As the SS Dewey Hit A Financial Iceberg, the Band Played On…..


The Housing and Tech Industries Are Not the Only Places for Irrational Exuberance


Over the last few months, the venerable New York law firm Dewey & LeBoeuf LLP has been losing partners in large part because of what has been seen by many of its partners as a compensation system that does not reward everyone fairly. The exodus could put the firm in danger of breaching loan covenants, which typically require firms to maintain a certain head count or income flow.

And it has been reported recently that it is more deeply in debt than was previously thought, according to a person familiar with the matter. As a result, the firm has been weighing a bankruptcy filing, and it is exploring other options that include merger scenarios.

The story of Dewey & LeBoeuf is an all too familiar one found in many industries where organizations are unable to manage their growth, or what they perceive will be their growth. Dewey & LeBoeuf became one of the largest law firms in New York five years ago when Dewey Ballantine LLP, which was founded in 1909, merged with LeBoeuf, Lamb, Greene & MacRae, founded in 1929. Like the Titanic whose 100th anniversary of its sinking we celebrate this year, Dewey & LeBeouf was a behemoth that was considered unsinkable.

As the newly merged firm pursued an ambitious plan to become one of the elite Wall Street firms, it relied on compensation promises to hold on to big earners and to recruit additional lawyers with big books of business. This was at the expense of adequately compensating other “non-star” lawyers. The guarantees to those chosen few were increasingly unsustainable and ate into the share of profits for the partners who lacked such agreements.

It’s unclear just how many clients the firm has lost as a result of the partner defections but as the departures continue, it is all but certain that Dewey & LeBoeuf has limited time and will be out of existence in short order.

This is a cautionary tale that “irrational exuberance,” which Alan Greenspan described during the height of the housing bubble, is not restricted to any particular industry: from government that thinks peak tax revenues will last forever (and spend as such) to even the cautious legal profession, all are susceptible to delusions of grandeur that can wind up dooming seemingly perennial and august entities like Dewey; few are immune to “bubble-think.”

And another ironic aspect of all of this, one to perhaps evoke schadenfreude from some, is that throughout this saga, Dewey leadership has been telling all to remain calm and that everything is fine, like Kevin Bacon did at the homecoming parade in Animal House when everyone was going berserk. Clearly everything is not fine and one must wonder if any partners, especially those who stayed, will bring some kind of breach of fiduciary action against the leadership of Dewey. If they do, Dewey can at least hire itself as it handles derivative litigation. That would help their bottom line.

-I.M. WIndee


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