After the gold rush

Maybe the rarified air imbibed over a summer spent up mountains and on beaches has gone to the legal ­profession’s head, but the bad times, some would have it, really could be behind us.

Do not go throwing caution to the wind just yet - the predictions are still that the current ­financial year is going to be even worse than the last one. The good news is that the Armageddon predicted a year ago has failed to materialise and lawyers are now anticipating that transactional markets will return to normal by the second quarter of 2010.

That’s the ‘new normal’, of course, not the ­normal prior to the collapse of Lehman Brothers.

The impact of the financial crisis that began when Lehman collapsed on 15 September 2008­ cannot be denied (a look at the leading firms’ financial results for 2008-09 prove that), but a year on, things are not as awful as were being anticipated at the time. In retrospect that is ­perhaps not surprising, given that the outlook was exceedingly bleak.

Looking back on the day Lehman did collapse Linklaters partner Tony Bugg, who was acting for the bank’s UK administrator Tony Lomas at PricewaterhouseCoopers (PwC), recalls how ­surreal it was when the bank’s fate was finally sealed.

“We had a meeting at 5.30am on Monday [15 September 2008] that went on until 7.30am,” he says. “A judge came in and we put Lehman into administration at 7.56am. It was clearly a very different kind of proceeding in the UK to the US. We were all sat in Meeting Room 207 in jeans, with a judge deciding the fate of Lehman. It felt very odd to be doing all of this at One Silk Street.”

For those working at Canary Wharf the ­enormity of the situation was all too visible, with streams of Lehman staff filing out of the bank’s building over the course of the day.

“Walking to work past Lehman’s offices early that morning, ranks of TV crews and journalists were already gathering expecting drama - never a good sign,” says a Clifford Chance associate.

Like my colleagues, I spent most of Monday ­following developments on the news, but also seeing the human effects of the collapse from my window. Throughout the day bankers steadily drifted out, dodging journalists and the growing ­number of bystanders. Some were carrying boxes and ­leaving forever; some were giving up and heading to bars in Canary Wharf; others were just leaving the building to reflect, but were determined to carry on. In the days after the chatter in the City was about nothing else. But as the dust settled my thoughts were with the younger guys at Lehman, just starting their careers like me - how would we fare in the new post-Lehman world?”

For many lawyers, when Lehman did go the feeling was that the world would never be the same again.

“A year ago everyone was just alarmed, then Lehman happened and everyone thought it was the end of the world,” says Clifford Chance partner Simon Gleeson. “As lawyers we all knew something dreadful had gone wrong, we just didn’t know what. People who didn’t panic were panicking.”

While the impact of Lehman’s collapse was felt on a global scale, in New York, where the bank was headquartered, the sense of impending doom was pervasive.

Sullivan & Cromwell chairman Rodgin Cohen, who became the lawyer most identified with the financial meltdown in the US after appearing on a succession of deals, recalls an “extraordinarily difficult” weekend, where both professional and personal matters were at full pace.

“Obviously Lehman was dominant but AIG was already active and complicated,” remembers Cohen. “And the daughter of one of my best friends was getting married, so that was an ­interesting juggling act. I left the meeting at the Fed at about 7pm, changed into a tux in the car, went to the wedding, did not stay for the ­dinner and was back at the Fed by around 10.30pm.”

Paul Weiss Rifkind Wharton & Garrison ­chairman Brad Karp says the period was ­characterised by a constant barrage of emergency assignments for key clients and lawyers such as him, who were trying to figure out which domino was likely to fall next and what the implications would be. “We were dealing with uncharted ­territory at that point,” he admits.

Similarly, Shearman & Sterling chairman Rohan Weerasinghe recalls the high levels of activity during the period.

“We were working with some potential investors into Lehman to try to solve some of the problems,” Weerasinghe says. “So we were ­extensively involved with Lehman, and after that AIG and Merrill Lynch as well. The activity levels worldwide had already started to slow down in the summer and the autumn, and I guess people were having concerns about what the impact of that was going to be.”

In the mêlée that followed Lehman’s collapse – with the sale of Merrill Lynch, Wachovia and Washington Mutual and the bailout of insurance giant AIG, followed by the rescues of RBS, HBOS and Bradford & Bingley - a raft of career-­defining instructions were handed out to the leading global firms. The magic circle and the Manhattan elite were called on time and time again.

While this made for good headlines for those involved, internally even the leading firms were panicking. A choice instruction or two on the ­crisis of the day is one thing, but the impact that crisis will have in the longer term is an altogether different prospect.

A partner at a magic circle firm says that, as the scale of the banking crisis became apparent, the firm began looking enviously at rival ­Freshfields Bruckhaus Deringer, which had trimmed back its finance practice over a number of years.

The partner says the firm was asking serious questions about whether it should reinvent itself as a “second-rate Freshfields”. Partners were debating whether investment banks as clients were finished. But they were not the only ones having a crisis of confidence.

“People were talking about whether Goldman Sachs and Morgan Stanley would be okay and the general feeling was that they’d be fine. But then their credit default swap spreads went wider than Lehman’s did before it collapsed,” remembers Freshfields UK corporate head Mark Rawlinson. “I said to my partners at the time there are two ways of looking at this: we’re on the edge of a precipice and there’s a big drop down, or we’re at the top of the Cresta Run and the next 12 months will be the most exciting white-knuckle ride we’ll ever have. It’s been an incredible and scary 12 months.”

Certainly Freshfields was one of the lucky ones, winning endless recession-related instructions on deals such as the administration of ­Woolworths and rights issues from the likes of Wolseley and British Land. At the 2008-09 year-end the firm’s corporate revenue was up by 9 per cent, while banking revenue rose by 25 per cent.

But while the transactional markets in general have been virtually non-existent for the past year, the feeling now is that things are definitely ­picking up. One partner at a City firm says enquiries are at a level not seen for many months and the anticipation is that the flow of M&A will grow over the coming months.

Banking lawyers are certainly being kept busy, with the masses of debt built up during the boom now needing to be restructured.

For example, both Allen & Overy and ­Linklaters played key roles in the restructuring of e12bn (£10.6bn) of German company ­Schaeffler’s debt, paving the way for the ball-bearing producer to merge with auto parts ­manufacturer Continental. Continental also has a multibillion-euro debt that needs restructuring.

Similarly, Slaughter and May, Skadden Arps Slate Meagher & Flom and Uría Menéndez acted on the $15bn (£9.23bn) restructuring of building supplies company Cemex’s debt.
The nature of these deals should serve as a chastener for the market, but there is definitely optimism in the air. Things could still go wrong - the recession could turn out to be a W rather than a V and protectionism could stifle much-needed access to finance - but compared with ­expectations a year ago, things are in good shape.

“When people look at this in hindsight, one of the things they’ll see is that this was a tremendous test of the legal infrastructure of the market,” says Clifford Chance’s Gleeson. “We won’t know the outcome of that for sure until the Lehman ­insolvency is complete. It’s conceivable that the aftermath of Lehman will reveal something unpleasant in the system, but I doubt it.”