Let’s replace the headline on a recent Am Law Daily story—"Judge Slashes Fees in Dewey Bankruptcy"—with this: "Golden Age for Bankruptcy Professionals Continues."

In bankruptcy proceedings, lawyers get paid ahead of everyone else. If they didn’t, insolvent debtors would go without representation. But that doesn’t explain why high-profile bankruptcies have become increasingly lucrative for lawyers. An absence of accountability does.

Professional compensation in bankruptcy matters is paid out of a dying entity’s estate. As the client disappears, so does close scrutiny of the legal bills it racks up along the way. Instead, the United States Trustee reviews bankruptcy fee petitions, as does the supervising judge who eventually approves them. But both offices have limited capabilities and a restrictive mandate.

Low-Hanging Fruit

The limitations arise from an understandable reluctance on the part of judges and the Trustee’s office to second-guess lawyers’ strategies and, more importantly, the deployment of manpower to execute those strategies. As a result, post-facto review of fee petitions usually focuses on obvious abuses.

For example, at a recent hearing in the Dewey & LeBoeuf bankruptcy case, Judge Martin Glenn criticized fee and expense requests for $550-per-night stays at the Waldorf-Astoria, private car expenses for driving around Manhattan, and excessively vague time entries. But in the end, Glenn did little to reduce the bills. According to The Am Law Daily, he cut a restructuring expert’s $250,000 request by "$4,455 in fees and $9,175 in expenses in addition to the amount Glenn axed [$4,400] during the hearing.”

Dewey’s lead bankruptcy attorney, Al Togut, wasn’t in court for Glenn’s tongue-lashing over what the judge called some of his firm’s "excessively vague time entries" and "a page of expenses related to car rides," according to The Am Law Daily. But at the end of the day, Togut, Segal & Segal’s $4.7 million bill for five months of work on behalf of the Dewey estate emerged largely unscathed, save for "$57,139 in fee cuts and $1,378 in expense cuts after consultation with the U.S. Trustee’s office, which had objections to several of the fee requests."

The Real Money

The professionals working on the Dewey bankruptcy aren’t unique when it comes to the fees issue. In fact, small boutique firms like Togut’s probably conduct the cases they take on more efficiently than big firms that can throw armies of bodies at any problem. But all such attorneys benefit from extraordinarily high hourly rates that are the product of common phenomena: the absence of a competitive market and the perverse incentives of a billable hour regime.

That’s where the restrictive legal standard for approval enters the picture. In particular the fees sought must be reasonable for the services rendered. However, law firms in the select club of prominent bankruptcy practitioners use publicly available information, including other firms’ fee petitions, to set hourly rates for their own personnel. Voila! The relative uniformity of such rates makes them "reasonable"—including the $700-an-hour associate and $300-an-hour legal assistant that pervade big-firm fee petitions.

The key players in this tautological circle don’t compete on hourly rates. What economists call conscious parallelism is far more lucrative for them. Because there’s no paying client searching for better value in response to rising legal costs, that potential market-driven constraint disappears. When Weil, Gotshal & Manges submitted a $430 million fee petition in the Lehman Brothers bankruptcy, it listed 40 partners with hourly rates of $1,000 and some senior associates at $800 to $900 an hour.

The Market Gone Awry

Defenders of the current system argue that complicated restructuring matters call for talent and skill comparable to what’s required to try a big case or guide a large transaction. After all, in 1978 Congress specifically made that determination in adopting a new compensation standard for bankruptcy lawyers. Today, the supporters of the status quo say, the market sets everybody’s rates. That position would be more compelling if hourly rates for bankruptcy attorneys were the result of a well-functioning market, but they aren’t.

If big law firms already competed on price in bankruptcy cases, they wouldn’t fear the increased transparency measures that the U.S. Trustee proposed last summer. The Trustee wants firms to disclose whether they use a differential fee schedule—charging one rate for attorneys working on bankruptcy cases and a lower rate when the same attorneys work on other matters. More than 100 big firms united in strenuous opposition to that idea.

It’s easy to see why they objected. Especially in recent years, paying clients have demanded discounts and alternative fee arrangements to reduce legal costs. In bankruptcy, it’s not happening. Where else can firms charge more than $400 an hour for first-year associates, as Weil sought for many such newbies working on the Lehman case?

Add the incentives for inefficiency and abuse that accompany the billable hour regime generally and the consequences become even more ironic: One of the most lucrative pockets of the profession reaps outsize rewards from the carcasses of distressed enterprises (and those enterprises’ creditors).

The entire system is uniquely vulnerable to creative innovation. Someday, it will arrive. Then again, for those currently reaping the greatest rewards, someday always seems to be somebody else’s problem.

Steven J. Harper is an adjunct professor at Northwestern University and author of the forthcoming book, The Lawyer Bubble: A Profession in Crisis (Basic Books, April 2, 2013). He recently retired as a partner at Kirkland & Ellis, after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at http://thebellyofthebeast.wordpress.com/. A version of the column above was first published on The Belly of the Beast.