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Since they started arriving in London in droves in the mid-1990s, U.S. firms have used the lure of higher profits per partner and associate salaries as one of their most powerful recruiting tools. They flaunted multimillion-dollar partner packages that trumped what the partners at the Magic Circle took home, and a fleet of lawyers bit. Some of those packages are still on offer from a few American firms, but in mid-April, when the exchange rate hit two dollars to the pound for the first time in 15 years, some of the gloss came off the greenbacks. As one White & Case partner in London puts it: “We’ve been screwed by the exchange rate.” The slide in the dollar is occurring at the same time that U.K. firms show improved profits. The result is a new U.S./U.K. balance of power, and a lot of unhappy Americans in the shopping halls of Harrods. The effect of the exchange rate is clear-and disheartening for lawyers paid in dollars. That group includes, for the most part, U.S. partners at both U.S. and U.K. firms, and British partners at U.S. firms. (British partners at British firms are paid in pounds.) White & Case, for example, has enjoyed a surge of profits in recent years. PPP rose from $935,000 in 2002 to $1.5 million last year. But when those lawyers go to the exchange window, they find that the number of pounds they receive has crept only from �655,000 (at 2002 exchange rates) to �750,000 during the same period. Most U.S. lawyers are protected, to some degree, from the vagaries of the currency market. The majority of U.S. firms offer their London partners some kind of hedge to protect all or a portion of their income. At Kirkland & Ellis, for example, a chunk of an equity partner’s income is paid in pounds at a fixed rate of $1.76. The hedge helps, but it doesn’t fix the problem for U.S. lawyers. “We don’t have an elaborate safety system,” says one Kirkland partner in London. “We generally leave it to people to arrange themselves.” In addition, U.S. firms such as White & Case or Shearman & Sterling, which bill clients in pounds for most of the work done in London, have a natural hedge against a weak dollar. As a result, those firms are enjoying a surge in dollar-denominated revenues. (Of course, some of that revenue is destined for New York, while those living in London are still paying top dollar for rent and petrol.) The exchange rate is only one factor driving the convergence of U.S. and British profitability. The Brits are reaping the rewards of Europe’s M&A boom, which saw deal activity in 2006 hit $1.5 trillion. And some bellwether firms � such as Linklaters and Freshfields Bruckhaus Deringer � implemented significant internal restructuring early in the decade that cut costs and kept down equity partner numbers. Last year Freshfields lost about 100 equity partners. The firm made cuts in less profitable practice areas, and many lawyers took early retirement in order to benefit from the firm’s generous pension scheme. A few New York firms in London that practice U.S. law exclusively, such as Cravath, Swaine & Moore and Wachtell, Lipton, Rosen & Katz, are still the profit leaders, with PPP in excess of $3 million. But those firms are increasingly the exception, not the rule. Elsewhere, the gap between the top U.S. firms in London and the top British firms � a group that includes the Magic Circle and a few others, such as Ashurst and SJ Berwin � narrowed. Top U.S. firms include Cleary Gottlieb Steen & Hamilton ($2 million PPP), Weil, Gotshal & Manges ($1.8 million), and Shearman & Sterling ($1.4 million). On the British side, Linklaters reported profits per partner of just less than $2 million, nearly double those of 2003. During the same period, Clifford Chance profits rose from $946,000 to last year’s $1.5 million. The Magic Circle will release their 2006 numbers in early July and are widely expected to continue their march up the profitability chart.
The slide in the dollar is occurring at the same time that U.K. firms show improved profits. The result is a new U.S./U.K. balance of power, and a lot of unhappy Americans in the shopping halls of Harrods.

Recruiters in London are feeling the change. “When the dollar started its slide, partners could be philosophical about it, they were getting paid well and still earning more than their U.K. counterparts,” says Dominique Graham of London recruiters Graham Gill, which recently commissioned a survey of how U.S. firms deal with the dollar exchange rate in London. But the combined impact of a sliding dollar and increased British profitability means that “A lot of U.K. lawyers at U.S. firms are [making] not much more than their peers at U.K. firms.” The change is also felt in the associate ranks. Those U.S. firms that pay New York rates to all associates are still the most generous payers in the market. Most firms in that group also offer some form of currency protection and, in many cases, pay a cost of living allowance to U.S. associates � a lump sum to cover the higher cost of living in London. Latham & Watkins, for example, currently pays a COLA of $50,000 each year. But the top U.K. firms are closing. The current New York starting rate of $160,000 is still more than at the Magic Circle, where associates start at �65,000 ($130,000). But in 2002, when the dollar was worth approximately $1.5 to the pound, and British firms were less profitable, a U.S. associate on a New York rate started at $125,000, while their U.K. counterpart at the Magic Circle was paid the equivalent of $75,000. At firms slightly down the food chain, U.S. firms make it a policy to pay higher salaries to U.S. associates, in dollars � and lower rates to British associates, in pounds. Now the exchange rate is playing hell with that policy. There are some exceptions, some U.S. firms still prepared to outstrip the local competition by offering massive, guaranteed profit shares to rainmaking Brits who are still some way from reaching the top of the lockstep at their firms. Kirkland, for example, reportedly paid between $3 million and $4.5 million per year to recent recruits A. Stephen Gillespie of Allen & Overy and Graham White of Linklaters. But fewer and fewer firms are willing to pony up that kind of money. Of course there are attractions other than cash that attorneys cite when moving to a U.S. practice � greater access to the U.S. market, more autonomy in building a practice, and less time spent on management and bureaucracy, to name a few. But the U.S. firms’ previously impregnable lead in profitability is disappearing, and the checks cashed by their lawyers just don’t go as far. The last thing those lawyers need is a $20 dollar pint of bitter. Richard Lloyd is a reporter with The American Lawyer, a Recorder affiliate based in New York City.

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