Among the many articles tracking the decline and, presumably shortly, fall of the law firm Dewey & Leboeuf, I found New York Times business columnist James B. Stewart’s “Dewey’s Collapse Underscores Law Firms’ New Reality” to be one of the most insightful as to the general shift in the business model of large, prestigious law firms. It’s insightful both in Stewart’s perspective as a lawyer who started out in a top tier New York firm, watching the changes across the years in high-prestige, high-pay law practice – and in his observations about the way in which the Dewey business model was financed, with long term debt.
As dispatches from my Times colleague Peter Lattman have made abundantly clear, Dewey collapsed under the weight of a toxic combination of high leverage, lavish financial guarantees to many partners and faltering revenue. This makes it, in many ways, the Lehman Brothers of the legal profession, although perhaps that’s unfair to Lehman Brothers. Though highly leveraged, Lehman Brothers had enormous assets on its balance sheet — while Dewey, like law firms generally, had scant tangible assets. Nonetheless, that didn’t stop the firm from heavy borrowing of about $225 million, both by issuing bonds and by drawing on a large line of credit.
“This absolutely falls into the category: What were they thinking?” Bruce MacEwen, a lawyer and president of Adam Smith Esq. and an expert on law firm economics, told me this week, as Dewey suffered a new wave of partner defections and the firm’s accelerating collapse appeared unstoppable. “This was Mismanagement 101 across the board. They had a ringside seat for the collapse of Lehman and Bear Stearns. But they had the same mismatch of assets and liabilities. They took on a massive amount of long-term debt, but their assets are short term: they walk out of the firm every day and may not come back, which is what more and more of them did.”
It’s not yet clear how the firm used the debt proceeds. Partners say most of the debt predated the merger with LeBoeuf, and was a rational and cost-effective way to try to manage existing debt. Still, it seems likely at least some of it went to meet the extensive guarantees the firm made to individual partners, some reaching millions of dollars and apparently extending over many years.
I am curious particularly to see the bond documents in this case, from an interest in the covenants and how they are drafted with regards to things like retention of partners and so on. If anyone were able to point me in the comments to an easy online link with the bond documents, I’d be grateful. (John Coates tweets that it was a private placement – from the press reports, I was under the impression that someone had posted the PPM somewhere, or at least the main terms, but I guess not. Maybe they were just described or show to some journalists.) The Times has done excellent reporting on Dewey over the past months, likewise the Wall Street Journal, and the Economist had, as ever, a highly readable, highly quotable, really quite elegantly cribbed summary a week or so ago.
The bigger question for law firms, lawyers, law students, and law schools is less the financing model and its flaws than whether Dewey ultimately was the latest casualty in a larger shift toward the commodification of hithertofor high-end, bespoke legal services, on the one hand, and increased customer pricing power, on the other. My own unscientific sense of the market is that there will be demand for legal services, particularly in commercial law, financial services and institutions – but that much of it will be related to bread and butter transactions taking place in real time, and much less large scale transactions in which lawyers can capture up front presumed premiums from the deal that would only emerge over many years. A lot of the new demand will be at the point where commercial law meets compliance law in ordinary transactions taking place today. The value is real; but the value is also much more tightly confined, and billings will reflect that. Even so, client pricing power will also continue to reflect excess lawyer supply for the foreseeable future. Am I mistaken about this highly subjective account?