Cadwalader, Wickersham & Taft, a leading law firm in the area of mortgage-backed securities, announced Thursday it was laying off 35 lawyers in the face of slumping credit markets.
New York-based Cadwalader is not the first law firm to have announced cutbacks in the face of the securitization slowdown, but it is arguably the most prominent. Cadwalader's large practice advising on the issuance of mortgage-backed securities helped catapult the firm to the top of the legal profession's profitability charts over the past few years.
But the market for such securities has all but disappeared since late summer, when a wave of defaults among subprime mortgage borrowers shattered investor confidence. Gregory A. Markel, the head of Cadwalader's litigation department and a member of the firm's management committee, said Thursday the firm decided to take action only after studying the market and determining that the downturn was likely to continue for some time.
"We concluded that this was not a three-month phenomenon or even a six-month phenomenon," he said.
Markel said most of the laid-off lawyers worked in Cadwalader's New York headquarters though the firm's Charlotte, N.C., office was also affected. All were in the firm's global finance and capital markets practices.
Almost all of the affected lawyers were associates, said Markel, though he said one or two counsel may also have been let go. He said all of those laid off were talented lawyers that the firm had hoped to avoid losing.
"It's a difficult situation because human beings are involved," he said. "This was not a green-eyeshade decision."
The affected lawyers will receive around three months' severance as well as health coverage for the rest of the year, he said. Those who qualified for year-end bonuses in 2007 will receive them. In addition to the layoffs, the firm is redeploying around 25 securitization lawyers to other practices within the firm.
Markel also said the firm was confident there would be no more layoffs in the future. After Thursday's action, the firm will still have around 260 lawyers in the two affected practices.
Cadwalader is hardly alone in facing a difficult market. Wall Street investment banks have announced billions in losses related to mortgage-backed securities and most have drastically pared groups working in the area, with some declaring their intention to leave the market altogether.
A number of law firms active in the area have already announced cutbacks. Clifford Chance terminated a six-lawyer group in November. Thacher Proffitt & Wood and McKee Nelson both have offered buyouts to large numbers of associates working in the area.
Thacher Proffitt Chairman Paul Tvetenstrand said Thursday that 24 of its associates had accepted buyouts and the firm would not be resorting to layoffs. He noted that all of those associates had since found other work.
Given its large practice in the area, layoffs had long been anticipated at Cadwalader. Other firms with large securitization practices are Sidley Austin and Orrick, Herrington & Sutcliffe.
Few firms are as identified with the practice as Cadwalader though. The firm's chairman, Robert O. Link, and many of its top partners work in the area, and growth in the area has led to a meteoric rise in the firm's profitablity. Once dismissed as a second-tier firm, Cadwalader ranked third in New York with profits per partner of $2.9 million in 2006, lower only than perennial leaders Wachtell, Lipton, Rosen & Katz and Cravath, Swaine & Moore.
The firm has used its strong profits from securitization to expand into other practices and promulgate a new business model for practicing law. The firm pays its rainmakers extremely well but eases out partners who fail to meet revenue targets of $5 million or more.
Cadwaladers' compensation model has attracted a number of high-profile lateral partners in recent years, and Markel said Thursday the diversification of the firm's practices would help cushion the blow from the credit market slump. Among those lured to Cadwalader in the past several months were a four-partner bankruptcy group from Weil, Gotshal & Manges, an intellectual property litigation group from Morgan & Finnegan and a star antitrust partner from Fried, Frank, Harris, Shriver & Jacobson.
Along with the new practices, some parts of the securitization and structured finance practices continue to be busy, said Markel. He said the firm's 2007 financial results would be slightly down from 2006 but still strong and that a slight dip was also projected for 2008. "We are going to continue to be an extremely successful, first-tier firm," he said.
Markel also predicted that the securitization market would bounce back, though he said it would probably be a long time before it reached its levels from a year ago. He said even banks that have said they are pulling out may eventually change their minds.
"The world is not going to stop financing real estate or securitizations forever," he said, "and, when it comes back, we will be a leader."
Layoffs among lawyers have accompanied many economic downturns in the past. In 2001 and 2002, law firms active in the technology sector laid off scores of lawyers. The dropoff in mergers and acquisitions also led to layoffs at Shearman & Sterling and other New York firms. In the early 1990s, the collapse of the high-yield debt market led to major cutbacks at firms like Latham & Watkins.