Perhaps Ronald Reagan said it best, "The only thing worse than godless communism is God-less capitalism." Those words have played out poignantly & distinctly in our current crisis, but have yet to reach their ultimate conclusion. Do not mistake the symptoms for the disease.
Lawyers have ever been the cesspool of capitalistic greed. It's horribly ironic that so many of them end up in government...
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Economy Pinches the Billable Hour at Law Firms
Lawyers are having trouble defending the most basic yardstick of the legal business — the billable hour.
Clients have complained for years that the practice of billing for each hour worked can encourage law firms to prolong a client’s problem rather than solve it. But the rough economic climate is making clients more demanding, leading many law firms to rethink their business model.
“This is the time to get rid of the billable hour,” said Evan R. Chesler, presiding partner at Cravath, Swain & Moore in New York, one of a number of large firms whose most senior lawyers bill more than $800 an hour.
“Clients are concerned about the budgets, more so than perhaps a year or two ago,” he added, with a lawyer’s gift for understatement.
Big law firms are worried about their budgets, too. Deals are drying up, and only the bankruptcy business is thriving. Two top firms, Heller Ehrman and Thelen, have collapsed in recent months. Others have laid off lawyers and staff. So cost-conscious clients may now be able to sway long reluctant partners to accept alternatives.
The evidence of a shift away from billable hours is, for now, anecdotal, as few surveys exist. But partners at a half-dozen other big bellwether firms and lawyers at corporations, who sometimes engage outside counsel, say they are more often seeing different pay arrangements.
Mr. Chesler, who is an advocate of the new billing practices, said that instead of paying for hours worked, more clients are paying Cravath flat fees for handling transactions and success fees for positive outcomes, as well as payments for meeting other benchmarks. He said that such arrangements were still a relatively small part of his firm’s total business, but declined to discuss billable rates and prices in detail.
The system of billing by the hour has been firmly in place since the 1960s; keeping track of time spent provided a rationale for the amount charged. In earlier, perhaps more trusting times, firms stated a price “for services rendered,” without explanation.
But one has only to eavesdrop on a table of law associates comparing their workloads to get a sense of how entrenched the billable hour is, creating a pecking order among lawyers, identifying the best as the busiest and the most costly.
With a sigh that is simultaneously proud and pained, lawyers will talk about charging clients for 3,000 or more hours in a year — a figure that means a lawyer spent about 12 hours a day of every weekday drafting motions or contracts and reviewing other lawyers’ motions and contracts.
“Does this make any sense?” said David B. Wilkins, professor of legal ethics and director of the program on the legal profession at Harvard. “It makes as much sense as any other kind of effort to measure your value by some kind of objective, extrinsic measure. Which is not much.”
To be sure, lawyers may be talking a good game but secretly hoping that the economy will bounce back and everything will return to normal, said Frederick J. Krebs, president of the Association of Corporate Counsel, whose members work in the legal departments of corporations and other organizations. He said that lawyers cheerfully lamented the bad incentives created by billable time for years, even as they grew rich from the practice.
“I like to paraphrase Churchill,” Mr. Krebs said. “In all these conversations, never has so little been accomplished by so many for so long. It just hasn’t happened.”
But the crashing economy may achieve what client complaints could not, Mr. Krebs added. “We may well be at a tipping point here.”
Greed may also encourage lawyers to change their payment plans. Law firms are running out of hours that they can bill in a year, said Scott F. Turow, best-selling author of legal thrillers and a partner at Sonnenschein Nath & Rosenthal in Chicago.
“Firms are approaching the limit of how hard they can ask lawyers to work,” he wrote, in an e-mail response to a reporter’s query. “Without alternative billing schemes, lawyers will not be able to maintain the rapid escalation in incomes that big firms have seen.”
A recent study released last year by the Association of Corporate Counsel showed a rise in the number of companies paying by the hour — but that covered the spring and summer, before the worst of the downturn.
Many smaller firms and solo practitioners have long offered to perform services, like mortgage closings, for flat fees. Plaintiff lawyers also often work on a contingency basis, receiving a percentage of any awards.
“What we do in our business litigation is charge clients some kind of monthly retainer, which gets credited against an eventual recovery,” said John G. Balestriere, a partner at Balestriere Lanza, a Manhattan firm with five lawyers. “It’s a lot easier for us to tell a client, ‘We want to do this, we want to push for summary judgment,’ ” he said, and so avoid a lengthy, costly trial.
When not paid by the hour, lawyers’ approach to their work changes, said Carl A. Leonard, a former chairman of Morrison & Foerster who is now a senior consultant at Hildebrandt International, which advises professional services firms.
In one case, he said, Morrison & Foerster negotiated a fixed fee for defending a company in court, covering work up to the point of a motion for summary judgment.
On top of the fee, if the case settled for less than what the company feared having to pay if it lost in court, the law firm got a percentage of the amount saved. The arrangement made sense when the goal was to resolve the dispute quickly, Mr. Leonard said.
Lawyers on the case negotiated a settlement for much less than the client’s worst-case number, Mr. Leonard said. “The effective hourly rate was something like 150 percent of our hourly rates,” he added. “We made money, the client was happy.”
In litigation, firms that charge by the hour can suffer if they are too successful and end a lawsuit — and the stream of payments from continuing work — too quickly. One law firm that recently collapsed, Heller Ehrman, was hurt in part because a number of cases had settled.
That collapse highlights the risk to law firms experimenting with other payment arrangements: If lawyers set too low a price, they lose money. Many lawyers may not be good enough businessmen to pick the right price, said Mr. Krebs, of the Association of Corporate Counsel.
“The difficulty is, we don’t really know what it costs us to do something,” he said. But the biggest stumbling block to alternative fee structures may be the managing partners at law firms, who will have to overhaul compensation structures to reward partners and associates for something other than taking a long time to do something.
“I don’t think law firms have completely come to grips with that issue,” said J. Stephen Poor, managing partner at Seyfarth Shaw in Chicago. “But they need to start coming to grips with it very quickly.”________________________
Global Worries Over U.S. Stimulus Spending, Debt
DAVOS, Switzerland — Even as Congress looks for ways to expand President Obama’s $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all.
Few people attending the World Economic Forum question the need to kick-start America’s economy, the world’s largest, with a package that could reach $1 trillion over two years. But the long-term fallout from increased borrowing by the United Stated government, and its potential to drive up inflation and interest rates around the world, seems to getting more attention here than in Washington.
“The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”
Mr. Zedillo said that Washington, unlike most other countries, had the option of simply printing more money, because the dollar was a reserve currency for the rest of the world.
Over the long run, that could force long-term interest rates higher and drive down the value of the dollar, undermining the benefits that come with its special status.
Until now, most fears about surging government debt have focused on borrowing by European countries like Spain, Greece and especially Britain, which is also in the midst of a sizable bank bailout. That recently forced the British pound to a 23-year low against the dollar.
While the dollar’s status as refuge in a time of turmoil should prevent that kind of sell-off for now, a number of financial specialists warned that if fundamental factors like the lack of American savings and bloated budget deficits did not change, the dollar could eventually fall sharply .
“There aren’t that many safe havens,” said Alan S. Blinder, a Princeton economist who is a former vice chairman of the Federal Reserve in Washington, explaining why the dollar’s status as a reserve currency is unlikely to be threatened.
Instead, it is the dollar’s long-term value against other currencies that is vulnerable. “At some point, there may be so much Treasury debt, that investors may start wondering if they are overloaded in dollar assets,” Mr. Blinder said.
While the focus in Washington has been on putting together a stimulus package that will attract broader political support when it comes up for a vote in the Senate, here in Davos the talk has been about the coming avalanche of Treasury debt needed to pay for the plan on top of the bailout measures approved last fall, like the $700 billion Troubled Asset Relief Program, or TARP.
The stimulus was approved Wednesday by the House without Republican support, and could grow larger — mostly likely with additional tax cuts — to attract a bipartisan coalition.
American officials maintain they are aware of the challenge. A top White House adviser, Valerie Jarrett, promised in Davos on Thursday that once the stimulus plan achieved its intended affect, the United States would “restore fiscal responsibility and return to a sustainable economic path.”
To be sure, Congress and the White House will ultimately need to refill the government’s coffers, but how they might do that is barely on the radar screen in Washington at this point.
“Even before Obama walked through the White House door, there were plans for $1 trillion of new debt,” said Niall Ferguson, a Harvard historian who has studied borrowing and its impact on national power. He now estimates that some $2.2 trillion in new government debt will be issued this year, assuming the stimulus plan is approved.
“You either crowd out other borrowers or you print money,” Mr. Ferguson added. “There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term.”
Mr. Ferguson was particularly struck by the new borrowing because the roots of the current crisis lay in an excess of American debt at all levels, from homeowners to Wall Street banks.
“This is a crisis of excessive debt, which reached 355 percent of American gross domestic product,” he said. “It cannot be solved with more debt.”
While Mr. Ferguson is a skeptic of the Keynesian thinking behind President Obama’s plan — rather than borrowing and spending to stimulate the economy, he favors corporate tax cuts — even supporters of the plan like Mr. Zedillo and Stephen Roach of Morgan Stanley have called on the White House to quickly address how it will pay for the spending in the long-term.
“It’s huge,” Mr. Roach, the chairman of Morgan Stanley Asia, said. “President Obama has now laid out a scenario of multiyear, trillion-dollar deficits.”
The stimulus is widely expected to pass, but once it does, Mr. Roach said the focus would shift to “who foots the bill and what is the exit strategy. We don’t have the answer to either question.”
Mr. Zedillo, who remembers how Mexico was forced to tighten its belt when it received billions from Washington to keep its economy from collapsing in 1994, was even more blunt.
“People are not stupid,” Mr. Zedillo said. “They see the huge deficit, the huge spending, and wonder what comes next.”________________________
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