Turbo-capitalism has hit the wall and City firms are already feeling the pain. But it could have been a lot worse, as lawyers seek to advise those affected by the market turmoil.

It’s an ill wind and all that. As City law firms try to catch their breath following the traumatic events of the last fortnight, senior partners will be turning their minds to the question of how the turmoil might affect – and even potentially benefit – the bottom line.

Certainly, the Square Mile’s heavyweight operators have an immediate opportunity to win advisory work from corporate general counsel, especially those at the bigger financial institutions. The latter will be revisiting their strategies and seeking reassurance. Recent deals involving bust and troubled companies will need to be scrutinised, while real estate contracts will require examination and re-examination. The threat of vexatious litigation hangs in the air too.

Magic circle and major US firms have the majority of mandates from companies at the centre of the storm, as well as with the regulators and central banks trying to weather it. As one might expect – if you have a major problem, you head for the big legal brands. Industry observers believe that cost will not be so much of an issue in the short term, and some firms stand to profit from the panic.

There is, nevertheless, a broad acknowledgement that last year’s bumper profits will not be sustained. The natural time-lag between the initial downturn in the economy at the beginning of the credit crunch, and its impact on law firms, is almost over. And that is before UK plc digests the medium-term impact of this month’s market meltdown.

Selva Naidu, global general counsel at recruitment outsourcer Alexander Mann, says fee competition between law firms will inevitably intensify over the coming months. ‘The fact AIG has been impacted demonstrates that this saga has further to run. This will flow down to the marketplace, and over the next couple of years things will be more difficult. It will put a squeeze on us and what clients are prepared to pay us. We therefore expect our providers to recognise these fundamental changes.’

Relationship advice

Strong relationships between commercial law firms and their corporate clients will therefore become critical in what is set to become an increasingly difficult legal services market. Some firms have been more proactive than others: one corporate counsel at a large financial institution said they received a call from a firm offering ‘market intelligence’ on the morning that Lehman Brothers sank. A conference was arranged for the afternoon of the very same day – and this was not even a firm from their current panel. ‘I would have expected greater proactivity from firms in general,’ said the counsel.

Thus the crisis underlines the need for firms to bolster existing relationships with counsel, ward off opportunistic newcomers and win new positions on panels. Proactively tapping up corporate counsel is undoubtedly a forward step, but there is probably no better time for firms to ask an in-house lawyer what, exactly, they would like to know right now.

This could provide the greatest opportunity for mid-sized firms, who may well have the expertise on hand but not the magic circle brand, to win big advisory roles. If corporate counsel are in need of ‘market intelligence’ – in other words, ‘what is that other company doing that I should do in order to sleep better?’ – a little proactivity could go a long way. And when coupled with a real ‘customer focus’ – a genuine understanding of what these counsel want – the impending battle for new business may well be won.

Run for cover

Outside the City, the mayhem had an equally sobering impact; most significantly, prompting fears that billions of pounds held by firms in client accounts could be at risk (see News).

The collapse of insurance giant AIG meanwhile, which provides solicitors’ professional indemnity insurance (PII), would have proved disastrous. Firms with existing AIG policies would have found themselves without cover, while the already volatile PII market would have suffered from the withdrawal of its second-biggest player. ‘If AIG had gone, we would have had a seismic shift’, says Tony Blyfield, chief executive of PII broker Prime Professions.

The US Federal Reserve’s $85bn (£48bn) nationalisation of AIG provided some stability, but brokers are reporting lingering unease among clients. According to Blyfield, some have shunned AIG policies, turning instead to the dwindling number of providers remaining in the market. ‘It could still have an impact on the market because inevitably AIG will have lost some solicitor business’, he says. ‘But many have taken the view that, now they’re insured by the US government, they’re quite happy.’

Nevertheless, AIG’s financial status ratings – which, when cut by three ratings agencies on Monday last week triggered its share price collapse – remained unchanged as the Gazette went to press.

By the end of a turbulent week, the UK government had taken two hugely important steps. Last Thursday, it banned the practice of ‘short-selling’ – the widespread (and widely criticised) trading practice of betting that a company’s share price will fall. The day before, it brokered the takeover of HBOS by Lloyds TSB without requiring referral to the Competition Commission. This lifeline thrown to the UK’s biggest mortgage lender averted a collapse that would have left conveyancers tearing out whatever remaining hairs were left on their heads. As things stand, the new ‘super bank’ will be watched ‘very closely’ by the Office of Fair Trading, according to Sam Szlezinger, competition partner at City firm Denton Wilde Sapte.

Both moves allowed the FTSE 100 to recover lost ground, which augurs well for the dealmakers out there, though the index was on the slide once more earlier this week amid uncertainty over the terms of the US government’s massive $700bn financial bail-out plan.

Marc Israel, competition law partner at City firm Macfarlanes, hopes big companies can ‘seek to turn the turmoil in global markets to their advantage’. Easier said than done, but at least they will undoubtedly require legal advice while they try.