strategies

Global strategies of law firms
The spectrum of international strategies

Law firms adopt different strategies to provide an international service to their clients. The image above provides a snapshot of five of those strategies, the left being the least integrated and the right being the most.

Furthest to the left, we have best friend networks. Rather than trying to plant themselves in many different jurisdictions, the law firms that adopt this model leverage strong international relationships with foreign law firms. You can read about how Slaughter and May uses this model in our firm profile. Using this strategy, firms may refer work and share marketing initiatives, but they don’t have to be exclusive and firms retain their flexibility to partner with international firms in the region.

Next on the spectrum, we have alliances. These are usually formal relationships with a specific foreign law firm, such as Linklaters’ alliance with Australian law firm Allens.

Swiss vereins (and the newer model of using Companies Limited by Guarantee), on the other hand, are how firms like DLA Piper, Norton Rose Fulbright, and Dentons quickly transformed into global law firms. The Swiss verein structure means these firms “merge” with a local law firm, but these aren’t true mergers; the law firms share marketing and branding, but they do not share revenue or liability. It’s a quick way to gain access to new jurisdictions, people, and expertise, without also taking on many of the burdens that come with a true merger.

Fourth and fifth, there are mergers, where two or more firms combine and share revenue, marketing, people, and liabilities in order to create one new business. In a merger, law firms don’t always share a single profit pool to pay partners, because that can be very hard to integrate and may involve a hefty tax bill. But some firms do, as you can read in our profile of Bryan Cave Leighton Paisner.

All this to say, a firm’s international approach tells you a lot about a firm, which may well trickle down into your reasons for applying. Is it important for you that a firm operates as a global one stop shop or do you prefer a firm that concentrates on key strategic markets? Are secondments to more exotic locations important to you? Do you want a firm that has a united global brand? These are the kind of specific details that will demonstrate not only your understanding of a firm, but also the fact that you have taken the time to think how these factors will influence your future career.

Comparing practice areas 

This can be a clear way to differentiate firms, especially if you know what practice areas you’re interested in. You can then justify your interest in a firm.

For some firms, the strengths are obvious. For example, Weil Gotshal & Manges and Kirkland & Ellis are well known for their private equity work in London.  Herbert Smith Freehills is a litigation heavyweight. Bird & Bird offers a top-ranked intellectual property practice.

Pro-tip: To develop your answer, rather than simply mentioning the rank of a department (we see phrases like: “XYZ firm is ranked tier 1 in X department by Legal 500″, try to give some indication of why you find that practice area or area of law interesting.

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How do you research a law firm?

One of the best ways to find out what makes a law firm different is to speak to lawyers at open days or firm events. Speak especially with associates and partners, because they can tell you about the nuances that distinguish their firm from a competitor.

Naturally, such direct information-gathering isn’t always possible, so the second-best strategy is online research.

Starting point

  • Chambers Student Guide: An excellent starting resource. It provides a useful overview of the firm, any recent developments or achievements, and an insight into the firm’s most significant practice areas. You’ll also be provided an insight into the culture within the firm and into what the training is like, from current trainee solicitors.
  • Roll on Friday: The firm profiles are a very useful – albeit informal – outline. You’ll gain a sense of the firm’s history, the work it does, and of how it sits in the market.
  • Legal Cheek: The firm profiles are a good way of familiarising yourself with the firm’s culture. You can also search for the name of the firm to find recent news.

Digging deeper

  • The Corporate Law Academy: Our law firm profiles are focused on what makes a firm different. We run through practice areas, innovation & tech, strategies and growth figures in the law firm insights page.
  • The firm graduate page: This will give you a sense of what the firm is looking for in candidates. It may also discuss the training programme, secondments, the kind of work you’ll be doing, and reasons you may want to join the firm. Try to look for specific information: Do they have a non-rotational system? More seats than normal? A required seat in a certain practice area? A mentorship programme for new trainees?

For example, take a look at Allen & Overy’s graduate page:

Screenshot of A&O graduate page

The firm gives you specific reasons to choose Allen & Overy including its international work, innovative client services and investment in technology.

  • The firm’s main website: Use this to find out about any awards, recent deals or new investments.

For example, I used to read Allen & Overy’s annual reviews, which are conveniently listed on their About page. They provide a subdomain for each annual review, so you can find out their key achievements, investments and strategies over the course of the year.

Allen & Overy annual reviews for your training contract applications
  • The Lawyer: Useful to learn about firm strategy, recent news and deals. Unfortunately, most of their content has been moved behind a paywall but it’s worth checking to see if there is any information available for your chosen firm.
  • Legal Week: You should be able to obtain access to five free articles. Good information on deals, lateral moves, firm strategy, and international plans.

Practice areas

  • Legal 500 and Chambers and Partners: Use these websites to determine the firm’s strongest practice areas (where they rank highly) and how they compare to their competitors.

You can use our fillable PDF to make a note of the information you find:
Law Firm Overview Plan


  • Navigate to a firm’s “experiences” page on the website
  • IFLR 1000: aggregates a variety of content for a particular firm, including its recent deals.

Shearman & Sterling deals

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How do you find the competitors of a law firm?

Many application questions require you to understand, or at least acknowledge, a law firm’s competitors. These are through questions such as:

  • Who are our competitors and how do we differentiate ourselves?
  • How do we maintain a competitive advantage?
  • How would you pitch our unique selling points to a client?

To find a competitor, the easiest place to look is to identify a firm’s core practice areas and compare the firms within a similar bracket as ranked by Legal 500 and Chambers & Partners.

Note, this isn’t a full proof method, and you should do further investigation into a firm (check out websites like Chambers Student as well as the firm website) to work out if the type of work a firm does seems to cross over.

Practice area also isn’t the only factor you can use to compare firms. It just depends on which firm you are looking at. E.g., if you were looking at Baker McKenzie, which other firms have sought to develop their global brand? If you were looking at Shearman & Sterling, which other foreign firms have long had a presence in the Middle East? If you were looking at Linklaters, which other firms have sought to build a deeper presence in China? If you had White & Case, which other US firms have built such a sizeable London presence?

You get the picture. The point is that unless the question is: “Who are our main competitors?”, you have a fair bit of scope to choose a firm’s rivals. Use this to your advantage; it will allow you to really narrow down the reasons why a firm is competing with another firm.

Let me show you how I used the above sources to answer this question for the law firm DWF.

  • Where is DWF positioned? As a starting point, I’d need some idea of where the firm positions itself. A quick Google search tells me that DWF is headquartered in Manchester, with 13 locations in the UK and Ireland. It was originally a regional firm, then it became a national firm, and now it’s on a pretty aggressive international expansion drive — but most of the work still comes from the UK. So, I know to look out for firms that are significant national players.
  • Check practice areas. Legal 500 tells me that DWF ranks highly for insurance work, especially personal injury (on behalf of defendants). I check the insurance practice area page for DWF and it confirms:  “We’re one of the largest specialist insurance teams in the UK and regarded as a national heavyweight.” Ok, so I know it’s big on UK insurance work: I should look for other national firms in this sector.
  • Who else is big on UK insurance work? I check Legal 500 and Chambers and Partners and make a note of the firms ranked above and below. Firms like Kennedy’s, DAC Beachcroft, Browne Jacobson, and Clyde & Co pop up. DWF isn’t necessarily direct competitors with all of them — some firms may be much larger and some may be more specialist — but they are ones to flag up.
  • Any other practice areas? I check Chambers Student Guide, which mentions that DWF is also good for banking and finance outside London and offers a range of commercial practices in the north. Chambers and Partners ranks it highly in employment and litigation in the NorthWest along with firms like Addleshaw Goddard, DAC Beachcroft, Hill Dickinson, and a few others.
  • Who are their clients? I’d also check the legal news to see who their clients are/whom do they share their legal panels with? You can then see which firms serve the same market.
  • Where do they hire from? Where are their lateral hires from? Which firms do partners exit to? If there are a lot of people coming from, or exiting to, certain firms, then these firms may well be competitors.

If you are then asked in the question, how is our firm different to our competitors, you may want to consider:

  • Both firms may excel in one practice area, but does your chosen firm also lead in
    another practice area?
  • Do the firms have different international strategies? Or a different global presence?
  • How do the firms invest in innovation and technology?
  • Does the firm prefer to promote its partners from within the firm or does it laterally
    hire partners? Or a combination of both?
  • Are the training programmes different? Does the firm offer a different seat structure? An MSc qualification during the LPC? A mentoring scheme?

If the question is: “How is our firm different to the other firms you are applying to?”, then you can also use personal reasons to justify your answer. For example, have you met the firm before? How did that influence you?

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How do you answer competency questions?

As I said above, different law firms are looking for different competencies, and this will be reflected in the questions they ask on your training contract application form. In their traditional form, these questions begin:  “Tell me about a time when…” and ask you to describe an experience in which you demonstrated a specific competency, such as leadership or communication.

This is an important reason why you should be careful before copying pasting competency answers, even when the question appears similar.

For example, with questions like: “Describe a significant challenge you have faced and how you overcame it”, a firm is looking for evidence of your resilience. Law firms want to hire candidates who will be there in the long term, who can overcome challenges on a daily basis, and who can still operate at a high level.

If another firm asked you: “What is your proudest achievement and why?”, you might think your answer to the question above would also fit well here, and the example may fit just fine but, importantly, the emphasis is different. For this question, you need to go beyond discussing the challenge and break down why it was your proudest achievement. The more personal you can be, the better. These types of questions are looking to learn more about you and your character rather than just the skills you have. Many candidates do not spend enough time on this part of the question, which means they lose out on the opportunity to show a firm their personality.

How to structure your answer

For most training contract application questions, you can structure your answer the way you want. But for competency questions, both in the application form and interview, I’d recommend you use a method to structure your answer. The most popular methods for training contract applications include the STAR method or the CAR method, as explained below:


How to structure the STAR method


The CAR Method to training contract competency questions



Personally, I prefer the extra step in the STAR method, but both work well. The point is they keep your answers focused on the most important aspects of your experiences. So, in the limited word count of an application form, or the short space of an interview answer, you can best sell your experiences.

Let me give you an example of how I used the STAR method in one of my successful training contract applications. The image below is taken from my training contract application to Allen & Overy. The questions asks applicants to describe a “recent challenge” they have faced, and explain how they responded to the challenge as an individual.

Looking back on it now, it’s far from a perfect answer, but it should give you an idea of how to employ the STAR structure.

Successful training contract competency answer

Choosing examples for your competency questions

I often hear from students they’re struggling to find examples to use for their competency questions. However, it never turns out to be the case that they don’t have enough experiences. Rather, they don’t believe their existing experiences are interesting enough to write down.

Don’t fall into this trap. You don’t need to write down experiences that you think are impressive to law firms. You just need to talk about what you’ve already done. The best answers come from students who haven’t tried to fit the mould. They show personality by talking about an experience that is interesting to them. And that could be from a university society, a weekend job, or a role in a volunteering organisation.

If there are multiple competency questions in an application form, you should use different examples to answer each question. You can use our fillable PDF below to think about how your experiences apply to different competency questions.


Law Firm Competency Interview Questions Plan
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How do you turn your application from “good” to “great”?

After reviewing many applications over the past few years, I have identified several areas that distinguish the average to excellent applicants when it comes to selling their experiences. They won’t take long to implement and if you do it well, it should make a substantial difference to your application.

It comes down to improving your writing skills, but while they do have a lot of general applicability, they most directly apply to application writing.

Why is good writing important for an application?

You could possess a first-class degree, have secured multiple vacation schemes, and have rowed for the Olympics, but if you write poorly, you’ll be rejected.  This is because your ability to write well is very much part of the assessment process.

Conversely, good writing makes an application stand out. It makes your personality shine through, raises your credibility, and most of all, is enjoyable to read. That’s refreshing, especially for a recruiter who has slogged through piles of similar application forms.

Good writing in an application form is not what you might think. It’s not about your mastery of vocabulary.

In fact, good writing is created from the qualities that are the opposite of lengthy words wedged into painfully complicated sentences:  Simple writing makes your point effectively and compellingly. Effective application writing is simple, direct and memorable.

In my application reviews, most of my comments follow these lines. Shorten this sentence. Delete this word. Cut this paragraph.

Most students are used to writing essays, but in an application form, your writing style needs to be different. You must talk about yourself, your motivations and your experiences. You’ve got to be clear and precise. You can’t waffle.

The good thing is, this type of writing is something you can easily practice — and if you do, it’ll make a substantial difference to your applications. The best applications I’ve read aren’t the ones with the most impressive experiences or grades, but the ones that are well-written.

So, what do you need to do?

What makes a good training contract application


Use simple language and short sentences

Don’t use a big word if a simple word will do. Long words make your answers hard to follow, easy to misinterpret, and less impactful. The impact of your writing is important, because your application form needs to be persuasive. And making an impact with your writing will help yours to stand out from the thousands of other applications.

You should also avoid long, complex sentences. For example, take a look at this sentence in a recent application form I reviewed:

Long answer to training contract application question

The sentence is clunky and unclear. The applicant should instead write one sentence for each point, and should back up each separate point with convincing evidence.

Use the active voice instead of the passive voice

What is the passive voice? It’s when the subject of a sentence is acted upon by the verb. In other words, the person or thing responsible for the action doesn’t come first in the sentence.

For example, I’ve seen these phrases in recent applications:

  • “M&A has long been the subject of my interest because…”
  • “The society was set up by us in June”
  • “Boxing training became necessary for me five days each week”

In these sentences, you are not the focus of the sentence and it’s hard for a recruiter to identify what you or your team did or what you were interested in.

When you use the active voice, you can be the focus of the sentence. The subject directly performs the action.

For example:

  • “I am interested in M&A because…”
  • “We set up the society in June”
  • “I train five times a week for boxing”

Your sentences are clearer, easier to read, and typically more concise, when written in active voice than when written in passive voice.

Show, don’t tell 

If you just write that you are good at managing your time under pressure and are organised, that doesn’t tell a recruiter much. In fact, the recruiter has no way of knowing whether or not it’s true. Furthermore, the recruiter has almost certainly read the same banal claims in several score of applications already this morning.

This is one of the most common mistakes candidates make. They write in their answers to the extra-curricular activity/positions of responsibility question: “I did XYZ and this developed my attention to detail and leadership skills”. Instead, you should focus on what you did and let the recruiter infer what skills you developed. If you write a specific and interesting anecdote that describes how you prioritised the most important issue of each day and made use of a to-do list to stay on top of tasks before an important conference, then the recruiter has proof in hand of your impressive abilities. This is a much more convincing and memorable way of presenting your qualities. And, of course, this presentation makes for more interesting and palatable reading for the recruiter.

Be specific

This applies to all the questions in the application form. If you want to write that the people at a law firm convinced you to apply, mention who (if you remember), and offer details regarding what they said.

If you’re talking about an achievement, end your description with an outcome or results — ideally something that’s quantifiable, such as how much money you raised or how many people joined.

If you’re talking about how legal work experience introduced you to commercial law, explain where you worked and what you found interesting.

Be consistent

Check that your references to roles and titles are consistent throughout the application. Should you be capitalising “treasurer”? Is it the “Business & Investment Society” or the “Business and Investment Society”? You should also keep an eye on your tenses, especially when talking about past and present experiences.

Use evidence

Use evidence to back up your reasons for applying to a firm, wanting to be a commercial lawyer, or demonstrating your competencies. Evidence removes doubt in a recruiter’s mind and adds credibility to your statements.

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What to avoid when writing your training contract application

The don'ts of a training contract application

Avoid cliché and informal language

I see a lot of clichés in application forms. Students are “passionate” about commercial law, they are applying with “great enthusiasm” because the law firm provides an “invaluable opportunity” to work with “high-profile clients.” These words and phrases are vague and unconvincing. Worse, these words and phrases are ubiquitous, and will do nothing to draw attention to you. Try to identify these clichés and replace them with precise words and phrases.

Typos and mistakes

Some recruiters won’t forgive one or two typos. Typos suggest a lack of effort and lack of attention to detail. So, you should always leave time to proofread your application. I’d suggest you print your application off and scan it with a highlighter. You’re more likely to pick up on mistakes when your text is in a new format. If possible, ask someone else to take a look at your application for spelling, punctuation and grammatical mistakes, or submit a final draft of your training contract application to us for a review.

Don’t write to impress

It comes across as disingenuine if you rely on flattery to answer the question: “Why are you applying to our law firm?” Instead, you should use evidence to justify your reasons for applying. Indeed, factual evidence, well-chosen and well-presented, can be even more flattering than are generalities that could apply to anyone’s firm.

The same goes for other application questions. You don’t need to write about your love for residential mortgage-backed-securities if you are to convince a law firm you want to be a commercial lawyer.

Unnecessary words, sentences, and punctuation

Every word in an application form should be included for a reason. Applicants write they are “very interested” or “heavily enticed” in XYZ. These adverbs add nothing. Or worse, they detract from the points you are trying to make. When you review your applications, you should ask yourself:  Does this word or sentence add to my application? If not, delete it! The edit will tighten up your writing. Concise is good!

The same applies to punctuation. Colons, semi-colons, and dashes can work well if they’re used correctly. But if your application is littered with incorrect punctuation, it’s distracting and unconvincing.

Let’s look at an example. Below is a mock application answer we’ve drafted. About 60% of the applications we receive look something the below. (Note – we made our own typo with the word “maker” – we’re not perfect either!).

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Final Thoughts

It’s training contract application season.

Forget about whether your grades or your experiences are “good enough”.

Focus on what you can control.

Take the time to tailor your training contract applications. Think carefully about why you want to be a commercial lawyer. Edit your writing so it’s easy to read.

Make your next application the best you’ve ever written.

Do all this and you’ll significantly raise your chance of securing a training contract interview.

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Vacation Scheme Guide 2019

How to prepare, impress and secure a training contract

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28/03/2019: This guide has been revised to prepare candidates for 2019 vacation schemes.

Vacation schemes are intense.

You’re in a new environment, with new people, working on tasks you may not understand.

You feel the need to be switched on, even at the social events, because you want to impress.

You’re constantly trying not to make mistakes because you really really want to convert your scheme into a training contract.

I’ve been there. It’s stressful. I made a lot of mistakes during mine.

That’s why I’m writing this guide. To help you avoid the mistakes I made, and to make it clear you’re not alone in feeling nervous.

I’m not an expert by any means, but I do have experience with vacation schemes. I did four and three turned into training contract offers.

By the time I started my fourth scheme, I had learned:

  • How to prepare for a vacation scheme
  • How to deliver good work
  • How to handle tricky situations and difficult people
  • What to expect in the final training contract interview

I know many of you have vacation schemes coming up, so I’ll share these lessons with you. My aim is to help you convert your vacation scheme into a training contract.

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Part 1: How to prepare for your vacation scheme

A. Research the law firm (again)

To convert a vacation scheme into a training contract, you need to convince the firm that you really want to work there. This is important: many candidates receive rejections because they fail to demonstrate their motivation.

Now, demonstrating your motivation goes beyond repeating rehearsed answers at interviews. During your vacation scheme, you’ll be on show for everyone to see whether you fit at the firm.

With that in mind, the starting point is to re-educate yourself about the firm before you begin your vacation scheme. Make sure you understand the firm’s:

  • Practice area strengths
  • International reach
  • Training programme
  • Innovation and technology
  • Training contract structure and secondments

You can use our fillable PDF here to keep this information in one place.

Editable PDF vacation scheme overview
(This will open in a new tab)

No need to memorise anything. The point here is to broadly understand the law firm before you start. It’ll help you ask informed questions during your vacation scheme. You may even find – at a presentation or networking event – a partner is explaining something you’ve already read about. That’s an immediate opportunity to impress.

It also stops you asking obvious questions.

Like the first question I asked my trainee buddy on a vacation scheme:

“So, why did you choose corporate as your first seat?”.

 “They haven’t told you? We don’t choose our first seats”.


Now, don’t get me wrong, it’s not the end of the world to ask questions like that, but it’s something you can avoid through some basic research. You want to be the candidate who seems like he or she fits at the firm, the one who shows potential. That starts from being informed.

What should you research?

  • Look for any big deals that have taken place in the London office.
  • If you know your department, research any recent important deals they have completed.
  • Look for events that have taken place at the firm: have there been any lateral hires? New offices? A merger?
  • The law firm’s website, Legal Cheek and The Lawyer are all good sources to find out that information.

B. Review your vacation scheme application

Remind yourself why (you said) you applied to the firm and what you’ve told recruiters about yourself. Remember who interviewed you during your vacation scheme – they should probably remember you because they vouched for you!

Reviewing your application will be important for your final training contract interview (see below).

C. Check and re-check your emails from the law firm 

Vacation scheme emails from law firms are exciting.

You’ll learn what to expect on the first day, when to arrive, what to wear, where to go.

But make sure you don’t miss anything out. It sounds obvious, but check and re-check what information you need to provide and where you need to be. It’s easy to miss a small sentence at the end of the email, and you want to avoid making a bad first impression.

Sometimes, you’ll be given a schedule in advance of your scheme. This is a good opportunity to plan your time. Check when your assessments are and when your final training contract interview is.

For one of my schemes, I had an assessment on the first day of my scheme and a final training contract interview by the end of the first week. This meant it was important for me to carve out time to practice for my interview.

At this point, you just want to make sure you’re ahead of things. Vacation schemes are very stressful, so if you spend more time preparing now, you’ll minimise the risk of last-minute surprises during your scheme.

D. Investigate your department

If you’ve already been told where you’re sitting for your first week, do some basic research on your practice area. While it’s not something you’re necessarily expected to know, and it should be explained to you, it can help speed up your own understanding if you’ve reviewed it first.

For example, if you are banking: What is  a loan? What is a bond? What do banking lawyers do? Are there any current big news stories in the space?

You don’t need to dig too deep, especially on this last one, just note down anything that catches your eye.

After that, do some law firm-specific research: Are there different teams within banking? Who are your firm’s key banking clients? 

If you know more information about where you’re sitting, you can also read up on your team: How is the department structured? What kind of work does your supervisor do? Who is the head of the team?

There’s an easy way to do this. Head over to your law firm’s website and find the list of practice areas. Usually, that’s under a heading called ‘Expertise’ or ‘Services’.

For example, this is the list under “Expertise & Experience” for Clifford Chance.

A screenshot of the Clifford Chance experience page showing you the practice areas and sectors

Now, for Clifford Chance, the practice area I want is ‘Finance’. If I click on that, I get a lot of information about their finance practice.

Screenshot of Clifford Chance's finance practice

On the left, I can find the different teams within Clifford Chance’s finance practice.

On the bottom right, I can head over to Clifford Chance’s ‘Financial Markets Toolkit’, which shows the latest updates in the finance industry (and is a good example of how the law firm adds value to its clients).

If you know someone from the firm, ask for information about what the department you’re going to is like and see if they can give you advice for the vacation scheme. Trainees who are already at the firm can be a source of great support, even if you just meet them for coffee during your vacation scheme to talk about how you are doing.

Don’t know someone at the firm? Use LinkedIn. Over the past year, we’ve reached out to many trainees who have been more than happy to meet up with future vacation schemes at their firm. If you think this would help you, it comes down to being proactive.

E. Commercial Preparation

If you’re anything like I was, you probably haven’t followed the business news properly since your vacation scheme interviews.

Presuming you have a little time before your scheme, now is the time to get back to it. You may be asked commercial questions during your training contract interview.

If you haven’t followed the news in a while, here’s a quick recap of some of the “big topics” (2018):

A screenshot summarising the big news stories before your vacation scheme including Trump's tariffs, the GDPR, Trump's trade war with China and the booming US economy.

Plus, updated for 2019, keep an eye on:

  • The Brexit situation
  • The US trade war with China
  • The regulation of Big Tech
  • The demise of the high street

These topics are relevant for two reasons. First, if you head into your vacation scheme with a good understanding of the existing commercial environment, you’ll be able to demonstrate a genuine understanding of the business world and have an opinion, if the topics come up in discussion.

Second, final training contract interviews often look to see how you handle commercial questions. These come in two forms. Either they’ll ask you: “Tell me about a news story that interests you?”, or they’ll ask you directly for your opinion on a particular commercial topic. This is why it’s important to keep an eye on the ongoing “big topics” because these topics are most likely to be chosen by law firms.

You won’t have enough time to prepare for these questions during your vacation schemes. Instead, I suggest you devote a portion of your day (say, 30 minutes to 1 hour) to read the business news. If you take the small steps, you’ll thank yourself later.

F. What to read to prepare for your vacation scheme

The “big topics”

China-US Trade War
Could the US win?
Impact on the car industry
Why is China devaluing its currency?
Impact of tariffs on businesses and law firms

The UK Parliament votes on Brexit
Brexit updates, news and resources
Impact of Brexit on individual practice areas

Big Tech Regulation and Data Privacy
Lawyers’ guide to Big Tech regulation
What is the GDPR
The impact of the GDPR on business and law firms

For detailed breakdowns of each of these topics, you can check out The Complete Commercial Law Course 2019.

Day-to-day commercial awareness

For day to day news, my go-to was the BBC News app during my train journey. It’s brief, but enough to give you an idea of what’s going on and good for following stories.

If I was applying today, I’d stay up to date with TCLA’s commercial awareness writers who break down important news stories every week.

Commercial Awareness Update – January
Commercial Awareness Update – February
Commercial Awareness Update – March

You can keen an eye on their latest posts in our commercial awareness forum.

I’d also use these resources:

  • Finimize: They send one email a day and provide a clear, simple breakdown of the financial news.
  • The Economist: The magazine provides a weekly overview of the key political, economic and social issues around the world. It’s opinionated (which is good for preparing for your interviews), but it can be technical. This is actually how I started developing my commercial awareness. Pro tip: if you’re a subscriber and looking to learn more about a commercial issue, use the search function on The Economist’s website, you’ll be able to access all their articles on that particular topic.
  • The Economist and FT podcasts: These podcasts, among others, are a great way to get the key updates if you prefer the podcast format.
  • New York Times: This is a personal favourite of mine for breaking down global commercial news stories.

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Here’s a table you can use to keep track of what you need to know for your commercial interviews (updated 2019).

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 Part 2: The first days of your vacation scheme

Surviving office life

I suspect most of you will have worked before, but maybe not in an office.

Some things you’ll be used to, like sitting at a desk behind a screen for many hours of the day. Other things you’ll grasp quickly, like using the office phones (PS: press 9 for an external call) or navigating your way to the right room at the right time.

My first vacation scheme was my first office job. So I’ll talk about a few of the quirks within law firms that you may not know about.

A. IT Training

You’ll soon learn that law firms use systems to manage their documents, which makes simple tasks like saving, emailing and printing, quite confusing.

These systems organise documents for a certain client and project (referred to as a ‘matter’). So, when you try to find documents, save or print, you may be asked to enter a client and matter number.  Your law firm will explain how to sort this out for your vacation scheme.

You’ll also find out about the law firm’s internal web – the intranet – to find information about the firm. Here, you should find profiles for the lawyers at the firm, which is handy if you want to find out someone’s name, where they’re sitting or what they do.

B. Trainee Buddies and Making a Good Impression

Many of you will be assigned a trainee buddy to help you get settled.

These guys are important. Here’s why:

  • Stuck on a task and think it’s too trivial to ask your supervising partner?
  • Want to learn how to approach a particular senior partner?
  • Want to know how a partner typically likes the format of a piece of work?
  • Want “inside’ advice on what makes a good vacation schemer?

The point is that trainee buddies are typically very willing to help you because they were in your position not long ago. If they seem approachable, try to develop a strong relationship with them. Check in regularly and invite them to coffee if they are not too busy. They’re in a position to really make a difference to your vacation scheme experience.

Now, sometimes, your trainee buddy won’t be available. Maybe they’re busy or away from their desk, but you need help.

In that case, if you’re spending a long time trying to format a table or fix the numbering of a report (I’ve been there), and you don’t want to bother your supervisor with the issue, see if there’s a nearby secretary that’s available. Secretaries are also fantastic.

Introducing yourself to non-lawyers is also a good habit to get into, even if you don’t need their help.

You’ll bump into many of them during your vacation scheme. It could be secretaries and paralegals outside your office, IT staff walking the floor or know-how or research departments on your floor. Whoever it is, these are the people that law firms rely on to keep the business functioning.

The reason law firms have vacation schemes and not just interviews is to see how candidates operate in a work environment and fit into the firm.

People will notice the genuine conversations you’re having around the office, and they may be asked for their thoughts; I know many firms send emails round looking for feedback on the vacation schemers.

Or, maybe you impress them and they send an email of their own accord.

Vacation scheme email to HR about success
Well, you never know

The first day of your vacation scheme will be your induction. The schedule differs between firms, but usually you will receive presentations from graduate recruitment. That’s often followed by IT training and an office tour. You may also start in your department later that day, in which case, you’ll meet your trainee buddy, your supervisor and the rest of the team.

C. Your First Day – MINDSET

Approaching the first day can be scary. There will be a lot of new information and many of you won’t be used to this environment.

This is why your mindset is important. 

First of all, you should know it’s quite normal to be anxious, or to feel like you’re not supposed to be there. You may feel intimidated by the other candidates: Perhaps they’ve graduated from prestigious schools and secured multiple offers. If you don’t have the same experience, it’s okay to feel insecure.

For my schemes, I found the “fake it till you make it” concept to be reliable and effective. I don’t mean you should be a fake person. No. That’s the opposite of what will earn you an offer. What I mean is, say to yourself: “I am good enough to be here and I have a lot to offer“. I mean: Trust that you were chosen to be on that vacation scheme, out of hundreds of applicants, for a reason. This idea helped me to drum up the courage to do whatever I was afraid of. It helped me to ask questions at presentations, lead a group activity, and push away the voice in my head that told me I was an imposter.  And I wonder now if some of those others who I worried about weren’t likewise faking it, at least in part.

At the same time, you should also remember you can’t be perfect. You are there to show them who you are. There are many ways to impress a firm, and you can do it by leaning on your strengths rather than trying to patch up your weaknesses. For example, if you are nervous around larger groups, focus on delivering the highest quality of work you can provide and developing a rapport with the people around you.

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 Part 3: Converting your vacation scheme into a training contract

A. Doing good work

In between the presentations, events and assessments on your vacation scheme, you will only have the time to complete a few tasks for each department. Because you have a limited opportunity to impress, it’s important that you perform each task to a high standard.

That doesn’t mean your work needs to be perfect. Far from it. What matters is how you approach the tasks, whether you take advice on board, and how you manage your workload.

Here’s my advice for approaching the work on your vacation scheme:

1. Organise your work

  • Use a to-do-list to manage your workload. A to-do-list will help you to track tasks and deadlines, and plan your work over the course of the day. In the morning, before you start any work, write a list of things you have to do for the day. At the end of the day, you can tick them off or carry over work to the next day. This will help you to manage your workload.
  • Use a work-log to keep track of the work you’re doing over the course of the week. Who did you work with? Who was the client? What did you do? What was the background to the task? What did you learn? Try to really dig into the work you did, and if you aren’t sure about any of the answers to these questions, see if you can schedule some time to speak with the person who set you the work. When it comes to your training contract interview, you can use this information to justify why you want to work at the firm. This will also be helpful if you are asked questions about what work you did on the scheme.
  • Keep a notepad with you. Learning to write effective notes is a skill. For now, when you are being given work, focus on writing down the most important aspects of a task and flag up any immediate issues with the supervisor. Carrying a notepad with you when you are working in your department means you will be prepared to receive work as you move between offices.

2. Scrutinise your work 

  • Attention to detail.  Your supervisor may be lenient if you’ve missed details or used the wrong structure in your work: these are things you wouldn’t be expected to know. However, one thing you can’t do is submit a piece of work with spelling and punctuation mistakes. It looks sloppy, and it reflects poorly on your attention to detail.
  • Before you submit your work, take the time to print it out and correct typos. The extra 15 minutes is well worth the positive impression, and chances are, you will notice points that you didn’t realise you had missed.

3. Use the appropriate language and structure

  • Ask yourself: What is the objective of the task? During my vacation schemes, I had to submit reports, memos and emails. Each time, I had to adapt my writing style and structure depending on who I was writing to. For example, if I was writing to a client, I learned to remove legal jargon and begin my report with a conclusion.
  • Use simple language and short sentences where you can, and try to be direct in your answer.  Where appropriate, use headings, sub-headings and bullet points to make your work easy to read. Try to work out what matters to the client most and have the confidence to discard what isn’t relevant.
  • For legal research tasks, write down the sources you use in your report. That way, your supervisor can see how you arrived at your conclusions.

4. Manage your time

  • Manage expectations. Sometimes, you’ll find yourself in a position where you have too much work to do. You can pre-empt these situations by asking the person who set you the work when he or she needs the work by. And if you don’t think you’ll finish it on time, speak to whoever set you the work. Communication is a vital skill. It’s far better to give your supervisor notice than rush your work or miss a deadline.
  • If someone tries to give you work when you’re at full capacity, be honest about your workload. Let them know what you’re working on and check whether you can do it after. That comes across as professional and it gives you the opportunity to work on the matter later when you have more time on your hands.

5. Be proactive

  • Ask questions about your work. This shows initiative, gives you a chance to build a rapport with the supervisor, and it could lead to more work in the future.
  • If you’re confused, make a start, and then check in with the supervisor to see if you’re doing it right. Trainees do this in practice. It stops you wasting time and it shows you’re proactive when you’re not sure: rather than waiting to be corrected when you submit the work.

B. You don’t need to be perfect

Law firms aren’t expecting you to produce instantaneous, flawless results, or to successfully complete tasks on your own, without checking in with your supervisor. You might find a task confusing; you could include some wrong information. You forget your interviewer’s name. Run late to an event. It happens. What leaves an important final impression is how you respond to and learn from those mistakes.

If you find yourself with too much work to do, ask if you can push back a deadline. Next time, ask when the work is due as soon as it’s assigned.

If you’re stuck on a task, that’s fine. But don’t just say you’re stuck. Explain what you’ve done so far and what you find confusing. If the work is for a partner, consider asking a trainee for help, first. Ask for pointers on how to produce something the partner will like.

If you make mistakes in your work, try to understand where you went wrong. Ask if you can run through the task when the lawyer is free. Then prepare some informed questions. Next time, make an effort not to repeat that mistake. Make a note. Print the document out and proofread it. Check and re-check your work a few times.

These are the small things that impress. And when it’s time to give feedback, an associate will not say, “she made mistakes in her report”, but, instead, ”she made mistakes in her report, but she was quick to learn from them’. That’s the kind of candidate who makes a good trainee.

C. How late should I stay on my vacation scheme?

Only stay if you have work to do. I hear this a lot: candidates often feel like they should stay late because they want to impress. That’s unnecessary and it doesn’t impress. It’s definitely good practice to ask your supervisor if there is anything else you can help with. And you can leave a little time to complete your to-do list or work-log, but after that, you should leave. Vacation schemes can be exhausting, and it’s important you give yourself time to rest.

D. Vacation scheme socials and networking events

Law firms will have social events during the vacation scheme and my advice is to get stuck in. It’s an opportunity to get to know the other people on your scheme – and often trainees – in an informal setting and you can show the law firm what you’re like outside the workplace. You shouldn’t be in the situation where you can’t attend a social event because of work commitments, but if you are, you should inform the relevant person why you can’t make it.

At the same time — pace yourself. If you start acting unprofessional, word will get around quickly. You don’t want to be another vacation scheme ‘horror story’ that trainees like to share.

There may be networking events during your vacation scheme. Here’s my advice for networking:

  • Make a point to remember people’s names at the start. If you find you have a good conversation with someone, send them a follow-up email. Give them an opportunity to remember you.
  • Be genuine. Sounds cliché and obvious I know, but I think it’s worth emphasising. It’s obvious when you speak to someone and they’re not being sincere, or they’re trying to sell themselves too hard, or they’re trying to flatter you.
  • Strike a balance in your conversations. You don’t just need to talk about work. That can make it easier to bond with the other person, especially as it’s often a chance for them to have a break away from work for a short time.
  • People like to talk about themselves. Quite simple this one, if all else fails, ask questions. This is specially helpful if you’re in a situation where you don’t know what to say.
  • Ask appropriate questions. Remember, certain questions about the firm will be more appropriate for graduate recruitment compared to trainees or partners and vice versa. (For example, you don’t want to be asking a senior partner about LPC funding!)

E. The final training contract interview

 My final training contract interviews had some overlap with the vacation scheme interview. The interviewer is looking to assess your motivation for commercial law and the firm, and you can expect competency and commercial questions.

Remember, you must justify why the firm truly interests you over other firms. This requires you to convince the firm that you genuinely want to work at their firm and that you would take a training contract with them if they offered it. (This is actually a common question asked by firms.)

Our TCLA moderator drew up a great list of areas to look at when trying to differentiate a firm:

In the final training contract interview, you want to especially draw upon your personal experience. Unlike direct training contract applicants, you’ve now been able to see what it’s like to work at the firm from the inside.

Think about:

  • What did you learn about the firm that you didn’t know before?
  • How did you find the quality of work that you did? How does this link to what you will do as a trainee?
  • How supportive did you find the people at the firm? Who did you meet that made a big difference to your vacation scheme?
  • Why do you think you would be a suitable fit for the firm?

You can expect some of these questions in your final interview, which is why it helps to do a proper review of your scheme. Firms also commonly ask motivation/competency-style questions, although these tend to be more informal now that you have experienced the firm. Still, it’s important you treat it as an interview and clearly communicate both your motivation and your suitability for the firm.

F. Standing out during your vacation scheme

It’s going to be a little scary, but remember, the firm has decided that you’re a good candidate, that’s why you’re on the vacation scheme. Even then, you don’t have to get everything right: schemes tend to be about not shooting yourself in the foot rather than being the perfect candidate. That means handling situations appropriately (communicating if there’s an issue), conducting yourself professionally (especially on the socials) and being friendly and enthusiastic (it’s very obvious when you’re trying to be competitive).

Here’s a summary of our top tips:

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Part 4: Resources for your vacation scheme

Law firm resources

While on your vacation scheme, you will have access to variety of resources.

Common resources firms have access to include:

  • Practical Law: This is often the starting point for trainees. It’s excellent for anything technical you don’t understand in corporate law.
  • Westlaw or LexisNexis: You can use these on your scheme for cases and legal research.
  • Companies House: When you want to find out information about a company. Private companies have legal obligations to file information at Companies House, so you can find good information on directors/shareholders/parent companies or subsidiaries/annual returns (now called a confirmation statement).
  • Information Resources Centre/Library. I didn’t actually use this during my scheme but I heard from other trainees that they did. These guys are amazing for the research-heavy tasks because they know where to look and how to use the firm’s various third party services. You can then pick out what’s relevant and provide a summary.
  • The firm’s intranet. What you find here depends on the firm but generally it’s a great way to find recent deals, awards and firm news. Many firms will also have department specific resources here.

During your downtime, you can also use these resources to find more information about the firm, specific departments and prepare for your final interview.

Our resources

1. Vacation scheme work log

Vacation Scheme Work Log
Click the image to open the PDF in a new tab

2. Access our case studies and interview resources

3. Join our vacation scheme forum 

4. Our list of existing vacation scheme experiences

5. Read our interviews with Rosie Watterson and Lewis Malkin.

Part 5: Top advice from other candidates

We’ve compiled the vacation scheme advice candidates shared in our forums. While these were provided as advice for particular schemes, the advice can equally be applied to other schemes.

Gibson Dunn vacation scheme

Throw yourself into everything the firm has to offer (the work, the socials, getting to know the people, the free-market system etc.). In my opinion, it’s very much the case that you will get out what you put into the scheme.

Do not be afraid to go around knocking on the doors of associates to find work. The firm operates something called a free market system, which gives people a degree of autonomy to seek out people with whom they want to work with and the types of matters they want to work on. (Not quite as broad a scope as a non-rotational system but is rewarding for proactive individuals). My first seat supervisor did not have much work she could give to a vac schemer because everything she had required prior training, and in my second seat, my intended supervisor was in hospital until the second-to-last day of the scheme. Knocking on doors around the office gave me a good chance to speak to new people and I ultimately completed work for 10 different people. It was quite a scary thing to do at first, but once you’ve done it once, it becomes so much easier.

Try to have a results-oriented mindset. Make sure all the work you do is as good as you can make it and do not be afraid to ask questions when you don’t understand something. People are friendly and happy to answer questions. Your supervisors provide extensive feedback on the work you do and if you do work for other people at the firm, they will give your supervisor feedback about your work too. Any negative feedback you receive will impact your chances of securing the TC. The assessments are always incredibly important. Your assessments are scored, and a bad assessment can affect your chances of securing the TC.

There are some people at the firm with incredibly interesting stories to tell who can give you great advice – don’t be afraid to just knock on doors/go for coffee with them and pick their brains.

As you might guess, the vac scheme is an incredibly intense experience. There were 19 people on the scheme (someone had dropped out having secured a TC elsewhere) and everyone had their eye on securing one of the few training contracts available (there’s an intake of 8, but 1 had supposedly been allocated for straight TC applications and 1 had been given to someone from the previous year). Try not to be overly tense about this and just enjoy what the scheme has to offer. You don’t want to be that shy person who never speaks, but you also don’t want to be so worried that you mumbles and bumble everything you say.

The firm also places a huge emphasis on culture, so be nice!

Allen & Overy vacation scheme

Be yourself, be friendly, ask lots of questions both at the workshops and in the office with your supervisor as this shows you are interested. Try to get involved in the firm’s activities outside work such as the choir or football, although this isn’t compulsory. Use the gym, and the roof gardens. They are great! Try to keep a note of the tasks you do for your own records and for your CV.

HFW vacation scheme

My advice would be to put a lot of emphasis on the assessments because they all seem to be very important in determining whether you get a TC offer.

The feedback they get from your supervisors on the written work that you do is also really important. It’s better to spend a lot of time on a task and to do it to the best of your ability than to do it quickly but badly. Sometimes I felt like I was spending a lot of time doing something but then the feedback I got was really positive and didn’t criticise me for spending too long on it.

Linklaters vacation scheme

Ask constructive questions. Be proactive in seeking out work.

Reed Smith vacation scheme

Read up on the firm’s recent deals and new initiatives. Make sure to ask questions and always be enthusiastic and engaged, even for the boring workshops! Get involved in socials such as sports teams while you’re at the firm if you have an interest in sports and make sure to be polite to everyone from Partners to support staff as everyone can relay feedback to graduate recruitment. Double and triple check all the work you submit and don’t be afraid to take the initiative to introduce yourself to everyone on your floor.

Slaughter and May vacation scheme 

Have an eye for detail, and take the time to do your application properly. The covering letter if your only opportunity to properly express why you are a good fit, so give it your best shot. Read carefully, ask for the deadline as soon as you receive a task, don’t be afraid to ask your Trainee buddy for assistance and see if you can lend them a hand too.

Sidley Austin vacatino scheme 

The final training contract partner interview is really important. To be honest I think it’s pretty much make it or break it so make sure you really focus on this, they definitely put a big emphasis on it when it comes to making the final decision. This is a shame because it kind of defies the point of a vacation scheme (supposedly getting a more rounded picture of you) but it’s understandable when the firm takes so few trainees. In terms of preparing, this is kind of difficult as you don’t find out what departments you’re in until the first day. So I think focus more on mentally preparing yourself for being in a professional.

Good luck!

10 years on from the financial crisis and the European banking sector is still suffering from a painful amount of problems; the sector is too large, lacks capital and most significantly has too many unprofitable, unsustainable players – the zombie banks.

This final problem is the most troublesome and the focus of this article. The recent calamitous breakdown of the Deutsche Bank & Commerzbank merger was a timely reminder of this systemic weakness of the sector. A zombie bank is essentially a bank which is either solvent in name only, as it is only able to operate due to explicit or implicit government support, or a bank which has a ratio of Non-Performing Loans (loans where borrowers have fallen behind in their payments) high enough that they are not technically insolvent, but large enough to significantly limit their capacity to lend to new more profitable enterprises.
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Oliver Gilliand
Oliver GillilandTCLA Writer

Both banks are prime examples of zombie banks. Commerzbank was bailed out by the German government in 2008-9 after acquiring Dresdner Bank and 15% of its shares are still held by the government. Despite the banks continued efforts to cut costs, it is earning 10-year low profits and returning a measly 4% of equity (a measure of a bank’s profitability). While Deutsche Bank was one of the few banks to survive the financial crisis without a government bailout, it is not faring any better is no better. In fact, Deutsche Bank had to rely on a $354 billion bailout from the US Federal Reserve in 2018 for fraudulent securitisation and its share price has plummeted from $76 to $8 since 2010. Furthermore, its market capitalisation (the value of the company’s shares) is the lowest it has been since the financial crisis and it has an even tinier return on equity (a measure of the bank\’s profitability) of 1%, which is 1/16th of its largest US rivals such as JP Morgan.

The merger was doomed to fail from the start as it was primarily driven by political motivations to create a national champion to rival the big US players, rather than economic viability. This came to the forefront in April when merger talks collapsed as executives realised (amongst other things) that the analysts were correct in saying that merging two zombie banks would only serve to create a larger zombie. Commerzbank’s $9.4 billion portfolio of high-risk Italian debt and the likelihood of capital requirements being imposed by the ECB were insurmountable hurdles and ultimately the merger would not create a benefit sufficient enough to offset the risk.
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The Origin of The Problem – Patient 0

‘Patient 0’ of this pandemic was born out of Europe’s piecemeal response to the financial crisis (although Britain, the Netherlands and Switzerland were quick to act). The Federal Reserve in the US quickly embraced interest rate cuts, a programme of quantitative easing and a Troubled Asset Relief Programme (forcibly recapitalizing banks). However, the Eurozone did not adopt such an approach until 2013 when the sovereign debt crisis forced them to act and many European Union countries were equally poor in their response. Interest rate cuts are required in times of crisis, to incentivise investment (cost of capital is reduced), which should have a multiplier effect leading to an increase in jobs and spending.

The US’s quick response allowed the economy to recover; the assets the Fed purchased through quantitative easing included high-risk securitised loans, while the US treasury acquired underperforming loans and implemented a Trouble Asset Relief Programme, which wiped out the infection. However, this programme has largely failed in Europe, the late response has meant the economic recovery has been sluggish and inflation remains extremely low. This has forced European countries across the board to keep interest rates low to prevent a further recession. This has been recently exacerbated by the fear induced by the imminence of Brexit and the US-China trade war, leading to increasing concerns over geopolitical factors and protectionism. Indeed, in the eurozone, the ECB recently announced earlier in March this year its decision to keep interest rates at historic lows of 1.1% for the rest of the year (compared to the 2.25% rates in the US). This low interest rate policy has suppressed banks\’ profitability; this is because a bank makes money through the difference between borrowing and lending rates (known as margin).
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The spread of infection

Insistence to keep these underperforming banks alive is a reflection a problem being replicated across Europe. Indeed, almost a fifth of 130 banks failed a European Central Bank stress test in 2014. In October 2016 the International Monetary Fund said European banks with more than $8 trillion in assets were still so weak they remain vulnerable.
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The German government alone has spent $70 billion since the financial crisis bailing out its banks and it is estimated that European banks currently hold €1 trillion of non-performing loans, which represents 30% of the banks equity, which is still higher than pre-crisis levels. Profitability is equally weak across Europe, with the average return on equity (measure of a bank’s profitability) of the 190 European Union banks being 6.5% (contrast to the US where banks such a Citigroup saw return on equity of 10%).
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Italy epitomises the European zombie-bank crisis. It currently holds €100 billion of bad debt (although this has been drastically cut since 2016 where it held 360 billion), has the second largest public debt burden in Europe (Greece being the first) and has one of the highest non-performing loan ratios in the euro zone. As a result, Italian lenders have had to come to terms with the fact that most of their loans will never be repaid. For several years, shares in Italian banks have plummeted, as it became clear that they would be required to write off billions of euros’ worth of loans. Even Italy’s most prestigious lenders including the likes of Banca Monte dei Paschi di Siena—the world’s oldest bank, have been infected by a combination of poor management and financial policy and turned into zombies. Monte Paschi is now 68% owned by the government following a 5.4-billion-euro government injection in 2017 but has a return of equity of 1.23% and has seen its share depreciated in value by 70% since 2017.
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Why is it problematic to allow this infection to spread?

Keeping these banks alive is problematic for several reasons:

As these banks cannot die – what incentive do they have to change the ways they operate? This is the root of the problem, as studies have shown that Zombies tend to maintain credit to companies they already have a relationship with even if they are struggling. To press for repayment would force the bank to recognise its own losses on the loans, which leaves both the banks and the companies they prop up zombified.

Managing a high proportion of NPL’s can divert resources away from more efficient and profitable business resulting in a misallocation of capital – meaning zombie banks do not positively contribute to the wider economy and keep unprofitable businesses, which are unable to grow alive.

Once burdened with NPLs, Zombies are less likely to lend capital, which in turn creates a negative feedback loop, as zombie banks slow economic growth through a misallocation of capital, which in turn increases the volume of NPL’s, diverting further resources away (Fujii and Kawai, 2010)

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Parallels to the Japanese Zombie Bank Crisis

To fully appreciate the impact a zombie horde sweeping across Europe could have one need only to look at the Japanese Zombie Crisis.

Japan in the early \’90s was suffering from the collapse of the real estate market in the 1980s, which in turn created a significant amount of NPLs and the economy began to slow. Japan just like Europe became overburdened with a high ratio of NPLs, peaking at 8% of all loans in 2001 (Italy is currently at 16%). More pressing still two of its largest urban credit co-operatives (essentially banks which lend to small borrowers and businesses) Tokyo Kyowa and Anzen were on the brink of collapse (could a similar fate be on the horizon for Commerzbank and Deutsche bank?). To counteract this the Japanese Finance Ministry undertook a policy of ‘public-private recapitalisations’, using a mixture of public and private support to recapitalise the banks.

What is recapitalisation?

This is the process of restructuring a company’s debt to equity ratio. A company which decreases its debt to equity ratio is said to have lower ‘leverage’, by issuing more shares to raise money to buy back securities. This would see the company’s earnings per share drop but would be less risky as its total debt and the amount of interest it pays to creditors is reduced. This in turn would increase the company’s liquidity leaving more money available to pay its shareholders. In the alternative a company may increase its debt to equity ratio to have higher ‘leverage’, by issuing bonds to raise money, for example. This would be useful where the share price is dropping or to defend itself from a hostile takeover, as the issue of bonds can fund the buyback of outstanding shares, which in turn should increase earnings per share. Interest payments are also tax deductible (dividends are not), so a company can also recapitalise to reduce their tax obligations.

The Bank of Japan provided a 40billion yen capital base and private banks/financial institutions provided another 40 billion in the form of low interest loans (increasing its leverage). This capital was used to create a new bank, which assumed the business of the two banks. This approach was coined ‘hougachou’ (festival of raising money from the community) and was used throughout the \’90s.

This became particularly problematic when ‘hougachou’ was adopted in the main banking sector in 1997 when Nippon Credit Bank came on the brink of collapse and the Japanese finance ministry sought to recapitalise it. A whopping 210/290 billion yen of new capital was injected from the private sector and the rest from the Bank of Japan. But despite its recapitalisation, as the bank was so large it was still under threat of insolvency. This approach was replicated across most of the banking sector and not before long the zombie horde had swept across Japan, unable to restructure, unable to take on new loans and stuck in a negative feedback loop due to their high proportion of NPLs precluding lending and in turn creating more NPLs.
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The problem with ‘Hougachou’?

The fundamental problem with this approach was that it failed to address the root of the problem, the NPLs. Instead, struggling banks were reliant on other weakened private banks, which resulted in underwhelming results and only served to create a negative feedback loop.

The failure was mainly due to relying on recapitalisation alone, without any regulatory pressure or NPL resolutions, as of such there was no incentive to address the NPL problem. Regulatory pressure was evidently required, as the banks were unwilling to call in these loans as this would cause short-term loss.

This period of zombification became known as ‘Japan’s Lost Decade’ due to the fact its economy suffered from economic stagnation and price deflation with annual GDP growth of only 1.14 until 2001 (compared to its 3.89% resulting from the real estate boom in the \’80s).
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Is there a cure?

Fortunately for Europe there is an answer, one only needs to look to the strategies of the successful European banks and the policy the Japanese government underwent in the late \’90s to eradicate the outbreak.

Firstly, inspiration should be drawn by the change of direction of the Japanese Ministry of Finance. After it became apparent Hougachou alone could not solve the zombie outbreak as zombie banks had no incentive to clean their balance sheets (call in the bad debts). To overcome this an independent Financial Supervisory Agency (FSA) was introduced. The regulator then started to force banks to write down the value of their NPLs, which meant they had to declare insolvency. The independence is the fundamental factor here, as the Ministry of Finance had a vested interest not to expose the high % of NPLs when recapitalizing these banks due to its financial stake. An independent regulator can kill off the zombies rather than keep them alive despite their inability to make a profit. The aggression of the independent regulator in turn forced the Japanese government bodies to reassess how they assisted struggling banks. Rather than simply provide capital to non-viable banks, a significantly larger public fund was set up of 25 trillion yen for recapitalisation. But rather than looking for a ‘quick fix’ with private sector buyers, a new focus was placed on cleaning up the balance sheets of struggling banks. The government set up a public asset management company to acquire and manage NPLs, this provided additional capital to struggling banks and relieved them of the need to manage some of their NPLs. The FSA also introduced financial incentives to improve profitability, which reinforced the need to clean up balance sheets. The combination of the government policy and independent regulations led to drastic reversal in the zombification of Japan’s banking system, as highlighted in the graph bellow.


Equally, there are many banks in Europe which are not struggling, and this is a direct result of their strategy and management. A focus on cost cutting efficiency and embracing digitisation would result in an efficiency drive and in turn start wiping out the infection. The growth of fintech in particular presents an unparalleled opportunity to increase the efficiency of these banks, as there is less and less demand for physical branches, which can significantly reduce overheads. The digital arm of ING (no physical branches) is a fantastic example of the result of embracing digitisation can have, which now boasts a return on equity of 20%. Other successful banks include Santander (ROE 6.37%) and BBVA (ROE 9.78%) both of which have heavily cut costs, invested into technology and relied less on interest rate income risks.

To conclude, an aggressive independent regulator would incentivise zombie banks to self-administer a cure by cleaning up their own balance sheets and force a change to the way governments\’ undergo recapitalization to focus on long-term profitability. This, combined with a change of an individual bank\’s strategic direction, in particular by adopting an innovative fintech strategy, would result in significant increases in efficiency and put to rest the horde sweeping across Europe.
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Oliver is a member of TCLA\’s writing team. He is a recent law graduate from the University of Nottingham.

You can reach out to Oliver in our forums by clicking here.
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