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The U.S. economy has been having a rugged few months, to say the least. The credit markets are snare-drum tight, deal-making has gone glacial, and the U.S. housing bubble has most decidedly popped. With headlines bandying “recession” around, no wonder managing partners in the country’s leading law firms are feeling uneasy about the coming year. Though many factors have led to the present state of unease (Alan Greenspan recently traced the slump all the way back to the end of the Cold War), the immediate catalyst was the subprime mortgage debacle. Lenders passed out mortgages like Halloween candy to people who couldn’t afford them. Those risky loans were then bundled, securitized with high ratings, and sold several times over, creating a financial mess that reaches so far down into the economic substructure that no one’s really sure where it ends. Robert Gottlieb, co-chairman of Venable’s real estate group, says that a client of his described the situation thusly: “When money flows easily, the rising tide carries bad decisions.” Of course, the same belt-tightening that’s occurring in the credit market is beginning to trickle down into the legal community. According to surveys by The American Lawyer and Citi Private Bank’s law firm group, managing partners have a less rosy view of the near future. “I don’t think anyone’s completely sanguine about what’s going to happen in 2008,” says Eric Bernthal, the managing partner of Latham & Watkins’ D.C. office. “If there aren’t deals to be done, it’s going to affect all law firms that have an M&A practice, but if you have enough geographic and practice diversity, it won’t be as difficult.” Firms with large corporate practices in areas such as New York are seeing fewer deals because easy financing has dried up. Private equity and securities practices have also seen a downturn, particularly on big deals. Some firms, such as McKee Nelson and Thacher Proffitt & Wood, which have large structured-finance practices, are offering buyouts and warning of layoffs. “The story coming out of the subprime crisis is going to be what it does to liquidity for the next two to three years, which will determine what we do for the next five,” says Greg Cross, a partner at Venable who leads the firm’s creditors’ rights group. However, firms in D.C. should be fairly well insulated from the most damaging fallout. The traditional Washington practice areas � regulatory and agency work � continue to be steady. And with a change in administrations coming, companies will be anxious to get a handle on the new regulatory landscape, which means work for firms. “The way you see it changing is that certain companies are going to be tighter on their legal budgets and will have to prioritize what they are going to pay, and I think Washington will still be one of the higher priorities,” says Ann Ford, the managing partner of DLA Piper’s Washington office. Of course the subprime crisis has some Washington lawyers, such as Skadden, Arps, Slate, Meagher & Flom’s consumer financial services enforcement and litigation practice, working overtime. Andrew Sandler, a partner in Skadden’s D.C. office who heads the group, says work stemming from the mortgage crisis has doubled every quarter this year, and the firm now has more than 20 lawyers working on subprime-related enforcement and litigation matters for mortgage lenders and financial services firms. Sandler expects to add even more attorneys to the practice in the coming months, noting that “it will take several years to fully resolve government investigations and litigation related to the subprime mortgage meltdown.” But it may well turn out that the record growth most law firms have experienced over the past six years has come to an end. And it’s not just due to the economy. The subprime crisis alone is damaging enough, but paired with two other business developments for firms in 2007 the economic downturn could produce a few Maalox moments. First, extraordinary associate salary raises have spread across the country, even to cheaper areas where $160,000 remains a princely sum. And firms went on a hiring spree this year that could leave many associates on the unemployment line in 2009. Stephen Nelson, a legal recruiter with the McCormick Group, sums it up quite well: “The firms didn’t anticipate what was going to happen with the credit markets, so you do have that double whammy. Firms had an increase in costs, which had to be absorbed, and then they ran into a slowdown in the economy.” Sounds a lot like a perfect storm.
Attila Berry can be contacted at [email protected].

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