Can Wall Street work its magic to reduce legal risk and cost while earning healthy returns? 

Three related themes dominate recent financial news:

  • Bundling Assets: investors reduce risk by buying aggregated individual instruments.
  • Uncorrelated Risk: investors want asset classes that do not move together.
  • Higher Yields: too much liquidity means low yields; many investors put some money in high risk – high reward instruments.

In the 1980s Wall Street invented bonds backed by portfolio of individual mortgages. From these “collateralized mortgage obligations” (CMO) have sprung many similar investments.

Consider the possibility of collateralized legal obligations (CLO). Growth in e-billing provides a rich data source. These data, if aggregated across companies, could enable analyzing litigation risks, costs, and outcomes. By measuring and predicting risk and bundling pending suits, it might be possible to create a portfolio investment.

Companies could hedge legal risks by pooling them. Investors would pay premiums that let them gamble on portfolio outcomes. “Gamble” here is a good thing – liquidity and risk management. Bundled litigation risk may be no less predictable than the weather some investors already bet on.

CLOs would offer general counsels a risk management tool and investors a high risk/reward opportunity uncorrelated with other market risks. So why not apply Wall Street techniques to manage legal risk? If the dollars are there, the ethics issues can be addressed. Comments to clo at prismlegal dot com