What does the sub-prime mortgage crisis mean for lawyers?

Published in Chambers Client Report, Spring 2008

Litigators anticipating a wave of disputes triggered by the sub-prime crisis may be disappointed, while finance lawyers could face difficult questions from clients.

The sub-prime mortgage crisis has been, for the most part, bad news for lawyers – along with everyone else. Clifford Chance and Cadwalader, Wickersham & Taft are two of the firms that have made structured finance associates redundant in recent months as the market for mortgage-backed securities and collateralised debt obligations has collapsed. And the ensuing credit crunch has all but frozen financing and M&A work, leaving non-contentious departments scouring the world’s emerging markets for work.

Litigators, however, have been looking forward to a wave of major, complex bank-on-bank litigation as the catalogue of bad offering and investment decisions that led to the sub-prime crisis falls out. Norton Rose, CMS Cameron McKenna, Eversheds and Herbert Smith have all restructured their dispute resolution departments in recent months to focus on financial institutions. The US firm Quinn Emmanuel, which specialises in suing banks, is planning a London launch in the next few months, and
another US firm, Fulbright & Jaworski, has snared away partner Melanie Ryan – currently specialising in sub-prime litigation – from Barlow Lyde & Gilbert to join a dedicated sub-prime practice with more than 100 lawyers worldwide. “A lot of highly structured sub-prime backed transactions are being looked at extremely closely right now,” says Ryan. In January, The Times reported that the litigation wave stemming from the crisis could be bigger than that which followed the Enron crisis. It predicted that the major investment and retail banks at the centre of the crisis would take each other on in mammoth disputes.

And yet, almost a year after the sub-prime mortgage crisis broke, the expected wave of
major litigation has yet to appear. The banks have held their fire, and commercial litigators on both sides of the Atlantic are still waiting for the gold rush. “What’s been going on so far has been a lot of what I call hand-holding,” says Matthew Newick, a specialist in financial institutions disputes at Clifford Chance. “Helping clients develop strategies for managing risks; advising them on what the documents mean; and there’s some pre-dispute rattling of cages, so we’re helping people through that. But very little that’s blown into a full dispute is related directly to the sub-prime crisis.”

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