How to deal with the dollar slump
23 February 2004
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Last week, as sterling breached the $1.90 barrier, Coudert Brothers became the latest US law firm to take steps to shore up its European-based partner drawings.
Coudert Brothers, which pays all its equity partners in dollars, is set to put in place a fixed currency rate, calculated on a three-year rolling average. The firm’s executive board is also poised to set fixed conversion rates for partners based in Europe and Australia.
Most London-based partners of US firms interviewed by The Lawyer said that they were concerned by the sliding dollar. “I think the dollar has moved away from the comfort zone. It’s acknowledged that partners shouldn’t see their incomes drop by 20 per cent,” said one US partner based in London.
But one City-based partner at a US firm says: “It’s swings and roundabouts – partners should ride this out.”
Meanwhile, as revealed by The Lawyer last week (16 February), Sidley Austin Brown & Wood is among a number of US firms exploring the possibility of entering into commercial hedging contracts to protect its partners’ compensation against any future decline in the value of the dollar.
Currency hedging is one of a number of options being considered by Sidley. Another option is to top up partners’ drawings and put it down as a cost to the firm.
Sidley’s remuneration system is slightly different from other US firms, as partners based permanently in London are paid in sterling, so are not exposed to currency fluctuations.
Commercial hedging contracts have been around for years, but they can be risky and expensive. If analysts’ predictions turn out not to be true, then firms could lose a lot of money.
Consequently, many US firms have opted to put in place a fixed currency rate to protect their non-US lawyers from losing value on bonuses and pay, compared with their transatlantic peers.
As of 1 January 2004, associates at Dewey Ballantine and Debevoise & Plimpton started to get paid at a conversion rate of $1.65 and $1.64 respectively, although this will be re-examined and potentially reset by 1 July this year. It is understood that Simpson Thacher & Bartlett also addressed the currency issue at the beginning of the year (The Lawyer, 2 February).
Setting partners’ and associates’ pay in sterling appears to be a fairly straightforward solution, but in reality it is only an attractive option for firms that want to staff their London offices with UK-qualified lawyers.
The depreciating dollar also raises questions about the sensitive topic of charge-out rates. Firms such as Bingham McCutchen and Latham & Watkins, which bill predominantly in sterling, should be experiencing a rise in fee income – a natural hedge. The reverse is true for firms that bill in dollars.
Another natural hedge is the booming UK housing market. One partner said: “I own a house in London, so as the pound gets stronger my house value goes up so that works as a natural hedge.”
The dollar crisis should also be looked at alongside US firms’ year-end results. As one partner at Kirkland & Ellis put it: “In a firm like mine, where profitability is going up, the problem will be mitigated.”