The nation’s top law firms are facing an uncertain new landscape following the demise of two of Wall Street’s biggest and most established investment banks.
The bankruptcy of Lehman Brothers and the announced acquisition of Merrill Lynch & Co. by Bank of America will no doubt produce a flurry of legal activity. In particular, Lehman’s massive filing, involving some $600 billion in debt, will keep scores of lawyers occupied for years to come.
But for most large corporate law firms, which depend on financial institutions as the cornerstones of their client lists, Monday’s developments, combined with the earlier demise of Bear Stearns and the possible imminent collapse of insurance giant American International Group, portend dark days ahead.
“There’s not a firm in the city that’s not terrified about what’s going on right now,” said the managing partner of one top New York firm, who asked to remain unnamed because he was dealing with a heavy volume of client inquiries about the current situation.
Both Lehman and Merrill had been battered over the past several months by exposure to securities backed by defaulting mortgages. Lehman opted for bankruptcy after failing over the weekend to secure a buyer or government assistance. AIG is frantically trying to raise $40 billion to avoid a potentially fatal credit downgrade stemming from insurance payouts also related to the mortgage crisis.
“There’s a tremendous amount of instability,” he said. “It’s a question of whether you’re fortuitous enough to be representing a financial institution that survives or whether you represent one that’s not going to be around much longer.”
The managing partner said the issue stretched beyond those firms that regularly represented Merrill or Lehman. Questions now being raised about other banks and the prospect of new financial regulation stemming from the turmoil, he said, will likely further hammer an already moribund private equity market and also severely restrict hedge funds.
“You don’t know who’s going to emerge at this point,” said the managing partner. “You don’t know what it’s going to look like tomorrow.”
Much is at stake. Investment banks and financial institutions are the main reason New York firms dominate the legal profession in terms of profitability. Unlike cost-obsessed corporate clients, financial clients have generally been willing to pay “full-rate” or premium fees to their favored firms. Firms from elsewhere in the country and across the ocean have invested heavily in New York offices to try to get a piece of Wall Street’s action.
A major fear now is that further waves of forced consolidation and new government regulation may entrench a cost-cutting mentality on Wall Street.
But it is not just corporate firms that looked to financial institutions’ deep pockets. Plaintiffs firms filing suits on behalf of shareholders of failed companies generally seek the largest recoveries from banks who they claim facilitated securities fraud at companies like Enron Corp. or WorldCom Inc. These suits in turn keep large firms’ litigation practices humming.
“I was just thinking about that this morning,” said class action lawyer Salvatore Graziano of securities cases that might be affected because of the collapse of Lehman. Graziano, a partner at New York-based Bernstein Litowitz Berger & Grossman, said there were cases across the nation that had gone on for years, costing the plaintiffs lawyers millions, which might be dead with the Lehman bankruptcy or a possible AIG filing.