I’m getting pretty annoyed at the calumny heaped upon “complexity.” Everyone wants to “hit the ball down the middle of the fairway”; “keep it simple, stupid”; “Stick to the knitting…”; “Plain vanilla only, please.” Don’t do anything not in the precedent. Oh, please. Okay, I’ll admit I’m talking my book here, but this is an inapposite choice of chief villain for the little morality play called “What Went Wrong.”
There were plenty of dumb things done in the capital markets before the Late Unpleasantness. There were indeed some deals and structures that could not be easily understood. There were some bad choices made about, shall we call them, “opportunities” presented by the application of super complex rating criteria. Then, of course, complex machinery was sometimes left in the hands of those ill equipped to manage it.
I know it is often said this is a business with a 7 year cycle and 5 year memories, but let’s try real hard to remember good old 2007 for a moment. Real estate values dropped 40% between 2007 and 2009. Game over. All the simplicity and clarity in the world would have done precious little good when confronted by a massive macroeconomic collapse of commercial real estate values. If I found myself standing on the beach in Miami next to Michael Phelps, arguably the greatest Olympian swimmer of our time, and, as we gazed at the horizon, a 100 foot tall tsunami approaches at 100 mph, it really wouldn’t matter how much better a swimmer he is than me, we were both toast. Complexity has been conflated with lack of prudence, with structures without robust architecture, and at the end of the day complexity has been conflated with the failures of the capital markets in 2007. That’s wrong. And we are and will pay a price for embracing such a simplistic and, and let’s face it, populist, anti-Bank, anti-Wall Street fueled viewpoint.
Now I don’t want to push this too far and suggest that there is not something to be said about excessive complexity resulting in structures ill designed to survive in a stressed environment and not amenable to successful management by reasonably competent professionals. Yeah, we got over our skis sometimes. Extremism in the defense of liberty is no vice, etc.? All true, but not an indictment of engineering and creativity.
So let’s not go all Luddite here as we navigate a market which is getting increasingly challenging. Complexity is an expression of a sophisticated engineered response to the desires of investors and deal sponsors to obtain a particular result. In a world driven by regulatory change with new and intrusive securities compliance, tax, capital adequacy, bank regulatory and accounting rules seemingly metastasizing every day into new challenges, complexity is just plain necessary to do business. To wax fondly over simple and straightforward structures (and short legal documents!), it’s a little like nostalgia for the good old days of telegraphs, phrenology, the lack of antibiotics and proud and boastful xenophobic nationalism (oops, maybe that’s still with us).
So what should we do? Throw up our hands and say well, it’s just too complicated to solve? Keep it simple, stupid! No. Bankers, lawyers and other professionals need to and will continue to work together to weave a path through the shoals of all these new and constantly evolving (devolving?) rules, investor needs and concerns, rating agency issues and the like to find something that works. That’s a good thing.
Creativity and innovation are what make the system work. They should be neither constrained, nor denied, but celebrated.
At the end of the day, complexity is the product of creativity, which is the response to the needs of the users and providers of capital. When properly engineered, it is a wonderful thing. We should honor the industry’s innovative tradition.
So let’s get over getting all shuddery over complex structures to meet complex needs. The underlying world is complicated; the needs of investors are various as are the structures to meet those needs.
