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Recessions are capitalism’s way of telling last year’s heroes that they aren’t as smart as they thought they were. These days there are fewer braggadocio cell phone conversations in restaurants and hotel lobbies about nifty new deals for the newest new thing. They’ve been replaced by quiet sobbing about, “How can I pay the $5.2 million alternative minimum tax on my FinancialSinkHole.com option exercise if the stock’s crashed and burned?” Life and the Internal Revenue Code aren’t fair. And the collateral damage is extending beyond former dot-com millionaires. A culling of the attorney crowd is already starting in the San Francisco Bay Area. The legal profession is headed into one of those periodic, inevitable contractions that hits any sector of the economy that gets ahead of itself. Too many lawyers were hired too quickly at too many firms. Venture capital doyen John Doerr used to gleefully describe the high-technology industry as the second most profitable in the world — after illegal drugs. The Bay Area prospered from a deal-driven boom and easy access to capital. “Liquidity events” — venture fundings, sales, public stock offerings and the like — meant money changing hands, with quite a bit ending up in lawyers’ pockets. The deals are farther between now — and the damage isn’t limited to IPOs. Dollar volume for venture-backed merger transactions nationwide in fourth quarter 2000 was about a third that of fourth quarter 1999. Unlike drugs, there is no insatiable demand for money-losing companies. But no matter what happens to the Silicon Valley economy in the coming months, some lawyers are going to do well by it. The question is who? This is a matter of interest not only to associates worried about layoffs masquerading as negative performance reviews and support staff in fear of being declared surplus and then heaved out the door. Even lawyers who have little to do with the new economy are affected by the boom times. Anyone who has a lease coming due in the next 12 months would appreciate a sudden exodus of tenants that brings vacancy rates above the 1 percent level found in places like downtown San Jose, Calif. On the theory that the newest new thing will star vulture capitalists and bankruptcy lawyers, Esquire magazine sent Pulitzer Prize winner Ron Suskind to survey the new economy’s collapse. Suskind has firsthand experience, having presided as CEO over his own dot-com disaster. In 1999 “reasonable, credentialed people” assured him that he was going to become a billionaire. Now he’s back to writing magazine features. His April Esquire article features a couple of Bay Area lawyers, Palo Alto, Calif., bankruptcy lawyer Lincoln Brooks, and Michael Malter, who heads a Santa Clara, Calif., bankruptcy boutique. It pegs Malter as a winner — even if the article does refer to him as the “Grim Reaper.” Suskind is not so kind to San Jose, Calif., bankruptcy judge James Grube, perhaps out of jealousy of golfer Grube’s three handicap. The judge is described as “infected, like everyone out here and across the country, with a kind of boom-time money lust.” His detailed knowledge of Silicon Valley microeconomics is described as “unseemly.” Grube knows that a membership at the Los Altos Country Club, where he’s a sometime guest, costs almost $400,000 last year. It’s a lesson, if another were necessary, why judges talk to reporters at their own peril. The writer invited himself first to Malter’s office, then to his house and then to a client interview, where he heard a sad story about yet another dot-com failure. Baldemar Fuentes, the company’s CEO, was being pursued by angry investors — a pride of unnamed lawyers — chagrined about losing their money. This is another lesson of the article. Consider other options before bringing lawyers-turned-venture-capitalists in as investors. Among other things, the bankruptcy and the dispute with the attorneys had put at risk a modest house Baldemar bought for his mother in Brownsville, Texas. Six months ago the national media wouldn’t have been writing about a Silicon Valley bankruptcy lawyer, and Baldemar would have been interesting only if his net worth exceeded the gross domestic product of France. But now bankruptcy law has replaced corporate finance as the hot practice area. Baldemar’s story does have more drama than whether the Pets.com sock puppet will find a new home. He came from a poor part of San Antonio, graduated from Stanford and started his own company. Malter ends up taking his case for free. Pro bono has a different context in the Valley. Recessions wash excesses out of the economy and reallocate resources to more useful ends. That’s helpful, so long as Adam Smith’s unseen hand doesn’t choose you to be the one looking for replacement work. The survivors of these reallocations of legal resources will do well on the next upturn. But even in boom-time areas like Silicon Valley many lawyers are content simply to do their best trying cases and counseling clients. Maybe they understand that anyone whose primary goal was making money should have gone to business school. At the end of Suskind’s piece, Baldemar’s mother gets to keep her house. The happy ending for Bay Area lawyers is that Malter’s firm is hiring. George M. Kraw is a San Jose, Calif., attorney. His e-mail address is [email protected]

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