The Bear Starts Mauling Lawyers

The mortgage bust has even hit New York powerhouses long immune to big layoffs

At a time when businesses from banks to bakery suppliers are shedding tens of thousands of workers, news that a New York law firm is pink-slipping 96 attorneys might seem like a speck of flotsam in a sea of economic pain. But Cadwalader, Wickersham & Taft's announcement on July 30 has set top-tier law shops abuzz nationwide. Economic downsizing is rare in such circles. And the number of lawyers the venerable Wall Street firm, founded in 1792, is letting go reflects the pain the credit crisis is inflicting,

The depth of the cuts—about 15% of its lawyers—is emblematic of the hard-headed management mindset that has taken hold at firms once known for their clubby ways. Associate attorneys (nonpartners) at blue-chip firms have enjoyed unusual job security since the recession of the early 1990s. With broad practices in areas from dealmaking to bankruptcy, firms could keep people on amid the normal ebb and flow of business cycles.

In the current downturn, though, some are suffering such a glut that they have to downsize. Even partners, who have an equity stake in the business, are not immune from being pushed out. Those "with less than ideal books [of business] or in practice areas that cannot command top dollar are being reevaluated from an economic point of view and are vulnerable," says Martha Fay Africa, managing director of legal recruiter Major, Lindsey & Africa in San Francisco.


The stress is especially acute at places that rode the credit-finance boom to lofty heights. In May, Chicago's Sonnenschein Nath & Rosenthal laid off 37 attorneys along with 87 other staffers, most of whom worked in real-estate securitization. Thacher Proffitt & Wood, a Wall Street firm with a big stake in structured finance, has shed 60 attorneys since Jan. 1 —a 25% drop. Managing partner Paul D. Tvetenstrand says firms nationwide have been hurt by the weak economy, but those in New York have been hit especially hard.

Few were as vulnerable as Cadwalader. It became the dominant player in transactions involving commercial mortgage-backed securities (CMBS), the finance method of choice for some of the biggest deals of the past three years. The number of lawyers grew along with the market, peaking at 669 this past January. Cadwalader partners' share of the firm's profits averaged $2.7 million each last year, among the highest in the nation.

Then, says Cadwalader managing partner W. Christopher White, "the music stopped." In January the firm axed 35 lawyers. The assumption, White says, was that the froth would come off the market and that CMBS issuance would resume at a more moderate pace. Instead, it cratered, dropping from a market high of $314 billion in 2007 to a projected $68 billion this year—prompting the latest cuts.

Some give Cadwalader credit for being up-front about the fact that its layoffs are economically driven. Most firms tend to engage in "stealth layoffs," upping the standards for performance reviews when times are tough. The result stigmatizes those attorneys who are let go. Indeed, Cadwalader's move may offer cover for other firms to do the same. Notes Ward Bower of law firm consultant Altman Weil: "These things tend to happen in bunches."

Cadwalader has held on to about 150 lawyers in its real-estate securitization practice who are ready to resume work once the deals pick up. Still, White says, they're likely to be underutilized, perhaps until 2010.

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