To The Readers Of The Metropolitan Corporate Counsel:
Signs of the times: in early October (when this column was written), a security guard, who under normal circumstances would have said, "Have a nice day," instead greeted me (not knowing that I was a lawyer) with, "Well, the bankruptcy lawyers are going to get rich."
Within recent weeks, the Federal government had taken over Fannie Mae and Freddie Mac, rescued AIG, allowed Lehman Brothers to file for bankruptcy, and arranged shotgun mergers of Bank of America and Merrill Lynch, JPMorgan Chase and Washington Mutual, and Citigroup and Wachovia (although the latter was up in the air following a higher bid from Wells Fargo).
Congress had enacted the Troubled Asset Relief Program (TARP) after a week of high drama, and stock markets around the globe plummeted.
Election Day was a month away.
What about the legal signs?
On one level, the security guard was right. The Lehman Brothers bankruptcy - the largest ever - would clearly keep many lawyers busy for a long time. Law firms scrambled to create financial services task forces, and the ripple effect from the global tsunami raised issues in many areas of legal expertise.
Many lawyers will undoubtedly participate in what promises to be a complete rethinking of financial market regulation. The current crisis has brought into sharp focus questions concerning the consequences of leverage, the appropriate level of reserves for insurers, and the lack of firebreaks in the global market. The Lehman bankruptcy threw into brutal relief the extent to which "counterparty risk" was underestimated, leading to a worldwide credit contraction. Before and after the passage of TARP, the Federal Reserve intervened strongly in the markets, making credit available on an unprecedented scale in a number of programs. Part of the price that Congress demanded of institutions that participated in TARP was regulation of executive compensation and Federal acquisition of equity or senior debt interests in the institutions.
But the security guard didn't see the larger picture. Already, one large firm (Heller Ehrman) has voted to dissolve. Other firms are struggling, and practice groups in particularly vulnerable areas (think collateralized debt obligations) have been decimated. Lawyer layoffs generally are coupled with staff cutbacks. As the recession spreads beyond the financial services sector, strain on clients will translate into strain on lawyers and law firms.
The financial crisis also presents lawyers with a greater demand for pro bono services. In the debate over TARP, many pointed out that there was a large segment of the population that suffered from the economic slowdown well before the meltdown in the financial markets: people burdened with consumer debt and subprime mortgages.
Now, faced with legal actions to collect the consumer debt or foreclose mortgages, many of these borrowers are not getting the benefit of legal protections that are available to them. Recent surveys in New York State reported that the default rate in mortgage foreclosure cases was between 75 percent and 90 percent. Default rates in consumer debt enforcement actions were similarly enormous. Just to underline the point: these are default judgments, where the borrower didn't even show up in court. When borrowers did appear, many were not represented by counsel.
Anecdotal reports from the courts indicate that if a borrower is represented by a lawyer, cases can be settled relatively easily. Any lawyer - with some training - can raise basic defenses that may be available to the borrower.
In the wake of the attack on the World Trade Center, many lawyers - and not just the trusts and estates bar - volunteered to help families of the victims. The families were not the only beneficiaries from these programs; the lawyers benefited from being part of the solution in a time of crisis.
Today, you can be part of the solution for consumer debtors and subprime mortgage borrowers. NYCLA and other bar associations have pro bono programs to assist those burdened with consumer debt or facing mortgage foreclosure. Please volunteer.
Ann B. Lesk