September 15, 2008 3:36 PM
Work, Jobs Drying Up for Firms in Wake of Wall Street Mess, Says Orrick Lawyer
Posted by Brian Baxter
We checked in with Alan Pomerantz, partner in charge of the New York real estate practice group at Orrick, Herrington & Sutcliffe and a former chair of the global property and finance practice group at Weil, Gotshal & Manges for 11 years, to talk about how law firms will be affected by the current economic crisis.
So, what are you hearing?
What I hear in the marketplace that's really disquieting is nobody says, "Well, we finally got the last piece scrapped out." You're not hearing that at law firms or in business. What they're all saying is, "Who do you think is next?" And as long as people have that mentality, they're still not going to move [on transactional work] because they think it's going to be cheaper later. It's going to kill lawyers. It already has. These people at other firms are my friends and we have talks and drinks and lunch. And everybody has the same story.
What's going on at large law firms right now?
Everyone is nervous. And it's not a good thing to be a lawyer and to be nervous. There are certain practice groups that are doing extremely well, but anything that needs debt to function is shut. It's a tough world out there right now. And there are no jobs. The people who got laid off [earlier this year] probably have jobs already. But for the next crowds, there are no jobs. It's an incredibly shrinking market.
How are firms planning to absorb the new law school graduates they've just taken on?
It's going to accelerate a firm's decision-making [process] on people. It used to be, "Well, he or she is doing good work, so let's keep them around a bit longer," but now it's, "Let's get rid of them." If you can get it done cheaper, and you've already committed to [first-years] and you don't want to pull commitments, get rid of [upper-level associates]. And what is truly horrible, is that some firms--I'm not mentioning any and I know it's not here--are telling [associates] that they're being let go because their work isn't good, instead of saying to them, "We don't have work."
They put the failure on the [associates] instead of on themselves. And that's a very bad thing. If I was a law student or summer associate right now, I would be very nervous.
Any chance we'll see some sort of market recovery anytime soon?
Lehman's failure with such an extraordinary amount of debt indicates that type of structure doesn't work. If you'll permit me to quote Mark Twain, he once said, "When a cat sits on a hot stove, not only won't he sit on the hot stove again, he won't sit on a cold stove either." So no one is going to go near those structures.
What we're seeing is that there is some pressure if a bank is going to securitize debt, they're going to have to keep a first-loss piece on their books, which is going to cut everything down. The idea of putting some kind of regulations on these swaps of synthetics is becoming very prevalent, all of which limits liquidity and access to capital. The only people in business right now are the portfolio lenders, and they want bigger margins and more equity. The risk curves are starting to separate again and I think that what Lehman was, was that whenever you wanted to buy something in real estate or finance it, they were always at the table. Because they could be very aggressive and give you different kinds of structures, so they did an enormous amount of business and a lot of people did extraordinarily well. And now the merry-go-round has stopped and they're running out of chairs.
Is this the worst you've ever seen it?
Not yet. I've been around a long time. I was around when the first mortgage REIT failed. It was a Chase Manhattan $40 million mortgage REIT and it failed in 1971. So I've been through some crunches. And what's different here is that nobody truly understands what's happening. No one truly understands how much leverage there is in the system. The issues of why one needs to save Bear Stearns and Lehman is not only the real estate investments that they made, but the risks and counterparty risks that they have on their books, which are quite significant. You can have swaps and synthetic credit risks on one asset that are ten times the value of that asset. I don't think the world--or the bankers for that matter--understand that.
Do you think we've reached the nadir today?
Right now you can't tell someone what their risk is! You just don't know. That's the problem. It's significantly different [from anything we've faced before]. When we did all the restructurings in the nineties, you could at least get your lenders in a room. Now you don't know who your lenders are. That's a material difference. My thinking is that you need to have a catastrophic event so that the buyers will say, "Okay, now things are at the bottom." But I don't think we're there yet.