Something to bank on

The transformation of Goldman Sachs and Morgan Stanley into bank holding companies may be the end of one era, but it is the start of another. And one group of lawyers is thrilled about the change: banking regulatory specialists.

That's because Goldman and Morgan now face scrutiny from the Federal Reserve and the Federal Deposit -Insurance Corporation. Also, they will have to adopt risk-management policies which limit how much debt they can take on.

That means a lot of regulations to study, a lot of hearings to attend, and a lot of forms to file. All productive legal work, to be sure. But some traditional banking firms, especially those focused on deals, do not have the capacity. They'll either have to get up to speed - fast - or risk being left behind.

The firms most likely to benefit are the ones ready to hit the ground running, such as Sullivan & Cromwell and Cleary Gottlieb Steen & Hamilton. Both firms are staffed to the brim with bank regulatory lawyers. "Those people will probably be working around the clock for years to come," says New York recruiter Lynn Mestel.

Firms that are not staffed up risk missing out on both the regulatory work, and the advisory work it supports. Firms without a strong regulatory practice "will be at a competitive disadvantage," says Cleary Gottlieb regulatory partner Robert Tortoriello. Another New York banking lawyer adds, "Several [firms] that do not have this capacity are just frantic they are going to lose the advisory business."

Fried Frank Harris Shriver & Jacobson and Katten Muchin Rosenman may be among the frantic, one source says, as both have recruiters making calls to prominent bank regulatory lawyers.

The impact from lack of regulatory expertise can be stark. For example, last year Linklaters advised Royal Bank of Scotland (RBS) on its $101bn (£67bn) buyout of ABN Amro. But because Link- laters lacked US bank regulation specialists, RBS had to bring in Shearman & Sterling to do the work. Since then, Linklaters has been trying to hire its own regulatory specialist, though the search hasn't come to fruition, says a firm spokesperson.

A few prescient firms, sensing that changes were coming to the industry, have already hired banking specialists. Three months before the meltdown, for example, Arnold & Porter brought on Kevin Barnard, a former top bank regulatory partner at White & Case. The firm, in announcing his hiring, cited the "increasing changes and challenges in the financial services industry."