Tuesday, December 09, 2008

The Rise of the Bankruptcy Lawyer...Again


Some years ago I wrote a pair of articles about insolvency/bankruptcy lawyers and the evolution of the bankruptcy markets under the impact of globalization. (They are: Normative Bricolage: Informal Rule-Making by Accountants and Lawyers in Mega-Insolvencies and The Vultures Fly East: The Creation and Globalization of the Distressed Debt Market.) And I thought the bankruptcy/restructuring world would exist in a kind of middle-aged, generally uninspired fashion. Indeed, it would hide itself behind pre-packs and informal restructuring outside the public gaze. I was wrong.

Since 2007 this world has woken from its slumber and is creating havoc again. Bankruptcy lawyers are in vogue again as businesses desparately attempt to restructure themselves, or are told to do so by Congress as with the big 3 auto manufacturers in the US. I've posted on restructuring, the new London Approach, and subprime here, here, here, here, here, and here.

The one thing we can guarantee is that no one remembers how to handle a crisis because institutions never remember. They always dissipate their expertise, because expertise is cyclical. Each crisis is always dealt with as if it is occurring for the first time. Someone ought to write a crisis manual.

The role of bankruptcy lawyers becomes increasingly important as they are probably the only ones with any form of memory from one crisis to another. You can tell how important this crisis is by the fact that Harvey Miller quit his investment bank, Greenhill, to return to his old law firm, Weil Gotshal. Miller had been the dean of the bankruptcy bar for many years. This has been recognized by the firm's central role in many of the restructurings now taking place.

Weil has recently been a key player in the largest US bankruptcy: "Lehman Brothers entered bankruptcy with assets of $639 billion. This is more than the annual gross domestic product of all but the 17 wealthiest nations," according to Ben Hallman in the American Lawyer.

Hallman describes how the Feds--Treasury, Federal Reserve, SEC--were opposed to any form of rescue or restructuring for Lehmans. They were adamant that there would be no adverse consequences from teaching the market a lesson on moral hazard.

"But Miller says that rather than pushing for a Chapter 11, the Fed could have provided a financial backstop to the firm while it closed its positions and unwound from the rest of the market in an orderly way. Instead, he and the Weil crew were forced to organize, on a moment's notice, the largest and most complex bankruptcy in history. But their work didn't end there. Over the next five days, the lawyers drove a sale of Lehman Brothers Inc., the brokerage unit, through U.S. Bankruptcy Court. They worked knowing that every minute wasted was a minute that the value of the underlying business diminished, "like a melting ice cube on the dock," as Miller said in court. More than 100 Weil, Gotshal lawyers would take part-many of them working around the clock to finalize deals that would normally take months to complete."
Hallman tells us of the relationships between Weil and Lehman, and of Miller's status in the world of bankruptcy. As he details the hour by hour unravelling of Lehman, we can see how the apparent reality of "it's happening for the first time" comes up against "we've seen this before and this is not the way to handle it".

The result of this tension is a refusal to believe things could get worse with the added desire to make sure that someone is in the middle of it who knows what is happening. So Miller's involvement becomes a means of capitalizing on status and social capital thus signalling to the world at large things are serious but without letting him determine the overarching strategy.

As much as Miller may be characterized as an "eminence grise", one who could truly be said to counsel his clients, he is emblematic of a move towards the lawyer as the new underlabourer. Since most of his counsel was ignored, it became his technical expertise (and that of his firm), and his ability to tap into networks, that produced the "creative" solutions to Lehman's enforced demise. Miller may represent the last generation that could stake a claim to being counsellor.
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