Cadwalader: Eye of the storm

With its massive structured finance practice, layoffs at Cadwalader were not a matter of if, but when. The hard-nosed firm is reaping the credit crunch whirlwind

The only truly surprising aspect of the redundancies announced this month by Cadwalader Wickersham & Taft (www.thelawyer.com, 10 January) was that it took so long. The market had been waiting for weeks.

Cadwalader was the firm that figured out how to commoditise certain areas of work and drive its partner profits up through the roof in the process. As one former partner puts it: “The firm got very rich largely by training junior lawyers to do the same deals over and over again using standard forms. It was very dull for the associates, but it made a lot of money.”

A big part of Cadwalader’s practice over the past few years has been based on derivatives. Whereas in most US firms the derivatives practice supports other areas, at Cadwalader it was core.

The firm also focused on collateralised debt obligations (CDOs), a huge part of Cadwalader’s overall practice and one more in which the market, to put it mildly, is now down.

But the real heart of the firm was securitisation, particularly real estate finance of the kind that could be securitised; CMBS (collateralised mortgage-backed securitisations) and RMBS (residential mortgage-backed securities). In real estate securitisation, the market is beyond toxic: it is dead.

One after another, when asked about the redundancies at Cadwalader, a procession of former partners, recruitment consultants and legal market experts trilled out the same mantra: “This was inevitable.”

The question now is, what next for Cadwalader? And what for the man most closely associated with its meteoric rise and architect of its business strategy, chairman since 1994 Bob Link?

A change of plans

Late last year it all seemed so different. In The Lawyer’s New York blog (www.the lawyer.com, 12 November 2007), Cadwalader management committee member and litigation chairman Greg Markel emphatically denied, on the record, that his firm had any plans for a round of redundancies.

“We have not had any layoffs and we don’t have any plans for layoffs,” Markel asserted.

This was despite the unavoidable storm clouds gathering above Cadwalader’s core markets and the fact that some of its structured finance rivals, including Clifford Chance and McKee Nelson, had already been forced to show some of their associates the door. Over at Cads, however, it appeared things were just fine. But appearances, as we know, are not always the most accurate indicator of reality.

Almost exactly two months later, on 10 January, Cadwalader released a statement. It pointed to “unexpected and persistent volatility” that was continuing to disrupt sectors of the financial markets, the capital markets and Cadwalader’s clients and practices.

“Cadwalader Wickersham & Taft is responding to these market developments with a number of initiatives,” the statement went on. “Targeted personnel reductions will affect 35 lawyers in our US offices. Other strategies involve continued practice diversification, practice enhancements and strategic redeployment of certain persons.”

It seems a reasonable question to ask of Markel: back in November, were you covering up?”Absolutely not,” maintains Markel. “What I said was absolutely the truth. At that time we had no plans for redundancies, we were still hoping to avoid this. But we finally came to the conclusion it was necessary.”

It is a conclusion that, admittedly with the benefit of hindsight, most of the market suspected a long time ago. Larry Mullman, a partner at recruitment consultant Major Lindsey & Africa, was among those market watchers who said Cadwalader’s move was inevitable.

“Their concentration is so much on the CMBS area,” adds Mullman. “It’s a very leveraged practice and Cadwalader is a tough place.”

According to Markel, however, the firm was still attempting to avoid redundancies as late as just a few weeks ago. As The Lawyer reported last week (14 January), the cuts were finally triggered by extensive due diligence Cadwalader carried out among its clients into the state of the real estate finance market and their deals pipelines.

“In November we had been looking at the market but had not yet reached a conclusion, as the likely direction of the downturn wasn’t clear,” Markel told The Lawyer last week. “We hoped that in the first quarter of 2008 the tide would turn. If so, we wouldn’t have taken this action.”

Showing its softer side

Cadwalader has long had a reputation, in the US at least, as a firm where the partners have sharp elbows. As one New York recruiter puts it: “Cadwalader partners constantly ask ‘what have you done for me lately?’.”

Yet with these redundancies Cadwalader does appear to have done what it could to mitigate what is, at its heart, an issue severely affecting at least 35 people. ‘At least’, because so far there has been no official word on the effect of the cuts on Cadwalader support staff and paralegals, although it is unlikely these areas will escape the axe. On this point, Markel says Cadwalader, “will be addressing other non-lawyer groups in due course”.

All of the 35 associate cuts came in Cadwalader’s global finance and capital markets groups, and specifically within its real estate finance and securitisation teams. Three-quarters were in New York and the remainder in Charlotte, North Carolina, with none outside the US. New York was the hardest hit as it is Cadwalader’s largest office, containing some 450 to 500 of its 700-plus lawyers.

Sources close to the firm say the 35 were given three-months severance pay, bonuses (if applicable) and year-long medical and dental cover. And as the firm’s statement outlined, an additional number of associates benefited from “strategic redeployment”.

In practice this means Cadwalader has redeployed some 20 to 25 lawyers from finance or capital markets into its litigation, financial restructuring, regulatory and corporate teams.

“We have also secured a smaller number of secondments, maybe half a dozen,” says Markel, adding that although there were no redundancies in London, there had been “one or two” practice group redeployments.

How Cadwalader handles the situation is critical. The firm’s reputation is already enough to deter meeker, less aggressive lawyers (not that Cadwalader would want them). A round of redundancies ruthlessly implemented could punch a hole in Cadwalader’s recruitment prospects for years to come. Markel knows this.

“We believe we have been very fair and forthright in handling this problem, and the reaction from all of the associates bears that out,” he argues. “We’ve provided an extremely fair and generous package for them. Going forward, none of our offers for autumn 2008 have been withdrawn and the summer class remains the same.”

Indeed, in a separate statement also dated 10 January, Cadwalader partner Paul Mourning reassured any of the 60 2007 summer associates who had accepted offers that their positions this year were secure.

“We remain committed to the future and to you, and look forward to your arrival,” Mourning wrote.

Widening horizons

But what will Cadwalader’s future look like when this fresh deal-doing meat arrives in the autumn? According to Markel, and as reported in The Lawyer’s same 12 November blog, Cadwalader has already embarked on a plan for significant diversification.

The firm added an antitrust practice last year, bringing in the ex-assistant attorney general for antitrust Rick Rule during the summer. It also launched an IP litigation practice with Chris Hughes from IP boutique Morgan & Finnegan.

“The IP capability has grown from four to around 30 in the past six months,” says Markel. “We’ve added antitrust litigation, expanded our white-collar litigation group as well as general litigators, and brought in a financial restructuring group from Weil Gotshal [a four-partner New York team consisting of George Davis, Deryck Palmer, John Rapisardi and Andrew Troop that moved in March last year].”

Even former partners admit that Cadwalader is now a broader shop than it was a year or two ago. “Certainly litigation could be big for them,” says one. “If the banks are being sued for miss-selling then it will certainly be an advantage knowing what securitisation is all about.”

Securitisation-related restructuring could be another significant area for the firm while, contrary to what might be believed, CDOs are still happening.

“But Cads will have to go out and be dynamic and hustle a bit,” says another ex-partner. “The next few months and maybe years will be very tough, but it won’t kill them.”

So the firm will no doubt survive. But what of the man who did most to shape it over the past 15 years? If Cadwalader increasingly distances itself from its core strengths, is there a risk it will it also distance itself from its legendary leader Bob Link?”In the early 1990s Cads’ practice used to be much broader, but then there was the palace revolt led by Bob Link,” recalls a former Cadwalader insider. “Link is a brilliant securitisation lawyer. He and his team threw out partners and cut Cads back to its core strength: securitisation.”

Link by all accounts is a particularly tough and talented individual who has now been running Cadwalader for almost 15 years. According to several former partners, the firm is run more like an investment bank than a law firm and it largely has Link to thank for that.

“The firm is completely bottom-line driven,” says one. “Practice group margins have to be in the high 30s, maybe 39 per cent, or they are binned. If they don’t meet that criteria, they’re gone. It’s not a firm known for esprit de corps.”

In other words, deliver and you will be extremely well compensated. Fail to do so and directions to the nearest door will be offered.

With the word on the street in New York that 63 per cent of Cadwalader’s profit is derived from its capital markets practice, questions must surely be asked internally (as they have been at a number of US investment banks) about the wisdom of the firm being so dependent on one area.

Asked if Cadwalader’s partnership still retained confidence in the leadership of Link, Markel confirmed it did, saying the downturn was “not Bob’s fault” and that Cadwalader had no plans for any management changes as a result.

“I understand that some financial institutions have taken people’s heads off at the top, but we’re not this way,” Markel adds. “Bob’s not blamed for this and we expect him to carry on doing what he’s been doing.”

High-profile casualties

If Link does step down, or is eased out, as a result of the collapse of Cadwalader’s core market he would hardly be the first high-profile victim. A succession of chief executives and high-ranking leaders at the investment banks and financial advisers linked to the subprime market – among them Bear Stearns’ James Cayne, Citigroup’s Chuck Prince and Stan O’Neill of Merrill Lynch – have already fallen on their swords. There would be a certain irony if the man who built Cadwalader in the image of an investment bank were to suffer a similar fate.

“It was Cads’ focus on exotic instruments such as CMBS that made Link’s career,” says one former partner. It may be an unwanted legacy.