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Many firms will want to put a bold asterisk on 2001 annual financial reports. The aftermath of the Sept. 11 terrorist attacks will deserve blame for having turned a mediocre year into something worse. For some time, managing partners were loath to forecast what Sept. 11 meant for business. They considered the question crass in light of more pressing concerns: depressed employees, shattered offices, even death in some instances. By now, though, the brutal economic reality is unavoidable — law during wartime, at least so far, means less work, lower profits and fewer jobs. If there is an end in sight, no one has spotted it. The terrorist attacks took an immediate economic toll. The period after Labor Day is usually a productive time; the traditional summer lull breaks with a rush of pent-up work, as clients begin cranking on deals in a sprint toward year-end goals. But this year, most firms, no matter how far removed from ground zero, suffered at least a week of shock and inattention. And it didn’t stop there. Deals stalled, and some crumbled, with companies such as Berkshire Hathaway Inc. and Citicorp USA Inc. resorting to “material adverse change” clauses (similar to the “act of God” clause) to back out of financing agreements. In Houston, several weeks after the attacks, Vinson & Elkins partner Jeffrey Floyd considered the many months that his firm had worked in preparation for the 2001 launch of ExpressJet Holdings Inc., the regional jet division of Continental Airlines Inc. With Continental badly hurting, like the rest of the industry, Floyd recognized that the work may be for naught. “If the IPO doesn’t happen,” he said, “we’ll give a discount in our fees.” A few scotched deals, however, is the least of it. The terrorist attacks and resulting war on terrorism have dealt firms a far more crippling blow by throwing capital markets into turmoil. Now, most investors won’t even sit down to talk business, because they are unsure how far the market will drop. “There is money available to be invested,” says Faiza Saeed, an M&A partner at New York-based Cravath, Swaine & Moore, “but no one is willing to take a bet and say this is the right price for company X.” Some deals that were already in the pipeline are moving forward, but new work, from mergers to debt and equity offerings, has almost dried up entirely. Unfortunately, this sort of transactional work is much of what premier law firms do. Since the 1970s, and particularly in the late ’90s, firms aggressively expanded their corporate departments to try to capture the premium fees that dealmakers can command. Most of the top firms now rely on corporate work for at least 50 percent of their revenues. The reliance is much greater among the top firms in New York. The terrorist attacks, though, have underscored the dangers of being so dependent on capital markets. There was an earlier reminder this year, of course, when Cooley Godward and Fenwick & West, deal-centric firms on the West Coast, laid off lawyers and staff. But it was easy to write that off as a technology-bubble phenomenon. Now, much of the rest of corporate America has sunk to the depths of the tech sector, and firms far beyond tech land are wrestling with the possibility of layoffs. The struggle for firms in this economy will be to direct corporate talent to other pursuits, namely bankruptcy. Restructuring lawyers were busy before the terrorist attacks, and now they are crazed. But it will not be easy for firms to surf bankruptcy billables to economic buoyancy. For starters, the group of firms that routinely represent huge Chapter 11 debtors — which is the sort of work that chews up attorneys and billables — is very small, perhaps fewer than a dozen firms. Only one, New York’s Weil, Gotshal & Manges, could feasibly claim to have a bankruptcy practice sufficiently robust to balance this corporate downturn, says Peter Zeughauser, a principal with the consulting firm ClientFocus. (Zeughauser is also of counsel at Claremont, Calif.’s Shernoff, Bidart & Darras and a contributing editor to The American Lawyer.) There are, to be sure, other escape routes besides bankruptcy. Most top-tier firms have sizable litigation departments, and they are generally busy now. The catastrophe also produced a fair amount of work, with more to come, such as insurance disputes. But this is a salve at best. Even a booming litigation business won’t be enough to offset what has been lost. As David Bernick, a trial lawyer with Chicago’s Kirkland & Ellis, puts it: “Transactional work when it is hot is more profitable than litigation work, unless you’re on the plaintiffs’ side.” Litigation, moreover, is not completely countercyclical. Many large national firms handle midlevel litigation, such as employment discrimination cases, which is cost-sensitive; in a down economy, employers will settle this sort of litigation more frequently, shop it to cheaper firms, or simply handle it in-house. In short, some Am Law 200 firms have significant hedges against a capital-market downturn, but they aren’t recession-proof, says Bradford Hildebrandt, the chairman of Hildebrandt International. If warfare is bad for billables, it is also bad for collections. Prior to the terrorist attacks, client payments had already started to slow from the normal 45 days to 60 days and above, says Thomas Clay, a principal with Altman Weil Inc. The delays have since gotten worse, say lawyers. In the months to come, firms will understandably be hesitant to be pushy about bills, but they will have to find a delicate way out of this morass. The fourth quarter is a critical period, with many firms collecting as much as 20 percent to 30 percent of their yearly revenues in December. “Firms recognize that they can generate IOUs by being flexible and accommodating during this time,” says Danilo DiPietro, head of the law firm group at Citigroup Private Bank. “But when the firms don’t have a long-term relationship with the client, there will be less flexibility.” With billables and collections down in the wake of terrorist attacks, DiPietro says, some high-end firms, which were on track to post a strong year in profits, may feel fortunate to stay flat. There is one prominent bright spot: Emotional capital has never been healthier. In the days and weeks following the attacks, lawyers showed remarkable fortitude. They worked out of their homes. They shared makeshift offices with competitors. In short, they made do. And they also stopped to remember what’s important — their families and personal well-being. The managing partner of one major New York firm tells of colleagues coping with the stresses of urban terrorism by considering moving out of the city or retiring early. The terrorist attacks, it seems, gave everyone a huge dose of perspective. Depressed profits alone are no reason to despair, especially considering that this dip in profits might only put firms where they were two or three years ago. Says Cravath’s Saeed: “We are pretty early in whatever this is, and the attitude is, we’ll just ride this out.” It could be a long ride. The last legal recession in the early 1990s, which was also tied to a military campaign, lasted less than a year. But, at press time, this military offensive appeared likely to be more protracted and far-flung than the Gulf War — and the economic effects more pronounced. Being a global law firm has never been so risky.

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