Law firms with banking and finance practices that were recently making deals with free-flowing credit are now scrambling to launch new practice groups to help clients simply survive the credit crisis.

“A year ago we were writing deals, figuring out how to grow businesses and expand products; now the markets are trying to figure out when the next shoe drops,” said Michael Missal, head of the global financial markets group that K&L Gates unveiled on Sept. 29 in Washington.

Katten Muchin Rosenman formed its credit crisis solutions group in late September. Hays Ellisen, co-chairman of the group with Eric Adams, said the firm was advising clients to anticipate that the government would intervene, despite the initial House rejection of the $700 billion bailout bill.

“When the government brings in a massive pool of liquidity to purchase these distressed assets, it will set a floor price, and the market will start to function,” Ellisen said.

SWITCHING SIDES

Gibson, Dunn & Crutcher last week announced the formation of a financial markets crisis group, coordinated by partner Michael Bopp in the Washington office. Just weeks ago, Bopp was associate director of the Office of Management and Budget.

“A month ago I was sitting at OMB and would have been handling this [crisis] from the other side,” said Bopp. “We put this [group] together because our clients have an interest in Washington’s response. There is a groundswell within Congress for a wholesale re-evaluation and modernization of the financial markets regulatory system.”

Pat Oxford, chairman of Bracewell & Giuliani, is heading the Houston firm’s new financial industry task force, announced on Sept. 25. The ripples of collapsing financial institutions are already reaching Bracewell practice areas ranging from white-collar crime to banking, securities, transactions and many more.

“Anyone who says they know where this is going is full of baloney. We have never experienced anything like this in my lifetime, and I am as old as anybody practicing these days,” said Oxford, 66. “The basic architecture of our banking regulatory scheme will change. There are hedge funds and private equity funds that, if you squint your eyes, look like investment banks. We suspect there will be a tsunami of regulation.”

Thomas Vartanian, head of New York-based Fried, Frank, Harris, Shriver & Jacobson‘s banking and financial institutions practice, unveiled last week, has had a front-row seat on two previous economic calamities. He was general counsel of the Federal Home Loan Bank Board (FHLBB) and the Federal Savings and Loan Insurance Corp. when the FHLBB seized and sold 400 savings and loans in the early 1980s. He was also an attorney for the Office of the Comptroller of the Currency from 1976 to 1981, when the FHLBB seized Franklin National Bank. This crisis is bigger and the ramifications greater, Vartanian said.

“In the past, the problem was the banks losing money,” Vartanian said. “This is a liquidity crisis. Confidence is eroding. In terms of causes and scale, this is much different.”

Early this year, Washington’s Patton Boggs began building a practice group within its financial services group to respond to the credit crises, but the number of practice areas involved has grown as the economy has stalled, said partner Jeffrey Haas.

“A lot of companies face credit quality, liquidity or enforcement issues, and there are issues relating to insurance coverage, litigation, transactions, bankruptcy — it’s a long list,” Haas said. “This is probably the busiest year I’ve had.”

‘WORST I’VE SEEN’

Karen L. Garrett, a longtime banking attorney in the Kansas City, Mo., office of Bryan Cave, heads the firm’s distressed financial institutions group, formed in August. Business is depressingly brisk, she said, as the contraction in credit stifles business and heightens worries. “Nobody is doing deals, just trying to get out of trouble,” Garrett said. “It is scary how little credit is available.”

Garret expects that the credit crisis will be resolved, ultimately, through a brutal shakeout as banks shed bad loans backed by assets attractive to loosely regulated hedge funds and private equity funds.

“This is the worst I have seen,” Garrett said. “My prediction is these bad loans will be bought by nonbank entities. They don’t have the same regulatory constraints as banks, so they can buy a lot of commercial real estate loans at 40 cents or 60 cents on the dollar and wait for the real estate market to come back. Banks can’t wait that long.”