Kenneth A. Kopelman’s practice as a financial services lawyer would have looked completely different had he worked in any city other than New York or at any time other than the two decades leading up to 2008. Kopelman is an expert on derivatives and their applications in trading, structured products, and capital markets, as well as on broker-dealer, securities, and futures regulation.
Raised in Yonkers, he did his undergraduate work at SUNY Binghamton and got his law degree from Brooklyn Law School . He began his career as a corporate associate at Baer Marks & Upham in 1985 and moved to Bear Stearns as in-house counsel in 1993, where he served for 15 years, rising to the position of senior managing director and head of the Fixed Income and Derivatives Legal Groups . Since 2008, he has been a partner with Bingham McCutchen in its New York office, where he provides cross-product legal advice and solutions to banks, broker-dealers, hedge funds, and other financial institutions. Few on Wall Street have had a more continuous or more privileged view of the meteoric rise of complex structured instruments and their impact on the financial markets.
Kopelman recounts the making of a corporate legal career in New York over a turbulent period. He tells how law firm life looked to a corporate associate in the ’80s, working 13 hour days, often seven days week. He describes the work of in-house counsel during a period of corporate growth ending in crisis. Kopelman explores what it means to be a law firm partner in the post-crash era, when client expectations are high and the old models of associate training and partner loyalty are changing. Are mid-sized full-service law firms a thing of the past? Is partner portability undermining trust and collaboration in today’s firms? What exactly are derivatives good for today?
Clare Cosslett: Where in New York did you grow up?
Ken Kopelman: I grew up in the suburbs of New York: Yonkers , New York—gateway to Westchester or gateway to the Bronx, depending on which direction you’re facing. Solid middle-class background. My father was a teacher who became the principal of the Bronx High School of Science. I went to a public school in Yonkers. When it came time for college, the state schools made a lot of sense and the best state school at the time was Binghamton, so that’s where I went.
Cosslett: And when did you decide you wanted to be a lawyer?
Kopelman: I’m not sure. I was always told, “You should go to law school .” And I think you’ll find traditionally with people who become lawyers that they’re verbal. They may be good or bad at math, but it’s not their first love. And they’re somewhat argumentative.
Cosslett: So that’s what you were hearing?
Kopelman: That’s what I was hearing, but that’s not what led me to law school and I don’t know that I can to this day pinpoint what did. I spent three years working between college and law school, and I’d recommend it for a lot of people. First of all, it gave me time to appreciate school because I had had it with school by the time I graduated as an undergraduate. There was no path that was so appealing to me that I wanted to go straight in for more education. So I did something else for a little while, and when I came back to law school, I was motivated. I recognized I’d be working hard, and I appreciated it.
For those three years between college and law school I taught high school English in the Bronx, in the New York City school system. It was a great experience. I found that I loved getting in front of people. I loved the kids. I loved the idea of learning something so well that you could teach it to others. I hated the pay and I hated the prospects, however. So I said: “I like using words. I like working with other people. I need something with better pay and prospects.” Law school became one of the obvious choices.
Cosslett: Why Brooklyn Law School?
Kopelman: Brooklyn appealed to me as well-suited to what I was trying to do. It had a good record of people who went on to do well and the professors were practical and well-regarded in their field.
Cosslett: When you got there, did you feel that you had made a good decision? Did you enjoy law school?
Kopelman: As it turns out, I really liked law school. I really liked what we learned, the way we learned, and the people I was learning with. But the deal with Brooklyn, and the deal with all law schools at that tier, is that you need to do well in school to have more opportunity. You have to understand the deal going in to make it work.
Cosslett: Did you do internships ?
Kopelman: I did, and wish I had done more. I did very few clinics. The student internship that I found the most valuable was during the school year with a federal court judge, Judge Morris Lasker in the Southern District of New York. Judge Lasker was best known for forcing New York City to clean up its overcrowded jails and ordering the city to release some prisoners from Rikers Island. He was highly controversial and known as being a very liberal judge. He was a wonderful man with wonderful clerks, and I learned how to write and research in a different and more practical way than one learns in law school.
Cosslett: When it came time to take your first job, what opportunities were presented to you coming out of Brooklyn Law School, and what was the most appealing to you?
Kopelman: One of the reasons I went into the law in the first place was for the chance of better opportunities, and better compensation—and summer associates at New York firms were paid a fair amount at the time, as is still the case. I did well the first year; I had written on to law review, so I had a choice of law firms. I would read the law firm brochures and they all looked exactly the same, but it turns out that when you speak to a number of people at a firm, you see that the firms are really quite different. Firms have different cultures. They have different approaches. Some have more jerks, some have fewer jerks. And the personality of a firm really comes across when you meet with three or four associates and three or four partners. I remember sitting in one office at a big firm and the guy said, “I do municipal bonds. I’m trapped. I can’t get out of doing this.” He had a very long, narrow office. It was scary.
So I had a choice of firms, and I chose an eighty-lawyer firm that is no more, Baer Marks & Upham. And it’s no more both as a firm and as a type of firm. There used to be eighty-lawyer firms that did sophisticated, diversified work. Today an eighty-lawyer firm is more or less a boutique, specializing in a few specific areas. It might do some other things, but it’s a boutique. Back then, there were about twelve firms in New York with under one hundred lawyers which were full-practice firms. Every firm claimed, “You’ll get great hands-on experience”—and at Baer Marks, I believed it. I did the summer there and it was a great summer. I got to see so many things up close: litigation, the way a firm worked, and what corporate transactional lawyers did—all of which, frankly, I had no idea about.
What do you know in law school? You know appellate arguments, so everyone wants to be an appellate attorney, arguing in front of the Supreme Court or the Second Circuit. And while that all sounded appealing, I realized that before you argue appellate cases, you’ve got to read a lot of cases, you’ve got to brief a lot of cases, you’ve got to do a lot of document production. Those were not the things I wanted to do full time. I liked the idea of getting up in front of a panel of judges, and I wanted to get right to that. It’s like not wanting to train or work out, but wanting to be a professional athlete.
But corporate law was very appealing to me—it had everything I wanted to do. Some writing. A lot of talking and thinking about things, which I really liked. And analyzing and understanding the transactions and the people, which was a skill set I think many of us who end up going into law have, but don’t realize that a corporate practice is a good place to apply it. It was eye-opening to me, and after the second year I decided, “That’s what I want to do. I want to be a corporate lawyer.”
Cosslett: Your relationship with your clients as a corporate lawyer at an eighty-lawyer firm was probably different than it would have been at a bigger firm.
Kopelman: Yes. Case in point: I was working with a partner on an application for funding for a municipal bond deal. I had worked with the client and had meetings with him. Client contact, by the way, is a two-edged sword for junior associates and some clients are better to deal with than others. So this is in the middle of the summer, as summer associate jobs tend to be, and the partner and I are working together on this application. He calls me into his office, and I, of course, am nervous. He says, “I’m going to Europe for three weeks. Here it is. It’s yours to fuck up.” Those were his very words to his summer associate. I said, “That’s great.” It was sink or swim.
So I worked with the client and we developed a very good rapport. I did have people I could go to. The partner had said, “Speak to this other partner if there’s any problem.” And it’s actually very important, because if you’re going to be a lawyer handling complex matters, you have to know when you need help and you’ve got to be able to deal with it when you don’t. That was one of the things I learned there, because I did have people I could call on and people were happy to help. And he was just a very distant phone call away. It was hilarious.
Cosslett: You’ve been in-house and you’ve been in two firms. What is the best part of firm life for you?
Kopelman: I think the best part of firm life is the work itself—working with clients and colleagues on varied matters, and continually learning.
Law school grads know virtually nothing of real practice, unless they have worked as a paralegal. Some have the capability to learn quickly, and some do not. That’s the big breakpoint. If you’re able to learn quickly, you need to be willing to immerse yourself in it. Working at a law firm—and I think working in most areas of the law—requires total immersion and total commitment.
As an associate, I enjoyed the commitment and what I accomplished with the commitment. I enjoyed getting better. The learning curve is very steep for a junior attorney. It starts to plateau after a while, and then it steepens again, and then plateaus again. I always worried about it going in the other direction at some point, but that clearly doesn’t happen. So I enjoy the entire experience although I will readily concede it is consuming. Working in the right way in a law firm is an absolutely consuming life. I have a family, and ironically I felt terrible for junior associates who didn’t, because I didn’t know how they were going to find one.
Cosslett: What was the lifestyle ?
Kopelman: At the start, I was not working with traders. I later became a lawyer who worked with traders and investment bankers. Before that, as an associate, I worked in a standard corporate lawyer lifestyle: get in at nine or nine-thirty in the morning, go home around eleven o’clock at night. We’d order meals in at the desk. Occasionally we got to go out to lunch if we were entertaining the next class of summer associates. That was one of the fancy perks: you got to take the associates out to lunch. Now, as a partner, I work every weekend, but I don’t come into the office every weekend, which is a real pickup in lifestyle. On the other hand, it’s a negative, of course, because you’re working from wherever you are.
Cosslett: That’s technology.
Kopelman: Another two-edged sword.
Cosslett: What is it like to be a law firm partner?
Kopelman: Being a partner in a firm is a multifaceted job . There’s the work itself, which I find challenging and love. Clients want us to have experience. They want us to have thought about the questions and to know the market, to know the answers and to be able to explain all of that in a cogent, concise way. The demands are high and the work is every bit as consuming as it was when I was an associate, it’s just on a different level.
There’s also working with the associates . The best associates are valuable from the beginning, and training and working with them is a pleasure.
And then there is working with my colleagues , whose particular expertise help me in my practice and mine often helps them. Again, finding the right firm is really important, because it’s not a solo practice at this level.
Cosslett: In the past couple of years, there has been a lot of movement amongst law firm partners.
Kopelman: I don’t know how radically different that is from investment banking, where I saw a lot of people jumping and some people staying loyal. Going back to the eighty-lawyer firm that used to exist, I think partner portability actually killed those firms. The ability of a partner to take a portable book of business and go somewhere else threatens the fabric of a firm. It also can make partners suspicious of other partners. We don’t have that issue here at Bingham where the culture is open and collegial, but there are other firms where partners are looking over their shoulders at their partners.
Cosslett: That’s unpleasant to be in that kind of an environment and it’s a disservice to the client. If you have a guy down the hall who has expertise in an area that your client needs, you should be able to bring that partner in without worrying that he’s going to elope with your client.
Kopelman: Absolutely. I think in the best firms, clients are shared and it’s collaborative and a pleasure. It gives better service and enables us to provide more to the client.
Cosslett: Do you have any insight into why so many top firms have run into trouble recently?
Kopelman: Not really; the most I can say is when you see a financial firm or a law firm go down there are probably things that are wrong at the heart of the business model or management and it leads to people losing confidence. Lawyers, more than a lot of other businesspeople, tend to be risk-averse. The thought of being the one to turn the lights off at a law firm is scary. When they see people leave, they say, “That’s scary. I should leave while I can.” I think it’s very hard to reverse the process once it has started.
Cosslett: Were you a corporate generalist at Baer Marks & Upham ?
Kopelman: I was, and I still consider myself something of a financial services generalist. There’s a real need for core competencies in the market. You need to develop core in-depth competencies around which you build your practice. You can’t really be a generalist—well, you can if you hang your shingle in a small town upstate, but that’s a different practice.
Cosslett: You joined Bear Stearns in 1993. Why did you leave the firm if you were happy? What were you looking for in a move to Bear?
Kopelman: In 1986 Baer Marks was approached by a Wall Street bank who said, “We’d like you to do our derivatives work .” Derivatives were a brand-new thing, a new area of law (to the extent it’s even an area of law as opposed to a conglomeration of other areas of law). So we started doing the derivatives work and I found it to be interesting and challenging. The lawyer was important to it. The contract is the product, and that’s what lawyers do: draft contracts. I got to deal with businesspeople and traders, whom I found to be very smart, very thoughtful and very creative. We were their partners in putting together products and getting trades and deals done.
So derivatives were a natural fit for me. I just loved it. Working with derivatives guys, I thought about the business in a whole different way. I’m not a mathematician, but as a result of my work in derivatives, I understand the math concepts a lot better, which I think is important for business lawyers.
Cosslett: To be an effective business lawyer , you can’t just deal with the law. You have to understand the business, especially in financial services.
Kopelman: It’s critical. I started doing derivatives at Baer Marks, and instead of having one client, it turned out we had three derivatives clients because business people move around. Our individual client contacts moved to different swaps dealers, started doing very well, and gave us their legal work. The derivatives business grew. At that time, it was still in the early stages. I knew that, by necessity, the relationship I had with traders, salesmen and businesspeople was one step removed. I was being asked, “Write this provision, help me with this contract,” but I wasn’t in the room. I began to realize that, for derivatives work at least, being in-house was a better place to be than a law firm. Now, in-house had historically been viewed as a second-tier place for lawyers to be.
Cosslett: It’s changed certainly.
Kopelman: It’s changed radically, and I think financial services lawyers helped lead the way. In-house actually became the place to be, and outside became a place to help the people who were doing the in-house day-to-day thinking and work. I got a very nice offer from Bear Stearns in ’93. Former clients had come to Bear Stearns to start a derivatives business. This made the offer very attractive to me; more attractive at the time than staying in a law firm.
Cosslett: How did you find the transition from a firm to in-house?
Kopelman: It’s interesting. Everybody thinks not doing timesheets would be the most wonderful thing in the world, and for about forty minutes you think, “Boy, this is fun. I don’t have to do timesheets.” But that’s not the real difference. I describe it to my partners now: “Imagine on the floor above you and the floor below you are all of your biggest clients, and they pay you a fixed fee per year.” What happens is they come to recognize you’re essentially a fixed resource in terms of cost, and they use you as much as they can. So that’s one difference—nobody thinks twice about using you. The second big difference is the rhythm and the nature of the day. At a law firm, I would get in at nine to nine-thirty. Once I started working at a bank, I was in at seven-thirty, eight o’clock, maybe eight-thirty, and my stomach would start to hurt if I was in at eight-thirty. Nine o’clock, forget it.
Cosslett: And that’s because of the market opening? Because it’s an investment bank ?
Kopelman: It’s the market and it’s the hours of the trading desk. So on the trading side of a bank, the day starts early and it ends early-ish. When I was an associate at a law firm, I never made dinner arrangements. I didn’t feel like I had sufficient control of my day to do that. In-house, I could make dinner appointments. Now, occasionally, it would blow up. Occasionally, I would work late into the evening or on weekends. The tradeoff is that the day is incredibly intense. It’s nonstop. In-house I would look up and say, “I only have two more hours before people start going home, but not me, maybe. I can stay around and do a little more work.”
Key characteristics of in-house work are the intensity of the day and the collaborative nature of the work. A law firm is a little more isolated. You’re working more with lawyers. You’re often one step removed from the business. It’s not a relaxed day, but it’s a more thoughtful day. In-house, you’re reacting all the time. You’re in the middle of the mix and you never know when you’re going to get a call from someone or another: “Come on up, we have a problem right now.”
Cosslett: Now, is that all the more so because you’re dealing with financial products affected by the market? Were these business issues or were they market issues?
Kopelman: They were always legal issues , first of all. And they were legal issues that were triggered by any number of things: a misunderstanding by a client, maybe a regulatory issue that had come in, a question someone very senior had raised about a transaction, or a transaction that needed to get done very quickly. But there would usually be some immediacy.
Cosslett: You might be working on a derivative at a law firm and you might be working on that same derivative once you get in-house, but the experience in-house is different: interfacing with the trading operation and the back-office, reacting to the exigencies of the market, et cetera, are realities of the business and can, I imagine, be overwhelming to a lawyer transitioning from a law firm.
Kopelman: People usually get it. It’s just a question of how quickly; although, some people never get it, never like it. You come to realize that at a bank there are different groups and each of them is critical to the bank’s functioning.
You mention operations. I spent a lot of time in operations because that’s what drove a lot of the structuring: “Can operations do it?” I spent a lot of time with credit and risk management. “What’s the effect from a risk management and credit perspective if we do this?” That mattered to the firm and to its basic overall well-being. After a while—and it does take some time to recognize it—you realize that while the issues are going to be different trade to trade, you really need to understand how the bank functions overall so you don’t go ninety percent down the way and the guy from operations says, “We can’t book that,” or a guy from regulatory capital says, “That’s going to blow things up.”
Cosslett: How many lawyers were at Bear when you started?
Kopelman: When I started there must have been about thirty. When I left in 2008, there were over one hundred. Bear was not known as having the biggest legal department of the banks, nor did it have the smallest. Bear felt that if the lawyers were involved, the chance of issues being spotted and problems being cut off was higher.
We had lawyers seeking out and supporting business groups, and the general counsel was very supportive of this. He said, “We shouldn’t have areas where there’s no lawyer involved at all.” I think that’s typical in the street now, where lawyers are, for better or worse and I think it’s better, involved in virtually every business in the firm. I think most risk management people, most regulators, and most lawyers think this is a good structure. There might be a few businesspeople out there who disagree.
Cosslett: Let’s talk about how your role as in-house counsel changed over time.
Kopelman: I think the role of in-house lawyers generally is very important, especially in financial services. It’s cost-effective and you get a different type of coverage than you get from outside counsel. Outside counsel is critical to all these businesses but having good in-house counsel to work as the liaison between the business and the outside counsel is a very important function.
In my own career at Bear, I began to get more responsibility as I worked on more things. That’s how you move forward in an in-house department: you find yourself dealing with more issues and more parts of the firm. So I started as the derivatives lawyer, the derivatives business grew, and I had to grow with it and build a team. Then I was given the role of overseeing the fixed-income business as well, which was a big business at Bear, and that was a lot more responsibility and a much wider coverage area. So, again, my team grew and my areas of coverage grew. I think it’s the same as in any other business: if you do a good job, I like to think you get rewarded with, among other things, more responsibility.
Cosslett: And, hopefully, higher compensation . As in-house counsel, is equity part of your compensation package?
Kopelman: Banks, investment banks , and other companies as well, will often include attorneys in whatever equity program they have, whether it’s a restricted stock program or an options program. With respect to compensation, many investment banks tended to treat most people, both front and back office, as very bonus-based: their compensation had a small base component and a high bonus component. Now, in a banking world, it really matters if an investment banker or trader has a good year or a bad year because his overall compensation is based on his performance. There can be a big difference in a banker’s compensation in a good year versus a bad year.
On the other hand, lawyers and control people, didn’t experience that volatility in compensation because what they do doesn’t change that much year to year. They have good years and bad years I suppose, like any human being does, but our performance isn’t measurable in the same way as a trader’s is. Bonus was generally paid in a combination of cash and whatever the equity incentive pay was, just as it was for the business people. That’s still the case at banks, but what they’ve done is make the base compensation a larger portion of the total compensation, which I think is probably a smart idea.
Cosslett: And they’ve tended to pay more of the bonus in equity.
Kopelman: They’ve done that for everybody. And they’ve done that for a couple of reasons. One is they want to retain people because a lot of it vests over time, so it’s a way to maintain loyalty. Also, it puts people in alignment with the company, and they like that. And there may be some financial reasons why it’s easier and better than paying in cash up front.
Cosslett: And usually it works out nicely, depending on where the stock moves.
Kopelman: It always works out nicely, except when it doesn’t.
Cosslett: Tell me about the role of in-house counsel during a crisis.
Kopelman: I’ve always believed and I’ve always told people who’ve worked with me that a time of crisis is when a lawyer’s supposed to be front and center. Typically lawyers have a supporting role, especially in-house. During a crisis, the lawyer has to be front and center because the legal issues are going to be critical. How things get handled will matter from a legal perspective and will have ramifications later. When you’re an outside lawyer, if your client has a problem, call them up and say, “How can I help?” I believe the same principle applies in-house; if there’s a trading problem, go to the trading desk. It’s important to volunteer your services and be visible.
Cosslett: Is there a role or are there issues specific to in-house counsel that you need to communicate to the businesspeople if there is a stress in the company?
Kopelman: There are a lot of constituencies when any company is in a crisis mode. One of them is obviously senior management . Another one, in a regulated business, would be the regulators. In terms of where the conflicts come in, it’s important for in-house counsel to explain to executives that counsel’s representation is of the company and not of the individuals. It can be hard to separate it out. It’s not exactly a dancer from the dance type of thing, but it’s a little difficult.
Sometimes it’s less difficult to say, “Your interests and the company’s interests are not aligned.” But it’s very important to recognize that the privilege that’s so important to lawyers is a privilege that belongs to the company and not to an individual. While this can be an abstract concept, it’s an important one for lawyers because representing the company can mean different things in different circumstances.
Cosslett: And that conflict could come up not only in regard to senior management, but in regard to board members, for example.
Kopelman: And, in fact, down to most all employees. It goes all over—it’s really a general truism . More and more, in-house lawyers find themselves saying, “Just remember, I represent the company. I don’t represent any individual.”
Cosslett: Unfortunately, you’re often not in a position to make that sort of statement until there’s a problem.
Kopelman: In a bank, a regulated business , there are enough regulatory inquiries that, for better or worse, you do have opportunities to say it, so I think that’s a place where firms will ordinarily say it in an ordinary course.
Cosslett: You’re an expert in derivatives , the application of derivatives in trading, structured products, and capital markets. You’re also an expert in broker-dealer, securities, and futures regulation. In an annual report to shareholders for 2002 Warren Buffett called derivatives “financial weapons of mass destruction.” What he was looking at in 2002 is probably completely different than the derivatives that we’re looking at now.
Kopelman: I think he was looking at his own portfolio at the time. He happened to have an extensive number of derivatives he had written over the years.
Cosslett: What’s a derivative?
Kopelman: First of all, a derivative is a contract . It’s an agreement between two parties that has one party paying or receiving amounts based on the performance of an underlying asset, rate, index or event. I’ll give you two simple examples.
First, a total return swap : we have an institutional client who wants to get exposure to a particular asset, but he can’t or chooses not to buy it (for some reason), but he can take it in derivative form. He doesn’t want to own the asset. He wants to have financial exposure to the asset. Let’s say it’s a bond. So he can go to a bank and say, “I’d like to get exposure. I’d like to receive performance on this bond that I can’t/won’t buy (for some reason).” And, of course, if you’re a bank and someone comes to you and asks you that, you have to think about whether there’s a legal issue. But let’s assume there’s not.
We do the analysis and it’s a legitimate transaction that he’s looking to do. So you write a contract that says, “Currently, the bond is trading at $90. We, the bank, will pay you any appreciation above $90 over the course of the next year when the trade terminates. You will pay us any depreciation, so if it goes to $80, you’ll pay us $10. If it goes to $100, I’ll pay you $10. And as part of that bargain, because it’s basically a trade where I’m funding you, I’m providing you exposure to an asset that would cost $90 in this example, I will charge you, in addition to your paying depreciation, an interest rate on $90.”
So we write up a contract. There are forms to do these contracts. And that’s a derivative. You don’t have an actual bond. You don’t have the right to vote the bond. If there’s a consent on the bond, you don’t get the consent. You don’t have any indicia of owning the bond other than through a contract with the bank.
Cosslett: Now, if these derivatives are issued on a one-off basis, we must be talking about significant amounts of money to make this worth the time of the bank.
Kopelman: Well, banks have trading desks that trade derivatives, and they do these with a lot of hedge funds and institutional investors over time, so you have a desk set up already. You do a fair amount of business with the same people again and again, and it doesn’t have to be a gigantic trade.
The market has changed, and Dodd-Frank will change the world fairly dramatically. The idea is that derivatives will start to be traded on swap execution facilities, exchange-like trading platforms for swaps, and the trades will be cleared. Once the clearinghouse accepts the transaction, it becomes counterparty to each side of the transaction. So, once a trade clears, the two parties will no longer be facing each other’s credit. This is a big change because now, in the example I gave you on the total return swap, if the bond goes down and you owe the bank money and you go into bankruptcy , the bank’s lost money. It has credit exposure to you, and vice versa. If the bond goes up and the bank goes into bankruptcy , you’ve lost money. Collateral reduces but doesn’t eliminate the risk.
Another type of derivative trade is an asset or liability hedging trade . For example, a company that makes widgets needs to borrow money. They do a floating-rate bond issuance because that’s the best funding they can get. So they have a bond issuance outstanding and are paying a floating-rate plus a spread.
And the corporate treasurer might say, that he doesn’t want to pay floating. He is worried about rates going up. And so a bank may enter into an interest-rate swap with the widget company. It will agree with the widget company that it can pay a fixed interest rate on its debt issuance through the interest rate swap.
So the widget company and the bank enter into a contract. This contract will specify an amount—a notional amount—let’s say the amount of the bond issuance. The bank will pay floating rate, the widget company will pay a fixed rate, and the result is that the widget company has now swapped its floating rate payment to a fixed rate payment .
Cosslett: So the risk of interest rates going up becomes the risk of the bank as opposed to the risk of the issuer.
Kopelman: Correct, and the bank could hedge that risk. And that’s a derivative that serves a hedging purpose and makes a lot of sense. Now, it so happens that a lot of companies got burned because rates didn’t go up. Rates went down, and they ended up owing the bank a lot of money. But they got the protection they were looking for—it turned out they just didn’t need it.
Cosslett: I think of derivatives, and hybrid products, and complex financial instruments as tools used amongst the banks. The example you gave is a company that made widgets. Are derivatives part of their balance-sheet planning?
Kopelman: Very much so. Companies’ asset and liability management groups often use derivatives. It’s a very accepted tool. You can’t believe everything you read in the popular press.
Cosslett: So a company out in Omaha making widgets is using derivatives as a way to hedge risk.
Kopelman: During Dodd-Frank, when Dodd-Frank legislation was moving forward, there were very few constituencies that got a hearing. Certainly, banks didn’t go near the Hill. Individual companies did very well. Individual companies said, “Here’s what we need. We like this type of trade, not this type of trade”—because industrial companies use derivatives all the time to manage their assets and liabilities. Of course there are also financial derivatives that are used not for hedging purposes but for investment purposes, to get a different type of exposure to a different types of asset, sometimes on a leveraged basis.
Cosslett: In your role as a derivatives lawyer, does the client come to you and say, “What kind of a product might help us to achieve these goals?” Or do they come and say, “We have this product, prepare the documents.”
Kopelman: We represent financial sell-side and buy-side and corporate-end users . Their requests will be different. So a bank might say, “We’re developing a new product. Here’s what we think it’s going to look like. Here’s what we want to do. What are the regulatory and legal issues you see? How should we disclose it? What sort of documentation do we need?”
A buy-side participant might say, “I’m being offered this. How should we change what they’re doing? How would it work better if what we’re trying to achieve is X and Y? How can we change the document to make it work better? And what do you think the regulatory and legal issues are?”
Corporate-end users might just want an explanation, and they might come to us and say, “How can we do this differently? Does this make sense to you? What do you see in the market?” So different counter parties, different clients will have different questions and requests for us.
Cosslett: This is such a highly specialized area. As a lawyer, does this get your juices flowing in the morning? Do you find this to be intellectually challenging?
Kopelman: I really like it and what I like about being in the derivatives area is that it’s creative and novel because you start with a blank piece of paper and you and I can write anything in a contract within the bounds of good taste. You can write a contract with any number of permutations.
Once you start thinking about the variations, you realize how boundless the creativity can be, which can also be a negative, and there were some examples of that leading up to 2008. And it can be a positive, such as enabling corporations to manage the risk of price fluctuations in their assets or in the supplies they need.
Cosslett: I read something the other day about regulators looking at some of these derivatives and saying, “There’s no financial basis for some of these products. They’re just gambling.”
Kopelman: Well, I know the theory. I had a friend who worked in a derivatives desk of a bank, and he said, “What could be a bigger gamble than buying a share of Google?” But that’s investing in a company, so that’s a good thing. I described to you the total return swap on a bond. You could say that’s just betting on the value of the bond going up or down. But you could also take that view of buying a bond. There are certain derivatives that people object to as a matter of public policy—structuring derivatives around election results, for example.
Cosslett: Did your experience at Bear Stearns make you a better lawyer?
Kopelman: Absolutely. Working in an intense atmosphere, with a lot of smart people, trying to think of new products and figure out ways to work in a very competitive environment was very helpful. In any crisis, such as the one in 2008, you learn a lot about the law, about how people react, about high-pressure situations and how to deal with them—you learn a lot of non-legal stuff.
Cosslett: What continues to motivate you as a lawyer? What do you get excited about in the morning, coming to work?
Kopelman: I love new business and I love new business ideas. I enjoy being able to take something that someone sees as a difficult problem and help them work it through very quickly and efficiently, which is not what outside lawyers often are known for. But I try to get answers to clients quickly, if the questions are susceptible to quick answers. Some of the questions in the areas that we work in are not susceptible to easy answers. I think Einstein said, “Make everything as simple as possible, but not simpler.” We can only make it so simple.
The other thing I really like, going back to my teaching days, is working with smart, motivated junior associates. You have to be ready for their questions. Part of your job is to make them better, and part of their job—whether they know it or not—is actually to make us better.
Cosslett: What would you tell law students or undergraduates considering law school about being a financial services lawyer?
Kopelman: I would simply express my view of it, what I find good about it, what I find difficult about it. I wouldn’t recommend anything to anyone. The most I can do is to give people information. Right now it’s a tough market and it’s a tough business to be entering.
Cosslett: It is. But for kids who are thinking about law school now, it is impossible to know what the market is going to look like in three years. It is so cyclical.
Kopelman: You’re right. Because the market is unpredictable , if they want to do it, they should do it. And if they don’t, they shouldn’t.