"The Lehman Brothers of Law Firms"

James Stewart has a brief look at what appears to be the End of Days for the famed and prestigious law firm Dewey & LaBoeuf in the New York Times.

What’s really interesting is that the law firm has essentially made the classic mistake that most of the failing financial firms made leading up to the credit crisis – a mismatch between long-term liabilities and short-term funding…

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.”

This is a pretty amazing story and as fast an unwinding for an iconic company as I’ve ever seen.

Source:

Dewey’s Fall Underscores Law Firms’ New Reality (NYT)