Every American Presidential candidate who finds himself trailing badly, in the days leading up to the general election, refers to himself as a modern day Harry Truman.
Why? Because in 1948, President Truman was considered such a long shot against challenger Thomas Dewey that the Chicago Tribune actually printed and sold newspapers headlined “Dewey Defeats Truman” on election night. In one of the most famous photographs in American political history, Truman is seen waving the newspaper while smiling sardonically over his victory.
But Dewey was no lightweight; he was successfully elected to a third term as Governor of New York in 1950, and then went on to establish Dewey Ballantine, an extremely successful and prestigious law firm. Last week, however, the firm began to crumble as a result of factors that are disconcertingly common throughout the entire American economy.
From Ballantine to LeBoeuf
Dewey Ballantine, along with Sullivan & Cromwell and a small number of other distinguished law firms, occupied the very pinnacle of the New York City establishment during the last half of the twentieth century. Indeed, they adroitly personified the professional standards that the American public once attributed to the entire legal profession.
But in the years following Dewey’s death in 1971, law firms in the United States began to operate more like for-profit businesses than private partnerships. And in 2007, a year before the global economic meltdown, Dewey merged with LeBoeuf Lamb with the hope of becoming a global legal juggernaut.
What a terrible sense of timing! The legal profession had already begun to evolve by the time that Dewey Ballantine became Dewey LeBoeuf, and the crash accelerated its evolution. Last week, Dewey found itself struggling to even attract prospective suitors to the negotiating table.
The Causes of Catastrophe
What were the causes of Dewey’s demise? To a certain extent, the firm fell victim to the same economic trends that now threaten all global businesses. For instance, its clients became increasingly disenchanted with the inflated billing rates that Dewey charged for routine legal duties that could be performed by far less prestigious firms.
And then there was a series of questionable decisions that were made by Dewey’s managing partners. Apparently, they granted compensation contracts that were guaranteed in value, whether or not “the talent” actually performed at a level that justified the expenditures. And when the firm’s client business failed to generate sufficient operating cash flows, Dewey went deeply into debt in order to meet its fiscal obligations.
It was the debt that ultimately shattered Dewey LeBoeuf’s ability to operate as a going concern. Unlike manufacturing firms that can leverage substantial tangible property assets as loan collateral, the only assets of value in a law firm are its human capital. When Dewey’s talent began to flee the firm, it was doomed.
A Familiar Story?
Does this story possess a familiar ring to it? An inability to maintain revenues. Constituents who insist on receiving guaranteed benefits. An unhealthy reliance on debt to pay for routine expenditures. And creators of value who flee an entity in order to prosper in friendlier climes elsewhere.
This all doesn’t ring a bell? Think bigger, much bigger. In fact, think of the United States of America.
America’s share of the world’s Gross Domestic Product reached its peak, in nominal terms, in 1985 when it produced almost one third of its overall wealth. After that time, global wealth that had previously flowed through the American economy began to shift towards various developing nations.
Furthermore, most economists now believe that America’s greatest future challenge will be the stabilization of its system of guaranteed wealth transfers through Social Security, Medicare, and private pension plans. And they bemoan the $15 trillion of debt that the United States has incurred in order to finance these expenditures.
Finally, America’s largest corporations continue to shift their growth focus overseas in the same manner as Dewey’s attorneys have shifted to other firms. As they do so, nations around the world have become stronger competitors on the global stage.
Predicting The Future
Dewey LeBoeuf fell from its post-merger pinnacle to the depths of financial collapse in less than five years. Is it possible that the entire economy of the United States may suffer a similar decline during a comparable period of time?
There are certainly parallels of similar declines throughout world history. Britain entered the Second World War in late 1939, for instance, as a pre-eminent global economic and military power. In a little more than five years, it ended the War as a shattered nation in desperate need of America’s Marshall Plan.
On the one hand, it is difficult to visualize how such a dramatic downfall might shatter the United States in the near future. But on the other hand, it is equally difficult to envision how the world’s greatest economy might now climb out of its current predicament.