Up by law.

Up by law.

Up by law.

Moneybox
Commentary about business and finance.
July 25 2003 5:05 PM

Up by Law

The bull market for Wall Street lawyers.

Last week, Charles Prince, a Georgetown-trained lawyer with scant experience operating an investment bank, was named to succeed Sanford Weill as the chief executive officer at Citigroup, the nation's largest financial company.

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Prince is a longtime legal troubleshooter for Weill. He helped hammer out the landmark legal settlement between Wall Street firms and federal and state regulators on research conflicts of interest. For his troubles, Prince last year received a salary and bonus of $2.8 million and $3 million in restricted stock—sums that are likely to rise sharply with his new post.

In corporate America generally, and on Wall Street in particular, what matters most is your compensation and your title. By both measures, in-house corporate lawyers like Prince are doing rather well. As Corporate Counsel gleefully noted in its annual salary survey, compensation for general counsels at large firms rose 9 percent last year, even as executive compensation generally was under stress.

But is the heightened respect given to legal minds a good thing for Wall Street? After all, whether you're Kobe Bryant or Sandy Weill, a lawyer is someone you call when you're in trouble—not when you're about to embark on a growth-inducing investment boom.

The elevation of Prince came just one week after Federal Reserve Chairman Alan Greenspan testified that the tax cuts and low interest rates haven't "materially improved the willingness of top executives to increase capital investment." Boards and executives are "unclear, in the wake of recent intense focus on corporate behavior, about how an increase in risk-taking on their part would be viewed by shareholders and regulators." Or, as Greenspan might have put it were he to speak in clear English, CEOs are acting more like risk-minimizing lawyers than like risk-taking entrepreneurs.

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Historically, in-house corporate lawyers have possessed all the status of hired help. Rather than formulate strategy, they help execute business objectives (concocted by other managers) by lobbying, ironing out agreements, gaining and protecting patents, and shepherding deals through the antitrust approval process. Above all, they get paid to help minimize risk.

On Wall Street in particular, in-house lawyers have been regarded by their colleagues as a nuisance. Compliance lawyers are the permanent, low-paid Dr. Nos, forever telling the rainmakers precisely what they should and should not be doing. At investment banks, law has typically been regarded as a necessary but onerous cost, not a profit center.

But in recent years, legal violations have resulted in mammoth hits to Wall Street profits. And the biggest Wall Street deal in recent memory was entirely a creation of lawyers: last spring's settlement between Wall Street firms and state and federal regulators to resolve conflict-of-interest charges in research and investment banking.

And soWall Street lawyers are feeling their oats. In the 1990s, Credit Suisse First Boston's investment banking division was dominated by technology banker Frank Quattrone. Today, with Quattrone under indictment, lawyers rule his former roost. In October 2001, CSFB hired Gary Lynch, the former head of enforcement at the Securities and Exchange Commission, as general counsel. Lynch has since added the titles of vice chairman and head of the research division to his portfolio.

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Meanwhile, it has fallen upon compliance lawyers—once a perpetually dispirited and low-paid group of functionaries—to ensure that investment bankers and research analysts don't run afoul of the corporate governance provisions of the one-year-old Sarbanes-Oxley law. That can frequently involve telling high-powered bankers precisely where to get off. At Lehman Brothers, the compliance department in May told an analyst that he couldn't go play golf in Scotland with bankers and clients of the firm.

Because of their newly exalted status, higher pay, and sponsors at the top of the organizational charts, Wall Street lawyers are probably less likely to roll over when confronted with envelope-pushing colleagues than were their hapless counterparts in the 1990s. All to the good.

But the idea that more empowered lawyers will, ipso facto, give greater comfort to investors and improve management doesn't wash. In Fortune's ranking of the 25 Most Powerful People in Business, only three possess law degrees. One is Viacom's Sumner Redstone, who hasn't practiced law in 50 years. The second is Franklin Raines, the chief executive of Fannie Mae—whose role is more akin to that of a lobbyist. The third is Richard Parsons at AOL Time Warner, who, like Prince, was brought in to help clean up a mess left by his growth-oriented predecessors.And once in power, JDs are no less likely than MBAs to misbehave. Mark Belnick was a highly respected senior partner at blue-chip firm Paul, Weiss, Rifkind, Wharton & Garrison. But no sooner did he join Tyco as general counsel than he allegedly became involved in Dennis Kozlowski's extreme compensation schemes. What's more, the way lawyers run their own businesses doesn't inspire particular confidence. Brobeck, Phleger, the one large law firm that conspicuously tried to mimic its New Economy, entrepreneurial clients in its own management, spectacularly crashedearlier this year.

By profession and temperament, corporate lawyers are more contemplative and less intuitive than other executives, more backward-looking and less visionary. They're pie-slicers rather than pie-enlargers. One can hardly envision Charles Prince—who admitted to being terrified on his first day—embarking on the sort of bold acquisition binge that Sandy Weill did. The spree effectively rendered the Glass-Steagall Act irrelevantbefore Congress had a chance to move and enabled Citigroup to steal a march on its competitors.

In his testimony, Greenspan obliquely referred to the real problem plaguing American business: excess capacity. Businesses are reluctant to invest today because we already have too many airlines, software companies, retail outlets, office buildings, and telecommunications networks. Unfortunately, corporate lawyers have traditionally not been instigators of the sort of merger booms that result in the painful wringing out of excess capacity. Despite the revival in stock prices and the continuing glut of capacity, the pace of those ultimate non-risk-averse activities—mergers and acquisitions—are actually running slightly down from last year.

It's unfair to blame the lawyers for the current torpor on Wall Street and in the boardroom. Instead, their rise in status, power, and compensation is a symptom of a larger ill. The joyriding kids who sat behind the steering wheel in the 1990s committed a lot of moving violations. Now, adults have a firm grasp on the steering wheel—and one foot permanently poised on the brake.