Friday, February 22, 2008

Changing Horses Midstream...

Since around 1750 Freshfields has had a nice little earner being legal adviser to the Bank of England. The relationship is close. When the law firm relocated from St Paul's to modern premises in Fleet Street, the governor of the bank was reputed to have warned Freshfields about moving to the other side of town. The was on the City boundary, almost beyond reach of the threat of the governor's eyebrows.

These kinds of links feed into the mythology of the law firms that make up the Magic Circle. They have the appearance of being forged in time immemorial and are effectively inviolate.

It was a huge surprise when Freshfields spurned the Bank's shilling in its dealings with failed mortgage bank, Northern Rock. Instead of acting for its long time client, Freshfields elected to hook up with Northern Rock. The "Rock", crumbly though it is, has been frantically searching for a suitor to protect it from the harsh winds of the subprime fallout. This was a much more lucrative mandate than advising the Bank. And for a couple of months while the Treasury dithered over the offers for Northern Rock, it was wonderful.

But neither of the offers was ultimately acceptable to government and the Rock is to be nationalized. Which means it is no longer looking for white knights. And really there is no need for Freshfields in the capacity it used to have. Linklaters is to advise the Rock's new chairman; Slaughter and May will advise the government, and
Sullivan corporate partner Tim Emmerson commented: “It would not make sense to replace Freshfields. They know the company. The interests may be different but it is the same business and the same legal work - albeit for less money.”

It is perhaps no great surprise that this should pass. A recent article in the American Lawyer pointed out that when it comes to marketing and customer relationship management, lawyers are lost. Freshfields' position is further bolstered by a report issued by Eversheds, which has as one of its key findings:


They used the caps not me, but it makes dramatic reading. "The legal profession is set for major change and the dominance of the 'Magic Circle' is set to erode, according to a major new study into the future of the legal market...with a third of clients (34 per cent), planning to buy legal services from firms outside the Magic Circle to get better value for money and better client service." Of course the Eversheds report is self-serving and over-optimistic about its own chances of muscling in on Magic Circle work.

Perhaps, however, if Freshfields had possessed the benefits of these insights back in the fall of 2007 when the queues of disgruntled customers were meandering down the streets of Newcastle outside Northern Rock, it might not have acted so fancifully.


Saturday, February 09, 2008

The Return of the Vultures

Throughout this credit crunch I have been awaiting the return of the vultures. In the 90s vulture funds were highly active in trading distressed debt and in the process disturbing established informal workout methods like the London Approach. These ways of restructuring relied on embedded relationships among professionals who knew how each other would respond in given situations.

Vultures were the new kids on the block who didn't understand the the folkways and customs and and who weren't afraid to disturb established patterns. As with most things financial, this passed and hedge funds and private equity took over.

The name vulture was then applied to another type of predator, one who bought distressed sovereign debt and sued for its recovery in the courts. The defendants were usually impoverished third world countries.

But now the original vultures have flown back across the horizon. They may prefer to call themselves "special situations investors", but no one is fooled by that transformation. Their aim is to buy as cheaply as possible: they are the bottom fishers. According the Financial Times two financiers, Warren Buffett and Ross Perelman, are actively searching for troubled companies.

Perelman has just closed a $4bn fund to "invest in and restructure financially distressed companies. He said his next moves were likely to be in insurance, mortgage servicing and car parts." Apparently the monolines have risen in attractiveness in recent weeks, with some forecasters predicting a "monoline tsunami."

Buffett is "looking to spend the $40bn cash-pile held by Berkshire Hathaway, his conglomerate, on a large financial or industrial company." The language being used in this market is very indicative of the approaches being taken. For example (from the FT):

"The elephant gun is still out," said Mohnish Pabrai, a California-based asset manager who owns shares in Berkshire, and follows Mr Buffett closely.

"This is Berkshire’s market. When you have this kind of sell-off in equity markets and the capital Berkshire has, things will happen".

Mr Perelman, who has assembled a collection of businesses ranging from Revlon cosmetics to Allied Barton security services by taking over companies in distress, said he regarded the current conditions as a "buying opportunity". "Over the next six months you are going to see very, very unique opportunities", he said.

Analysts said that, aside from well-known investors, several hedge funds and private equity groups have been raising billions of dollars in anticipation of a sharp rise in the volume of distressed assets and companies.

In finance, it is truly "ars longa, vita brevis".

Thursday, February 07, 2008

Giving Papers at Miami

One of the attractive features of going somewhere new is receiving fresh feedback on one's ideas and research. And that's intensified when one leaves one's home turf and crosses continents.

I was asked early on if at some point in my stay I would present a paper to faculty. Of course one says yes, imagining the scene a couple of months down the road. So it was a shock when after seven days in the school, the faculty seminar organizer tracked me down and said those fateful words, "We've had a cancellation. How would you feel giving your paper now?" I smile and say, blithely, yes. Inside I realize this is it. I was to be the first of the faculty presenters for this semester.

Fortunately I had a paper ready. It's Lawyers, Law Firms, and the Stabilization of Transnational Business (with Fabian Sosa) available at SSRN. My chair for the session, Michael Froomkin, gave me the game rules. There would be lunch beforehand, then exactly at 12.35 he would call to order and I would be given 20 minutes to present my paper. During that time Michael would take questioners and organize them into a queue and feed them to me. He had also distributed the paper to the faculty, which would be read.

I took my 20 minutes, then turned to Michael for my cross-examination. He said we have six questioners lined up and we started. I had been told that the faculty was lively and vigorous in their seminars. I can confirm that.

Questions ranged over a wide area including legal ethics, licensing, regulation, legal theory, finance and more. Some commented, others criticized. The queue grew longer. It was both daunting and exhilarating. Not only were they tackling my ideas, but the faculty was giving me new ones. Realistically I considered there five new papers that I could write from the questions and comments directed at me.

Just over an hour later, Michael called a halt so we could return to the classroom. I had seen the Miami Law School faculty at their best.

Saturday, February 02, 2008

Professional Responsibility/Legal Ethics

While I am at the University of Miami Law School I am teaching Professional Responsibility, a compulsory course for law students. It takes students through the law governing lawyers and the rules of conduct they should abide by when in practice. I like teaching it. I also think it gives the students an opportunity to reflect on what practice might entail for them. It's good that they have these spaces to reflect and think.

I am using Lisa Lerman's and Philip Schrag's Ethical Problems in the Practice of Law as my text. It's a great book with clear exposition of the core issues--e.g. when can you talk about your cases and what can you say?--filled with problems and cartoons (What would we do without the New Yorker?)

For those from the UK, this emphasis on legal ethics might seem over-zealous. But I'm not so sure. I gave a paper on lawyers in international business transactions to the faculty here recently and a number of the questions directed at me concerned ethical issues, which surprised me.

Despite the huge rise in consumer complaints against lawyers in the UK, which has led to the effective abandonment of self-regulation in favour of external governmental regulation (see the Legal Services Act 2007), there is little awareness of this in legal education.

With the exception of scholars like my colleagues Andy Boon and Julian Webb, few give the topic any attention. In legal education generally, ethics is not addressed until after the academic stage. So that in three years of studying law, it's absent.

During the Legal Practice Course ethics is treated as a "pervasive" subject. This means it crops up occasionally in various places and is then forgotten. There is no sustained examination of the problems and difficulties. Ethics and professional responsibility are the lost territories of law.

This was discussed in a paper I read recently on pupillage. The interviews with barristers and pupils showed that although high grades from the elite universities were a necessity for entry to the Bar--and the Bar thinks it's being meritocratic when it does this--the interview process was such that these educational and cultural affinities would play a big role in one's chances of entry. Barristers argue they are more interested in academic excellence, advocacy and mooting skills and experience, being able to construct an argument, poise and confidence, which are, of course, a function of one's background. Using these kinds of ascriptive criteria, ethics training is perhaps redundant. Some chambers, however, have internal ethics exercises, but generally pupils absorb ethical ideals by osmosis from their pupil masters. Of course if you widen entry the scope of shared values will shrink and professional responsibility will rise in importance.

The British legal profession and the academy has lost the plot on this, if they ever knew it existed. Why is it that business schools have been able to grasp the importance of teaching ethics, but law schools haven't? Is it that lawyers have managed to escape censure in recent scandals whereas business executives have been publicly exposed? Not quite.

Recently a senior partner of Freshfields was sanctioned for involving his firm in a conflict of interest scandal during a major takeover. Was the partner criticized for his unprofessional behaviour? No. The prevailing sentiment among the profession was one of sympathy and a feeling of "There but for the grace of god go I." How differently it would have been treated in the US.

Commuting to Miami Beach

It's rare that one could enjoy commuting, but my drive from the University of Miami in Coral Gables to my apartment in South Beach is delightful. Crossing over the MacArthur Causeway is beautiful. I look forward to it.

Here's a short video of the drive..