For more than a decade, law firms just about everywhere, in Pittsburgh and Providence as much as London and Los Angeles, have dreamt of New York.
The dream was that any firm, through hard work and the right lateral hiring in the city, could become a "New York" firm, with a Wall Street book of business and sky-high profits per partner to match.
This striving transformed the legal landscape. Associate salaries nationwide skyrocketed to meet Manhattan norms. Firms merged or rearranged themselves to stress their New York credentials, however slight. Partners elsewhere were squeezed to pay millions to big-name New York laterals.
But now Wall Street is being decimated by an unprecedented crisis likely to restrain the financial sector for years to come. Overexpansion, especially in New York, has been cited in the deaths of San Francisco firms Thelen and Heller Ehrman.
In the face of such headwinds, can the New York obsession continue?
According to Ralph Baxter, chairman of San Francisco's Orrick, Herrington & Sutcliffe, there is simply no turning back.
"There will be some adjustment," he said. "But there's really no way to be an American-origin firm that has anything to do with capital markets and finance without being in New York in a serious way."
Orrick has been among those firms most committed to New York expansion. New York became the firm's largest single office following its absorption of lawyers from former Manhattan stalwart Donovan, Leisure, Newton & Irvine. Orrick also pursued but ultimately failed to seal a merger with Dewey Ballantine, another illustrious New York name that went on to combine instead with the former LeBoeuf, Lamb, Greene & MacRae.
Baxter and the heads of most other large firms founded outside of New York have long believed the future of the profession will lie with a small group of global mega-firms that can straddle the major financial centers of New York, London and Hong Kong.
This widely held view is a sign of how closely large law firms see their fortunes aligned with those of global financial institutions. But it is precisely those institutions now facing a wrenching round of consolidation and collapse. Thus far, Lehman Brothers has declared bankruptcy; Merrill Lynch and Bear Stearns have been absorbed by other banks and American International Group has been effectively nationalized.
This turmoil may play havoc with those financial institutions' longstanding client relationships. Since native New York firms like Sullivan & Cromwell, Davis Polk & Wardwell and Simpson Thacher & Bartlett have long had a stranglehold on such relationships, some non-New York firms sense opportunity in their sundering.
"Consolidation can affect things in a number of ways," said Jay Zimmerman, chairman of Boston's Bingham McCutchen, another firm that has been eager to expand in New York, acquiring local firm Richards & O'Neil in 2001. "It's going to require some nimbleness."
The thought is that the consolidated banking giants that emerge from the crisis will be more cost-conscious than the profligate investment banks now fading from the scene. Such a scenario could prove disastrous for elite New York firms with super-premium billing rates. But out-of-town firms willing to perform the same work for less could stand to benefit.
Thus far, though, the crisis seems to have magnified rather than diminished New York firms' dominance in financial practices. Sullivan & Cromwell chairman H. Rodgin Cohen and Wachtell partner Edward Herlihy, the nation's pre-eminent banking lawyers, were ubiquitous in the lightning round of bank mergers that followed Lehman's collapse. Wachtell, Davis Polk and Simpson also have all taken on assignments for the U.S. Department of Treasury.
The top New York firms should continue to have an edge in expertise for some time, said Gregory Jordan, managing partner of Pittsburgh's Reed Smith, which has also sought to increase its New York presence.
"It is really a tribute to those firms," Jordan said of New York firms' high-profile roles in the financial crisis. "They are really the best of the best when it comes to those kinds of ground-breaking transactions."
But despite the short-term flurry of activity, there is likely to be a dearth of such transactions going forward, said Baxter. "There is a market appetite for simple transactions," he said.
Such a trend would not necessarily benefit Orrick. Like a number of other non-New York firms, Orrick had seen structured finance, the packaging of mortgages and other loans into tradeable securities, as its best bet at building a strong capital markets practice. But the securitization of questionable mortgages has been at the core of the financial crisis, and the practice has unsurprisingly ground to a halt.
Orrick has not laid off any lawyers, said Baxter, but has redeployed several to new practices. He said the firm would continue to seek areas of specialization in finance for when the market rebounds. The firm also recently began working for the Treasury Department.
"Some of the kinds of deals that were done will not be done anymore," said Baxter. "We're going to stay as active as we can, participate as much as possible in what activity there is."
Staying active has already proven too difficult for some firms.
Heller Ehrman and Thelen were both mid-sized firms that nonetheless harbored big New York ambitions, and their largely ineffectual efforts in the city are widely regarded as factors in their demises. Thelen pursued two high-profile mergers with New York firms, but proved unable to build a strong New York franchise.
A 'DARWINIAN' MARKET
There is some safety in size, said law firm consultant Ward Bower of Altman Weil. Firms with a larger New York presence will find it easier to compete for valuable assignments but will also be less dependent on any one client. The present economic environment will be particularly tough for those smaller firms trying to become national or international players by entering the New York market, he said.
"It exposes the vulnerability of firms that are trying to replicate that kind of geographic footprint," said Bower. "They need to get really big, really fast."
Orrick added somewhat to its New York footprint with three partners fleeing Heller, but Baxter agrees that the New York market is going to grow more "Darwinian," especially for smaller firms.
"There will be fewer, larger banks and fewer, larger law firms," he said. "Some firms should shrink, and focus."
But whether a diminished New York can remain the world's financial capital is another uncertainty facing firms. Recent months have brought a surfeit of announcements by firms of expanding finance practices in the Middle East and Asia.
Even before the financial crisis, Zimmerman said Bingham had broadened its approach, continuing to seek opportunity in New York but also expanding abroad, especially in Asia.
"There have been shifts in the global economy," he said. "Demographics are clearly pointing to a shift in influence and financial strength to Asia," he said.
But Zimmerman added that it would be quite some time before such new markets could supplant New York, either as a financial center or a source of firm revenue. He said the city would remain Bingham's number-one priority for growth.
"I wouldn't want to bet against New York," said Zimmerman.
Editor's note: For more on this subject, see Susan Beck's American Lawyer article, "Chronicle of a Future Foretold."
