Litigation is a function of two things: losses (incurring financial loss) and opacity (usually of contract. It is not a coincidence that we, a litigation support and expert witness firm, have started our marketing campaign in the past six months. If you are in litigation, we think you should be considering doing so too.
We are neutral when it comes to the type of litigant we support. We have worked for both claimants and for major banks and corporations. This article is to assist those litigators whose clients are major corporations and banks.
It is our view that we are approaching a major inflection point in markets, and that will result in a spike in litigation and arbitration opportunities for the legal community, on both sides of the fence.
Why are we approaching an inflection point?
The imminent downturn in markets and the economy is likely driven by central bank action to combat inflation. Interests have been going higher, and may stay higher than people expect. There are two reasons for that: the first is cyclical and the second is structural.
The cyclical nature of the economy, exacerbated by Covid, means that central banks are at the point in the cycle where they are removing liquidity and trying to get inflation under control.
In most developing economies, inflation is still above (in some cases like the UK, far above), the official inflation target of the central banks. Central banks rely on inflation targeting to set interest rates, to retain confidence in their respective currencies. If a currency does not hold value, then people won’t keep deposits in banks, and the monetary system faces challenges (Link to Bank of England paper).
However, after over a decade of low rates, first in the recovery from the Great Financial Crisis and then due to Covid, many sectors have become used to low interest rates and likely increased their borrowings. We see signs of this in the recent US banking crisis, amongst more leveraged corporations, and in public sector borrowing (both at a local level and a national level). This over reliance on debt can become a debilitating burden for some, and that results in financial distress, poor practices and even insolvency.
The second is structural. As we explained in this piece (link), central banks today are warning they ‘have the tools’ to keep rates higher for longer. In the past high rates became so painful, and potentially risky for banks, that central banks would relent and cut rates back down. This became known as the ‘too big to fail’ problem during the GFC. I.e. policy makers would make compromises on setting interest rates due to concerns over the impact on the banking sector. No more.
Post GFC, the Basel reforms have empowered central banks to take a raft of measures to directly intervene in failing banks and even the economy. We have now seen that approach applied in a number of jurisdictions, from the banking crisis in Cyprus (in 2014) to the US crisis earlier this year.
We also hear this term repeatedly in central bank speeches: ‘we have the tools to intervene, if we need to’. We believe this is a reference to the new powers of their financial stability arms.
This means that this interest rate cycle will be different: higher rates for longer (something else the central bankers keep saying in speeches) which means more pain for those who have borrowed too much.
Where should litigators be fishing?
To answer that we look back at the GFC and the era after the Dot.com bubble.
Large organisations are simply groups of people working together. If they don’t have the right culture and leadership they can make poor decisions that impact their businesses and stakeholders: clients, employees and creditors.
The entities most in need of legal help will be those that are least well managed. They will invariably have the light touch procedures, the combative internal culture, have sold the most challenging products (to their clients) and could be facing a vicious spiral.
During the last crisis, those banking entities were the Royal Bank of Scotland, Deutsche Bank and a few others. Notably some major US institutions, that were fairly well run, faced much less litigation.
If we look further back to the Internet bubble of the late 90s, we saw a number of blue-chip companies in a similar position to today, over leveraged, with the wrong bets or strategies, that would go bust shortly after the dot.com bust. Enron, Worldcom and Parmalat are some of the big names that failed then that people recognise, but there were a raft of others.
We expect to see a repetition of the many of the issues we saw in the past and some new themes. Where should lawyers look and be marketing? Well in summary look for institutions that face challenges: good institutions are meritocratic, accountable and (relatively) transparent. To identify the poor institutions look for the opposite traits.
We recognise those are intangible metrics, but we will also be using a more data driven approach to point us to the clients litigators should market to.
To learn more about our views on which sectors and clients litigators should be focusing on in the coming two years, and the decade that follows, join our LinkedIn forum for litigators and barristers here: Linked to private LinkedIn forum.
Join us on Litigation Hotspots to read more about this and other exciting trends shaping the world of litigation over the next decade.
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