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Wall Street Law Firms Face an Uncertain Future


The current financial crisis has sent the sector into overdrive, but many see legal business drying up on a downsized Wall Street

Until recently, things were a bit too quiet for Mel M. Immergut, chairman of Wall Street law firm Milbank, Tweed, Hadley & McCloy. The yearlong credit crunch had dampened dealmaking, while the litigation and restructuring work the firm typically counted on during down times hadn't kicked in. Then, on Sept. 17, Milbank learned it had beaten out at least two competitors to be selected as counsel to the unsecured creditors committee in the Lehman Brothers bankruptcy. In a flash, 30 lawyers were put onto the assignment—a number that's likely to double. "It's crazy busy now," Immergut says.

While the financial crisis may be hammering banks, it has spawned a flurry of activity for many of the nation's top-tier law firms, particularly those with a big presence in New York. Investor lawsuits, government investigations, employment law counseling, and bankruptcy work have thrown many firms into high gear. Yet there is also anxiety as lending dries up, corporate transactions go into a deep freeze, and clients vanish into insolvency or into the arms of other institutions. In a recent survey by recruiter Lateral Link, 42% of big-firm attorneys said the demise of Lehman and Merrill Lynch (MER) would hurt their careers, up from 27% who were similarly concerned following the collapse of Bear Stearns.

The fate of Heller Ehrman offers cause for concern. Succumbing to financial pressures, Heller partners voted on Sept. 26 to close the highly regarded, 600-lawyer shop. The 118-year-old firm saw revenue drop last year as several big lawsuits settled. And the current environment makes it hard to reposition the practice. Says Matthew L. Larrabee, Heller's most recent chairman: "If your business is otherwise struggling, trying to rebound in a tough market is a lot harder." It didn't help that significant Heller clients included Lehman and Washington Mutual (WM).

THE LONG VIEW

Even healthy firms expect a bumpier ride. Cravath, Swaine & Moore, among the bluest of the blue-chip law firms, could see a dip in profits in 2008, says Presiding Partner Evan R. Chesler. He attributes that to the "long-term effects of the credit crisis" and the resulting chill on deals. Still, in September the firm landed work representing Morgan Stanley (MS) directors in connection with Mitsubishi UJF Financial Group's $9 billion investment in the bank. It's also been hired by JPMorgan Chase (JPM) for a securities offering connected to its acquisition of Washington Mutual's banking operations.

Some firms that have lost clients may want to look to history for comfort. In the late 1980s, the largest client of Cahill Gordon & Reindel was investment bank Drexel Burnham Lambert. When Drexel declared bankruptcy in 1990, many thought Cahill would vanish, says James J. Clark, a partner there since 1987. Instead, he says, Drexel alumni fanned out into the world of financial services, often sending work to Cahill. Among the firm's top 10 clients today: JPMorgan Chase, Citigroup (C), and Bank of America (BAC). Cahill partners earned an average of $2.6 million each last year, making them among the best paid in the country.

Snaring new business may require sharper elbows. Fewer financial institutions may mean fewer deals, and struggling banks could put pressure on fees. But Dan DiPietro, head of a Citigroup unit that lends to law firms, believes "there is this flight to quality [by clients] because the stakes are much higher." That, he says, is "probably good news for the upper echelon."

Orey covers corporations for BusinessWeek.

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