Will Lumps of Coal (and Pink Slips) Fill Lawyer Stockings This Year?

The woes of structured finance lawyers in the wake of the credit crunch have been extensively chronicled in these pages. Now they’ve migrated over to the MSM. One of our favorite young reporters, Lindsay Fortado of Bloomberg News, has this detailed report:

New York law firms are cutting associates for the first time since 2001 as the collapse of the subprime mortgage and credit markets causes private equity deal volume and structured finance work to slow.

Clifford Chance, the world’s highest-grossing law firm, dismissed six senior associates who worked on mortgage-backed securities in its structured finance practice on Nov. 5. At least two other firms asked associates, or salaried lawyers, to take sabbaticals or switch departments, a move that often precedes job cuts. Partners, about one-fourth of the attorneys at the biggest firms, may also face some belt tightening.

The subprime collapse and its effect on the credit market and the volume of deals have brought a slowdown in work, probably leading to job cuts. While structured finance practices have been hit the hardest, mergers and acquisitions and private equity practices also face a slowdown, legal consultants said.

Troubling. If the problem remains confined to structured finance, that’s one thing; but if it spreads to M&A, that’s another thing entirely. Since M&A work is such a big driver of firm profitability, troubles in the merger market could scuttle any chance of “NY to 190” in the foreseeable future.
More excerpts from Fortado’s extremely interesting (and long) article, plus additional discussion, after the jump.


How much slower are things now? Consider the data:

[M]ergers and acquisitions hit record highs in the first and second quarters of this year, and then slowed dramatically in August because of the subprime market collapse. In July, $492.8 billion in deals were announced, compared with $196.1 billion in August, according to data compiled by Bloomberg.

The article also goes into bonuses:

[This year’s bonuses (year-end and special) ] exceeded those in 2000 when Cravath associates got bonuses of as much as $100,000. Last year, law firms doled out year-end bonuses of $30,000 to $65,000.

The job cuts at London-based Clifford Chance, which gave out $115,000 bonuses, were “a direct response to market conditions in a specialized product area,” spokeswoman Anne Groves said. The six associates will receive the bonus.

Sponsored

Ah, interesting. So the speculation that the layoffs were designed to deny the victims their bonuses, which first appeared in the New York Law Journal, appears to have been off the mark.
Correction: We’ve been informed that CC was NOT planning on paying bonuses to the laid-off associates — but reversed itself on this, after the NYLJ article was published. We also understand that the layoff victims received year-end bonuses, but not ‘special’ bonuses.
There’s also discussion of one of our favorite subjects at ATL, McKee Nelson, and how much they want to cut from their ranks. Fortado reports that the firm “plans to cut 20 to 30 lawyers on a temporary basis through sabbaticals and attrition.”
Also, some excellent historical background on which firms have laid off associates in the past:

The current market conditions are reminiscent of 2001 when the technology bubble burst and the economy slowed after the Sept. 11 terrorist attacks. New York-based Shearman & Sterling fired about 70 associates because of the decline in business. Morgan, Lewis & Bockius dismissed about 50 associates.

The firm “had too many lawyers compared to clients’ anticipated demands in certain specialties,” Morgan Lewis managing partner Tom Sharbaugh said. “Since 2001, Morgan Lewis has experienced very balanced growth, which makes a downturn in a particular sector less likely to affect our staffing.”

And what about layoffs in the future?

At Thacher Proffitt, about a dozen associates from the group, which accounts for about 40 percent of the firm’s lawyers, have moved to other practice areas, said Chairman Paul Tvetenstrand.

When asked if the firm would lay off associates, Tvetenstrand paused for at least 10 seconds before answering, “We have to constantly monitor the situation.”

Who’s most vulnerable?

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Legal consultants say that Cadwalader, Wickersham & Taft; Orrick, Herrington & Sutcliffe; and Sidley Austin, based in New York, San Francisco and Chicago, respectively, have the largest structured finance practices of the U.S.’s largest firms.

No wonder Sidley isn’t spreading its bonuses far and wide, but keeping them in New York (although, perhaps ironically, we’d guess that most of the firm’s structured finance people are in New York).
Finally, more on those McKee Nelson sabbaticals:

McKee Nelson, whose clients include General Mills Inc., SLM Corp. and GlaxoSmithKline Plc, is asking associates to take sabbaticals with 40 percent pay to do campaign or charity work, unpaid sabbaticals that last as long as a year or severance packages that include four-months pay and benefits, Nelson said.

“Nobody’s been fired,” Nelson said. “No one in this business has the volume that they had before.”

The firm has moved nine lawyers from the capital markets practice to tax and litigation and about 15 have chosen one of the layoff alternatives the firm offered, Nelson said.

It’s a lengthy and very interesting article; read it in full here.
Credit Market Collapse Claims Victims as Lawyers Exit [Bloomberg]