Just last year, Cadwalader, Wickersham & Taft was riding high. Double-digit growth in profits per partner over the last five years had catapulted the firm to economic heights previously scaled only by the Cravaths and Wachtells of the profession.
In an interview with the New York Law Journal during those heady days, then-Chairman Robert O. Link confidently predicted continued success.
"Are we going to have difficulty sustaining this?" he asked. "No, short of some cataclysmic event that hits everyone else too."
Cadwalader is now confronting exactly that kind of cataclysmic event in the form of the now year-old subprime crisis. The New York-based firm announced Wednesday it is laying off 96 lawyers in the United States and Britain due to continued slowness in real estate finance and securitization, the firm's core practices. It is the second round of layoffs for the firm, which slashed 35 lawyers in January.
For a firm that so recently posed a challenge to the profession's traditional pecking order of elite firms, the massive cutbacks represent a stunning fall from grace.
In a statement Wednesday the firm said: "From 2003-2007, when [commercial mortgage-backed securities] issuance tripled, the firm grew rapidly to meet client needs. With CMBS issuance now at a small fraction of previous levels, we are making these personnel adjustments in response to this change in demand. In September 2008, the firm will have 580 lawyers, the same number we were in January 2006."
At the end of 2007, the firm had around 720 lawyers.
Cadwalader is not alone in having to resort to layoffs. Most law firms with large practices focusing on mortgage-backed securities are facing the dilemma that the market for such securities, decimated by the wave of defaults among the underlying mortgages, has come to a virtual standstill. Thacher Proffitt & Wood, Cadwalader's neighbor in lower Manhattan's World Financial Center, also has had a large number of layoffs, as has McKee Nelson, a boutique firm heavily focused on securitization.
Moreover, the economic downturn has taken a particularly heavy toll on the structured finance departments of investment banks, the main clients for legal services in the area. Bear Stearns, which shut down due to losses in the area, and Lehman Brothers, which has had large-scale cutbacks, were both major Cadwalader clients.
The chairman of another leading New York firm, who said he was "stunned" by the scale of Cadwalader's layoffs, said this legal recession already felt qualitatively different than that which accompanied 9/11 and the end of the dot-com boom.
"Those were lulls in activity," he said. "This is a fundamental change. A whole segment of capital markets has disappeared and we're not sure when it will come back, in what form or if it will ever come back."
But the chairman added that some of Cadwalader's difficulties were firm-specific, noting its heavy reliance on the mortgage-backed securities practice but also its rapid acquisition, especially in the last year, of new and presumably expensive lateral recruits.
Another New York firm managing partner agreed that Cadwalader's very large structured finance practice presented a challenge that most other leading New York firms did not face. Firms with relatively small structured finance practices could try to keep them afloat while relying on countercyclical practices like litigation, he said.
"But [Cadwalader's] practice is so large they may have felt like they had no other choice," the managing partner said.
Whether Cadwalader's other practices can pick up the slack is a major question hovering over the firm.
Long before 2003, structured finance had been the firm's engine. Both Link and W. Christopher White, who took over as Cadwalader's chairman earlier this year, came out of that practice and used their positions within it to take power at the firm in the mid-1990s. They instituted a sweeping turnaround program, dubbed "Project Rightsize," aimed at boosting profitabilty by eliminating weaker partners and practices and bringing in stronger ones.
The firm has had mixed success with new practices over the years. But with profits per partner close to $3 million in recent years, the firm has been able to attract star partners. In the last year, the firm has established a private equity practice led by former Latham & Watkins star R. Ronald Hopkinson, as well as an intellectual property litigation practice comprising several former Morgan & Finnegan partners. The firm also substantially boosted its bankruptcy practice with the recruitment of four partners from Weil, Gotshal & Manges.
But it is unusual for new practices and partners to immediately boost a firm's bottom line, and some question whether Cadwalader acted wisely in investing heavily in private equity, another practice severely impacted by the tightened credit environment.
"You can't just buy some PE guys and present yourself as an alternative to Simpson Thacher to [Kohlberg Kravis Roberts & Co.]," said the firm chairman.
Even in the face of a bad economy, firms are wary of engaging in layoffs. The New York managing partner said the layoffs' damage to internal morale is often manageable but he said damage to law school recruiting is severe and long-lasting.
"Law students are impressionable," he said. "It takes a long time to recover your reputation on campus after that. We spend so much on recruiting it's just not worth it to add another $200,000 to our profits per partner, especially when our income levels are still so high."
But Cadwalader's business model, which has emphasized high leverage and performance-based pay among partners, may be less susceptible to reputational harm from layoffs, he noted. "Their reputation is already that they are run like a corporation."
By that same token, however, that business model may make it harder for the firm to hang on to valuable partners with less flush days ahead.
"It will be interesting to see how a firm like that holds together," the chairman of the other New York firm, said.
The managing partner noted that the timing of Cadwalader's layoffs come just before the Citigroup law firm leaders summit, the profession's Sun Valley-esque confab. He noted that Link has been a regular participant in the past, and the other firm heads would be curious to see either him or White show up.
"I'd like to see them there," he said. "There's no reason for them not to be."
Cadwalader did not respond to requests for comment.