Our texts for today come from (in inappropriate order) the New Testament, as it were, and Peter Kalis, the chairman of K&L Gates:
"The metaphysical question is whether you can have bulge-bracket Wall Street firms without Wall Street," says Kalis. "The capital markets, when they rebound, will no longer have the margins they once did. Like night follows day, they won’t be willing to pay premium rates."
And from the Old Testament, Simpson Thacher’s Chairman Richard Beattie:
"I strongly suspect we’ve got a rough period of time ahead". He sees the markets turning around within a year or two, and doesn’t expect big changes ahead for his firm and its closest competitors. "I don’t think [the market changes] will impact fees," he says. "The M&A work will come back, and Goldman Sachs and Morgan Stanley will be advising the companies doing M&A, and I don’t see the fees being different. . . . The private equity firms will be back. They’re sitting there with huge piles of money."
In my conversations with managing partners in New York and elsewhere, they segregate their worries into the (relatively) pedestrian and the existential. The low-level worry is one of duration: How long will this recession last? If it’s of "ordinary" duration, say about a year, and of "ordinary" depth, with unemployment staying below 8%, we know how to deal with that: Be prudent about costs, manage your partners’ expectations, and stay the course.
But there’s another possibility, the one Pete Kalis fingers: Are we facing an existential challenge?
If the US Treasury is a major stockholder in major financial institutions, how will that change the dynamic of how premium-level legal services are bought and sold? Not to be facetious about it, but how would you feel to be called before Barney Frank to justify your $950/hour rates?
Short of being hauled before the television cameras of Congressional hearings, contemplate the implications of the changes in ownership of major financial institutions simply on the private side. If you think that Bank of America hires lawyers as Merrill Lynch hired lawyers, guess again. Here are a few examples from their website (warning: they run 69 pages):
- Extraordinarily explicit diversity requirements;
- Refusal to pay for first year and junior associates;
- No payment for time spent on conflict checks;
- Automatic "most favored nation" status on rates;
- Staffing demands enforced at a task-level basis;
- Highly stylized and formatted billing submission requirements, failure to adhere to which spurs immediate rejection of the entire bill; and
- You get the picture.
But back to the issue of New York. To what extent will it remain a financial powerhouse for investment banks and, by analogy, law firms?
At the risk of offending both Pete Kalis and Richard Beattie, I don’t think New York will become Just Another Big City, nor do I think its pride of place at the pinnacle of the food chain is guaranteed. Instead, I want to offer an analogy between law-firm land and corporate land.
The common perception is that Fortune 500 companies have been abandoning New York for their headquarters in a steadily departing stream for the past 40 years or so. The reality is quite different. (Not so incidentally, there are a multitude of studies showing that firms that relocated outside New York have underperformed the S&P 500 whereas those that stayed here have outperformed–but that’s a debate for another day).
Here are the numbers on Fortune 500 headquarters in New York over time; the exodus actually ceased over 20 years ago:
- 1965: 128 of the F500
- 1976: 84
- 1986: 53
- 2007: 53
And just for reference, here are the top five states by Fortune 500 headquarters as of 2007:
- New York: 57
- Texas: 56
- California: 52
- Illinois: 33
- Ohio: 28
Even companies that have formally relocated their headquarters, with all the ancillary staff that usually implies, more often than not keep a core group of finance, design, marketing, and other professionals in New York, and you can be sure their key executives fly through regularly. (Even the Sage of Omaha almost invariably announces his big deals in New York.)
Similarly, as recently as 10 years ago, New York was where essentially all new significant company listings occurred. Since then, for a variety of reasons including Sarbanes-Oxley, the "Spitzer Effect," and even (I say this speculatively) America’s relative fall from international grace, new listings on London’s AIM, in Hong Kong, and even in Beijing are now substantial.
But New York remains the financial capital of the Americas and, I will confidently wager, will remain so as far as the eye can see.
Is its international importance diminished? To be sure. Is it at threat of becoming marginalized? Not a chance.
To some extent, the erosion in New York’s pre-eminence is an ironic reflection on how all-important it had become—and on how that importance can only decline, in a relative fashion, as Brazil, Russia, India, China, and the Mideast grow in global importance. But surely Orrick’s Ralph Baxter has it right when he says:
"There will be some adjustment. But there’s really no way to be an American-origin firm that has anything to do with capital markets and finance without being in New York in a serious way."
On this view, New York will remain one of a handful of global financial centers, along with London, Hong Kong (or its possible Asian successor, such as Shanghai), and perhaps Dubai or another Mideast center of gravity.
Recent months have brought a surfeit of announcements by firms of expanding finance practices in the Middle East and Asia.
Even before the financial crisis, Jay Zimmerman, CEO of Bingham, said his firm had broadened its approach, continuing to seeek opportunity in New York but also expanding abroad, especially in Asia.
"There have been shifts in the global economy," he said. "Demographics are clearly pointing to a shift ininfluence and financial strength to Asia."
But Mr. Zimmerman added that it would be quite some time before such new markets could supplant New York, either as a financial center or a source of firm revenue. He said that New York would remain Bingham’s number-one priority for growth.
Let’s not be seduced into thinking this is an all or nothing, Manichean proposition: "New York will forever be King of the Hill or it will become irrelevant."
Consider that New York has so many established assets which are all part of the lush and verdant ecosystem sophisticated law firms needing to attract world-class talent have to have, and it’s not all about stock exchanges, banks, and capital markets. Hubs of top-end global commerce need to provide the environment to attract, please, and win the affection and allegiance of the Type A, discriminating, demanding professionals from all walks of life who together produce the pulse, the vibrancy, and yes, the romance, of a global capital: Museums, theater, opera, restaurants, sports, universities, stores and boutiques, a reasonably salubrious climate, great housing stock, and abundant international air connections. These aren’t built in a day.
And unless you really know New York, it may be hard to appreciate how profoundly woven into the City’s warp they are.
It’s not that you can find a dozen great restaurants or a spectacular concert or a wonderful theater troupe or the "nowhere else" boutique, because you can find those in a hundred or more cities worldwide. No: It’s the depth of New York’s "bench." By which I mean: Not only are the top 10 [pick your favorite category] institutions great, but so are the 50th, the 250th, and the 500th. I would pit a "neighborhood" New York restaurant against a top restaurant in many other cities, the chorus line at an off-Broadway show against lead dancers in other shows, and so forth. You are welcome to call this chauvinism or provincialism, and I’m an increasingly appreciative consumer of culture and the "urban experience" around the globe, but it’s a difficult base of expertise to replicate in short order.
Think this is a bit touchy-feely? Think again. Studies of why corporations tend to favor large metropolitan areas for headquarters reach a common conclusion:
"What exactly are the competitive advantages of large cities? The central function of corporate headquarters is the acquiring and disssemination of information. […More specifically,] concentrations of business service firms in large cities, such as medial, law, accounting, and consulting, may enable firms to achieve cost and price advantages."
If acquiring and disseminating information doesn’t sound to you like what law firms do, what would?
But don’t just take my word for it.
Professor Bill Henderson of Indiana University School of Law—Bloomington just published "The Changing Economic Geography of Large US Law Firms," which analyzes the geographic migration of lawyers in the AmLaw 200 over the past 20 years and concludes (emphasis supplied):
Our preliminary findings suggest that over the last twenty years, New York City has supplanted Washington, DC as the more interconnected market, particularly for law firms with international offices in Europe and Asia. Although profitability and revenues per lawyer appear intimately tied to presence in large global cities, particularly New York City and London, the network analysis reveals several firms that are following successful niche strategies.
Bill also produced this fabulous graphic showing the change in headcount of lawyers in AmLaw 50 firms from 1984 to 2006, by region of the US:
This shows how uneven lawyer headcount growth has been. In absolute numbers the growth occurred:
- Abroad: +8,012 lawyers
- New York: 7,315
- Washington, DC: 4,908
- Los Angeles: 2,453
- San Francisco: 2,430
- Chicago: 2,130
- Everywhere else (domestic): 7,372
The short story this tells is that, if you’re a lawyer in BigLaw, being in a major metropolitan center is more important than ever, not less.
If you’re asking yourself right about now whether this distribution mirrors that of corporate America, the answer is not in the least.
To dimensionalize that asymmetry, Bill undertook an ingenious analysis, namely comparing the percentage of Fortune 500 revenue attributable to each city to the percentage of AmLaw 200 lawyers in each city. (Actually, it’s next to impossible to determine the percentage of Fortune 500 revenue actually "attributable" to each city, so as a proxy Bill assigned all revenue to the headquarters city. I’m not a statistician but this strikes me as a fair approximation.)
At one extreme, take the Midwest region (ex-Chicago), which accounts for 25.2% of Fortune 500 revenue (2004) but only 10.1% of AmLaw 200 lawyers. The ratio of lawyers to revenue is then 0.40. At the other extreme we have Washington, DC, with 14.7% of lawyers but only 3.4% of Fortune 500 revenue, for a ratio of 4.33. Here are the other figures:
| City/Region | % AmLaw 200 Lawyers |
% Fortune 500 Revenues |
Ratio |
|---|---|---|---|
| Los Angeles |
7.2%
|
4.2%
|
1.72
|
| New York |
23.6%
|
16.6%
|
1.42
|
| San Francisco |
6.6%
|
5.2%
|
1.26
|
| Chicago |
7.7%
|
6.2%
|
1.24
|
| NE/Midlantic |
9.7%
|
10.8%
|
0.90
|
| SW Sunbelt |
8.1%
|
10.8%
|
0.75
|
| SE Sunbelt |
8.1%
|
11.4%
|
0.70
|
| West Coast/Rockies |
4.3%
|
6.2%
|
0.69
|
In macroeconomic terms, this means that New York is a net exporter of legal services (and,with more AmLaw 200 lawyers than LA, San Francisco, and Chicago combined, a huge exporter).
The question remains—and a fair one it is—whether New York’s past pride of place is prologue to future pride of place. The answer will emerge from whether New York can continue to generate innovations—in finance, in transactions, and in capitalizing upon changes in the regulatory environment. And the answer to that, in turn, depends on continuing to attract the premier, take-no-prisoners, absolute best of breed talent. So far as I can see, nothing that has happened in the last year has changed that dynamic. Nothing.
The challenge is famously laid down in the sappy but still resonant chorus to "New York, New York:" "If I can make it there, I can make it anywhere." Those of us who have lived through this City’s re-inventing itself roughly every decade for the past 40 years will give the last word to Jay Zimmerman:
"I wouldn’t want to bet against New York."
