How to Pay to Change the Law

Rules, Rubes and Ratchets

The first time my mental model of law broke was during a complicated deal to sell an organic wholesale distributor to a trust.

I was essentially working as a junior partner on behalf of the lead investor. The deal involved about a dozen lawyers, countless hours of long meetings to hammer out complicated terms and argue about what numbers to put into even more complicated spreadsheets.

Once everyone agreed on deal points, we got down to papering the deal. This is the part of a financing process where lawyers take the thing everyone has agreed on and reveal that there’s about a million more things you don’t agree on, but everyone lets them argue.

Eventually, we hit a serious snag. The term in question was not so much a point of negotiation, but rather a disagreement between both sides legal teams about the legality of the proposed structure itself.

The details here don’t matter, but the gist is that their legal team made a detailed argument about why what we wanted was simply not legal.

Thousand dollar an hour analyses, laden with charming subtext about how our lawyers were morons unfolded in a numbing screed over the course of about 50 increasingly polite-but-actually-hostile emails back and forth.

It was a gloriously expensive and technical email chain. One for the books. It also wasn’t getting anywhere useful.

Then something magical happened. Our legal team sent a document, with a very formal looking letterhead, labeled “Opinion Letter”.

Minutes later, scarcely long enough to have skimmed the letter, let alone evaluate the detailed legal pondering contained within, opposing counsel responded that the matter was resolved to their satisfaction.

What?

24 hours prior, I’d been sure these legal nerds would sooner declare a gentleman’s duel at dawn before back down. As far as I could tell this was their fucking alamo and now we’re just good?

The law (let alone the opinions of the opposing lawyers in questions) didn’t change overnight, obviously.

What actually happened was (as I now understand) an extremely normal game of risk-chicken that legal firms play with each other to decide who gets to say what is legal.

If you’ve never had the pleasure of seeing this kind of thing play out, let me explain.

Power Objects: Opinion Letters

Essentially, this very expensive argument boiled down to both legal firms trying to avoid being on the hook for a potentially shoddy / illegal looking deal structure. Our legal firm, greased by a tidy 50k additional “analysis” fee, had blinked.

For non-lawyers and non-Americans: An opinion letter is essentially a fancy document that says “we believe this issue should be interpreted by a judge in such and such a way if a court ever looks into it, and we’re willing to bet against the risk of getting a fine for doing a maybe illegal thing in order to get this deal done.”

An opinion letter is less like an earnest reading of the law (although it is of course supposed to also be that) and more like an implicit contract that says “we will deal with the shitstorm that occurs if anyone ever cares enough to challenge this thing”.

The opposing legal team didn’t give a single fuck about the legality of the deal structure once they knew someone else was taking the economic risk for papering it.

Note: obviously, if someone challenged this opinion letter, the company would be the ones paying out the nose to defend it, not that legal firm, and certainly not us as investors. So “taking” economic risk here is even more abstract than it first seems.

I found this process profoundly interesting and stupid.

My naive confusion at the time circled around the idea that if the law is, at least nominally, the canon of rules that people and corporations have to follow to operate then this kind of thing shouldn’t really happen.

Even if the law is just differently interpretable by good faith parties who simply disagree on the details, the process seemed much more like paying a ransom for the interpretation we wanted than getting a legal opinion.

Law is not what you might think

For the record, opinion letters are just the tip of the iceberg. I have dozens of examples like this both inspiring and deleterious. Two are worth naming here because they’re cool and almost too on-the-nose.

A personal favorite is the Private Letter Rulings (PLR) system. For the low, low price of $50-100k, you can have an attorney petition the IRS with a formal opinion on how a specific tax rule applies to your specific situation. If successful, you’ve just quietly, legally, and very expensively bent how the tax code works in practice, for everyone, with no legislation required. It’s a subtle but powerful move that you’ve probably never heard of.

But, it’s not just the IRS that’s olympic-level-gymnast flexible. The SEC can be similarly convinced to adjust their stance on under-looked securities law for the less affordable, but still shockingly down-to-earth cost of $250k. A former Obama cabinet member walked me through the process. Apparently, the play here is getting someone credible-seeming to just hang out enough at the SEC, shilling your policy via credible-looking whitepapers which happen to be written by equally for sale thinktanks.

This stuff blows my mind. Sure $250k isn’t pocket change, but damn that’s really not that much for even minor edit-access rights to fucking investment law.

Rules, Rubes and Ratchets

As a civilian you can be forgiven for having the parochial notion that laws are mainly constraints on forbidden behaviors, written and enforced earnestly by the impartial priestly class of lawyers who steward and interpret its cannon.

That is obviously true, for you and me.

With enough resources at your disposal however, in many areas of law, finance, taxation, accounting, and business, the application of law is considerably more pliable. In these areas, laws are more like participatory guidelines. They are shaped, actively, by the actors who they are meant to constrain and guide.

The mechanism here is perfectly legal and often shockingly transparent to boot. Specifically, there are myriad ways to jiu-jitsu legal constraints into economic purchases. In other words, within some negotiable bounds, you can pay to make the law do what you want.

This is expensive though, because obviously you can’t simply have anyone rewriting the legal code of society to fit their whims. That would be chaos!

There are noble ways to use these tools, by the way. I’ve used them with some moderate success towards aims I thought were altruistic. The tools are, in a real sense, neutral. They work for whatever user picks up and operates them, technically speaking.

But there’s a sticky structural problem with bending law in a useful direction: it requires a powerful economic actor with a direct, vested interest in exactly the right three-word clause of exactly the right statute.

It’s not that no one could use these tools for good. It’s that the current version of the game doesn’t produce many players who want to, can afford to, and happen to care about the specific thing that needs changing. That combination is rare.

Given that practical reality, this game, as it stands, is a slow rot on core civilizational infrastructure.

Not because it’s inherently bad for the actors being regulated to guide regulations, but because in practice those actors’ incentive is always to act in a way that shapes the regulation in their favor and ever more towards already-asymmetrically-powerful interests. It doesn’t take an economics PhD to see how this game should play out.

More generally, one might ask: If powerful actors can simply pay to bend the rules, exactly when they’re supposed to matter most (when breaking the rules would be economically worth paying for), then in some sense the rule of law is fundamentally better understood as the rule of power on its own terms.

If law, as such, is what underwrites our civilizations’ self-governance apparatus, then this whole thing should make you wonder: what’s the logical end state of a self-editing process that repeatedly ratchets towards perverse incentives?

Spoiler: it’s BAD. But like, the slow kind of bad that you don’t really notice until it’s way too late. Something something frog in a pot.

On Progress

Jason Crawford read this and asked me “So what?”. If you don’t know him, this guy is smart and nice and really hot on Progress.

So, fuck it, lets talk about progress.

The tools are neutral but the playing field isn’t. The gap between those two facts is where some very impactful and deeply unglamorous work lives.

Oh, by the way, remember that opinion letter from the top? The ridiculously expensive game of legal chicken where I was working for the villainous investor peddling a shady deal structure?

Here’s the part I left out: we were doing it to help a company’s owners sell to their employees.

The whole complicated, legally questionable structure existed to route around the standard playbook where a company like that gets swallowed by a PE firm, stripped for parts, and the people who actually built it end up with nothing. The shady opinion letter was, in this case, load-bearing infrastructure for a pretty wholesome outcome.

Civilization is a game whose rules get rewritten mid-play. The people who get to do the rewriting are the people that know the game exists.