If you have been involved in the practice of law for 20 years or more and listened to yesterday’s Sunday morning news shows, I’m sure that the talk of a bailout of banks and the creation of a resolution trust to manage and dispose of distressed real estate seemed like déjà vu. It certainly reminded me of the Savings and Loan Crisis of the 1980’s and the millions of dollars in legal work that it created.
For those of you too young to recall (or weren’t paying attention), in the middle 1980’s, 747 savings and loan institutions failed as a result of imprudent real estate lending. It ended up costing American taxpayers $160 billion to protect depositors and dispose of thousands of distressed properties. The crisis also provided one of the greatest legal market opportunities in U.S. history. It occurred during (or, some would say, helped create) a massive white collar recession but laid the groundwork for the tech boom of the 1990’s that drove an unprecedented period of economic prosperity.
Now, we can debate the similarity and differences of the crisis that occurred 20 years ago and the current sub-prime mortgage fiasco, but if the US is going to ante up $700 billion as a starting point toward resolving the real estate part of the problem, this can’t help but be a full employment act for lawyers. And, some observers think that this is just the beginning and the credit card and auto securitized debt shoes are still left to drop.
It makes sense, therefore, to do a little planning as to how your firm could or would want to be involved in this work and, most importantly, benefit from the things we learned during the Savings and Loan Crisis.
1. Self-Assessment. In all likelihood there will be all sorts of opportunities in bankruptcy, real estate, and every aspect of commercial litigation as well as white collar crime. Perhaps the greatest opportunities will involve representing the Federal or state governments. Working for government, especially on high profile matters, involves heavy oversight which means the need for absolutely clean hands. A healthy activity would be to figure out which of your practices are well positioned by experience and expertise to benefit from available work, and which you are effectively conflicted out of (remember, we’re talking about political appearance, not just pure legal conflicts).
2. Urgency. At least as of today, there is incredible urgency for the Congress to pass legislation this week. If that occurs, the Congress will transfer that level of urgency to the government. One of the things we saw during the Savings and Loan Crisis is that law firms were hired very rapidly by governments, institutions and by creditors, and the first firms in the door received a huge volume of additional work. There is a definite first mover advantage and time invested in preparing an RFP response for the work where there is the greatest opportunity for your firm would probably not be wasted.
3. Sacrifice Margin for Flexibility. During the Savings and Loan Crisis, work (especially work for the FSLIC and the Resolution Trust Corporation) was handed out rapidly and in large volume. Some firms built to a volume of $25 to $35 million in annual billings very quickly. Government lawyers were looking for safe and convenient choices and the firms that were able to gear up quickly were heavily favored. However, it didn’t take long before Congress got involved and legislated a limit of $2.5 million in fees paid to any single firm. As quickly as the work came in, it left and some firms were left with floors of space filled with lawyers with nothing to do. Plan on uncertainty and assume that every piece of work could disappear on a moments notice. Plan on using month to month leases for space and technology, hiring contract lawyers and support staff with short notice clauses and avoiding any permanent commitments. This flexibility may increase costs but it will help you sleep at night.
4. Create Rigorous Pricing Schedules. The urgency of hiring may short circuit some normal price negotiations during the engagement process. Expect government work to include most favored nations clauses (agreements promising that no other client will be charged a lower rate). With the FSLIC work, government audits conducted years after work was performed found minor violations of the most favored nations clauses that cost law firms millions in refunded fees. Many firms take pride in not restricting partners’ ability to accept clients and discount rates. Unfortunately, a partner in a remote office that gives a large discount to a mom and pop donut shop could cost the firm a lot of money on large engagements.
5. Set a High Price Point. There is no way of knowing how pricing will be set in engagements. The government has a record of bouncing among percentage discounts on hourly rates, blended rates and partial contingent fees. In any case, you are probably better off starting from a higher price level and giving the appropriate discounts. Now – as opposed to January 1, 2009 – might be a wise time to do an appropriate standard rate adjustment.
Of course, if you think back, we learned many more things during the Savings and Loan Crisis, but these are the most important immediate issues. Additionally, there are a variety of opportunities for which firms can begin positioning themselves that do not involve immediate government work. For example, the bundling of properties for disposal by the resolution trust will create entrepreneurs eager to buy those properties and further dispose of them, all of which creates a large volume of real estate work.
The key take-away is, if your firm is looking for an opportunity to build the volume of your legal work and is willing to accept some risk in return for a healthy reward, you ought to spend some time talking about this in the next couple of days.