Washington Lawyer

Financial Crisis: Where Were the Lawyers?

From Washington Lawyer, January 2010

By Sarah Kellogg

coin By most measures, the United States remains in the grip of a prolonged financial crisis: unemployment is dreadfully high, the stock market has the feel of a roller-coaster ride, consumer confidence is low, and the public’s disheartened spirits could use a good dose of strong economic growth. More than a year after the bottom fell out of the U.S. economy, the masterminds on Wall Street and in Washington continue to struggle.

While much of the frantic finger-pointing has shifted to chronic, partisan grumbling, it seems likely that the possible onset of a “double dip” recession would gin up a wave of public outrage. In the meantime, there is ample, lingering resentment directed toward those involved with the 2008 debacle. Subprime borrowers, high-risk lenders, reckless investors, complex derivative traders, the credit industry, the rating agencies, Wall Street bankers, the U.S. Securities and Exchange Commission (SEC), the secretary of the U.S. Department of the Treasury, and the Federal Reserve are all among the favored targets of angry critics. In the long list of potential bad actors in the financial crisis, accountants, analysts, and lawyers have been among those who have come in for sharp criticism.

There is no doubt that in-house and outside counsel played a vital role in the corporate decision making that resulted in the collapse. Lawyers were advising their clients when critical decisions on financial transactions were being made. For the most part, however, that legal advice remains confidential. Meanwhile, unanswered questions regarding what attorneys said and did have left a lingering feeling that lawyers were somehow complicit in the collapse.

“I think there are a substantial number of questions about where the lawyers were, and [those questions] haven’t been answered yet,” says Benjamin W. Heineman Jr., former senior vice president and general counsel for General Electric. “In contrast to Enron and WorldCom where there were senior people at the top of the corporation committing fraudulent acts and who basically blew the systems apart and cowed everyone, here in the financial crisis, it’s fair to say all systems failed. I think it will turn out to be more of a question of negligence than of intentional acts, though.”

Not everyone would agree that the attorneys’ actions lacked intent. Critics have suggested that professionals in accounting and law may have used their expertise to conspire with corporate chiefs to either design or justify irresponsible schemes. Unfortunately, the facts are not known and may never be.

“The big banks have huge legal departments, and they also have huge law firms on retainer,” says John Dunbar, coauthor of the Center for Public Integrity report titled “Who’s Behind the Financial Meltdown: The Top 25 Subprime Lenders and Their Wall Street Backers.” “These big banks were lousy with lawyers, so where were all the lawyers when this was going down? I think it’s possible they played a role in this, so I think it really is fair for all of us to ask, Where were all the lawyers as the system was crashing right in front of them?”

Dunbar is not the first to ask this question, and he won’t be the last. But the answer may be far more difficult to tease out than finding wrongdoing in the work of accountants and analysts. After all, lawyers have a unique relationship with their clients, one that is protected from public view by attorney–client privilege.

“Because of ethical rules on confidentiality, we don’t know a lot about what advice lawyers were giving to clients,” says Deborah L. Rhode, a visiting professor of law at Columbia Law School in New York and a legal ethics scholar. “We don’t have the kind of evidence that we had, for example, with Enron about what the lawyers’ roles were.

“It’s possible that ethical rules may have given lawyers license to participate in financially irresponsible transactions, many of which were not just at the fringes of fraud but may have stepped over the line,” Rhode adds.

Yet even Rhode admits it may be hard to divine whether there was fraudulent activity since the attorney–client privilege keeps legal advice from public review. That is why, she suspects, the public, the legal profession, and government regulators may have to wait for their answers, or not get them at all.

For Rhode and others, a more effective line of exploration may be discovering how the profession has reached this crossroads again. It was just a few short years ago that, in the wake of the Enron disaster, lawyers received the equivalent of a regulatory spanking by Congress and the SEC when rules were enacted to require new reporting by attorneys—reporting that does not appear to have had any impact on the current financial crisis. How have lawyers turned out to be participants, or at the very least interested bystanders, in another financial train wreck? Experts say that a number of key factors has contributed to this latest legal collision, and that some of these factors—competitive and economic pressures inside the legal profession, evolving relationships between corporate clients and attorneys, and the legal requirement that lawyers be both client guardian and public gatekeeper—may be difficult for lawmakers, regulators, or even law firms to change.

Déjà Vu, All Over Again
When the Financial Crisis Inquiry Commission (FCIC) held its first meetings in the fall of 2009, beginning in earnest its late-to-the-party investigation into the causes of the financial market collapse, many outsiders hoped the panel would focus the spotlight on the guilty parties and powerful interests associated with the crisis—most of whom have so far eluded punishment or even moderate public disgrace.

If any group is primed to unearth the role of lawyers in Wall Street’s failure, it is the FCIC, with its subpoena power and broad charge to investigate every corner of the crisis. Chaired by Phil Angelides, the former treasurer for the state of California, the 10-member, bipartisan FCIC has been compared to the National Commission on Terrorist Attacks Upon the United States (also known as the 9-11 Commission), which investigated the causes and failures that led to the attacks of September 11, 2001.

In his opening remarks at the FCIC’s first public meeting, Angelides said his panel would “leave no financial stone unturned,” noting that the commission’s work would have the same sweeping impact as the Pecora Commission hearings during the Great Depression. “We have been called upon to conduct a full and fair investigation in the best interests of the nation—pursuing the truth, uncovering the facts, and providing an unbiased, historical accounting of what brought our financial system and our economy to its knees,” Angelides said.

The Pecora Commission set off on a similar mission in the 1930s when it was charged with investigating the Great Crash of ’29 and recommending legislative solutions such as the far-reaching Glass–Steagall Banking Act of 1933, a comprehensive reform of the financial services sector. The Glass–Steagall Act truly was groundbreaking for any era. It segregated commercial banks from the credit markets, and established the Federal Deposit Insurance Corporation (FDIC), facilitated the eventual establishment of the SEC, and enhanced the regulatory powers of the Federal Reserve over banks.

“Our job is not as we see it to embarrass people but to produce facts,” Angelides told a group gathered for a conference of the New America Foundation, a nonpartisan public policy group that invests in new ideas, in November. “And if facts embarrass people, so be it. And if in fact they unveil wrongdoing, so be it. . . . The most important thing that we can do is to shed light, and not heat. To unveil what happened, so that Americans can have a clear understanding of history, so we do not repeat it.”

Not repeating history has been the goal of any number of well-meaning commissions, judges, and lawmakers in the past, but still Wall Street and Washington seem consigned to repeat past lessons. In the past two decades alone, financial and corporate scandals have prompted observers to investigate the role of lawyers in the savings and loan crisis of the 1980s and 1990s, and then again in 2001 when Enron’s backroom deals and risky leveraging bankrupted the company.

After the government took over the failed banks, including Lincoln Savings and Loan Association, during the savings and loan crisis, Charles Keating Jr., chief executive officer of Lincoln’s parent company, challenged the move. In rejecting the challenge, Judge Stanley Sporkin of the United States District Court for the District of Columbia asked: “Where . . . were the outside accountants and attorneys when these transactions were effectuated? What is difficult to understand is that with all the professional talent involved [both accounting and legal], why at least one professional would not have blown the whistle to stop the overreaching that took place in this case.”

Investigators asked the same questions in 2001 when billions of dollars in debt from unsuccessful projects and investments resulted in the ruin of Enron, and, eventually, triggered the largest bankruptcy in history, up until that time. Enron’s executives had misled its board, employees, and investors by using accounting loopholes and poor financial reporting to hide the company’s rotting core.

Lawyers in both the savings and loan scandal and Enron bankruptcy paid the price for their wrongdoing with prison terms and financial penalties. Enron’s downfall also impelled Congress to approve the Sarbanes–Oxley Act of 2002, prompting the promulgation of new rules that set stricter financial reporting for public companies. Along with provisions for tougher penalties for defrauding shareholders and increased accountability for auditing firms, language was inserted into the act requiring attorneys to report “up the ladder” to senior executives if they know or fear a company is doing something that is not legal.

“The reporting-up process, which is really intended to make sure the board can perform its oversight role, is a very worthwhile process,” says Linda L. Griggs, a partner at Morgan, Lewis & Bockius LLP and the former counsel for the SEC’s chief accountant. “That process is a good process. The lawyer shouldn’t have knowledge about some potential violation of the law without taking some individual action. The lawyer needs to be sure that he or she is able to do the job.”

Many have argued that the legislative and regulatory responses to the Enron abuses were little more than symbolic, and they will likely be the same in the FCIC investigation. “A lot of the requirements that companies jump through—a lot of the paper hoops that are required—may or may not accomplish anything substantive,” Griggs adds. “It’s a great full-employment program for lawyers and auditors. It’s not at all clear, in many cases, that it accomplishes the purpose of the regulation.”

There is some curiosity about what could come out of a massive investigation into the financial crisis, including peeling back the layers of confidentiality to reveal the role attorneys played. So far, many of the lawyers going to jail or being sanctioned for their advice are those who worked to contrive fraudulent tax shelters, for example, as in the case of the attorneys who devised tax evasion schemes for auditing firm KPMG. “The organized bar and law firms make it very costly for regulators and prosecutors to go after lawyers. They’re very well connected. They’re very powerful and have a lot of capacity to make life miserable,” says Robert W. Gordon, the Chancellor Kent Professor of Law and Legal History at Yale Law School. “All lawyers talk about the noble vocation of the lawyer who stands up for clients against the power of the state, as if it’s a lonely and heroic vocation. They’re a powerful lobby, and they’ve been pretty immune.”

The one group that is willing to take on lawyers is the state attorneys general, many of whom have been rapid in their pursuit of financial services companies in hopes of recovering lost investments for their states and citizens. Chief among them is New York State Attorney General Andrew Cuomo, who is the prosecutor for Wall Street’s home state and who has been dogging law firms and lawyers to bring more and more of these problems to light, including those involving both AIG and Bank of America.

Many in the legal profession feel that corporate counsel needs to take a more expansive view of their functions to ward off further run-ins with the agencies. It is possible to comply with the technical requirements of the law but still drive a corporation into bankruptcy. Enron is often used as an example of this behavior. What Enron was doing in creating its financial devices was asking lawyers to decide if they complied with the law.

“I basically think the lawyers saw their roles as just giving remotely plausible legal arguments for whatever it was the clients wanted to do, and they believed they had discharged their duty,” Gordon says. “I think that’s a serious misconception.”

Still, there are a number of factors that may have contributed to that perception and, ultimately, to the financial crisis. These factors may demand new thinking to ensure that they do not result in similar misfortune in the future.

A Business In Flux
Today, more than ever, corporate lawyers find themselves in a tenuous position. Corporate America is constantly evolving, and the multifaceted transactions that are the fabric of the financial services industry demand a level of knowledge that surpasses the skills of even the savviest corporate counsel. More importantly, clients often require lawyers to produce a business judgment as well as a legal judgment. In those cases, lawyers are at a serious disadvantage: forced to keep abreast of the financial developments to carefully weigh the legal considerations for any transaction or agreement, while having to balance the legal concerns in relationship to those pertaining to business.

Georgetown University Law Center professor Milton C. Regan Jr. wrote about this problem in a 2005 article titled “Teaching Enron,” which appeared in the Fordham Law Review. In the article, Regan postulated that when it comes to the intricacies of business, a lawyer may not “fully understand, and is not responsible for understanding, the business purposes that animate and the economic consequences that flow from a given transaction. The lawyer is entitled to assume that the client has a good business reason for wanting to enter into the transaction, and need not become an expert in the intricacies of the company’s business operations.” Yet he points out that the most effective corporate lawyers understand their clients’ businesses and goals, if only to keep their clients as their clients.

But Stephen Gillers, a professor at New York University School of Law and an expert in legal ethics, argues that lawyers have a responsibility to be more than the blank slate upon which their clients can write. He adds that being a lawyer is more than acting “lawyerly,” and that the test of a principled attorney is how he or she behaves when there is no accountability and when no one is watching.

“Honor, shame, and empathy, then, make up the glue of civilization,” Gillers said in a speech at the Central Synagogue’s Jethro Shabbat Program and Dinner in New York City in February 2009. “Without them, things will fall apart. And as bad: when the public sees a loss of honor in how institutions and professionals behave, we have a loss of trust. That is what we see happening now.”

But some worry that in the quest for the guilty by activist attorneys general, Congress, the FCIC, or federal investigators, the attorney–client privilege—a vital component of any corporate client relationship—will be roughed up in the process. It is not a right embodied directly in the U.S. Constitution, but it has been a part of common law and an integral safeguard for attorney–client relations for more than 400 years. “I think it’s most at risk during crises,” says Stan Anderson, senior counsel to U.S. Chamber of Commerce President Thomas J. Donohue. “The people or prosecutors say they want to get to the bottom of whatever they’re looking at, and they decide a person is not going to testify, and they’re going to force them to do it.

“To make society work, you have to have the balances. We’ve got to make sure that even though in these crises that are legitimate crises, and where the abuses are clearly abuses, you still need to make sure there’s fundamental fairness.”

Partner v. Gatekeeper
Since lawyers play such a pivotal role in public accountability, they carry with them enormous responsibility. The law puts them in the business of assuring third parties—investors and regulators such as the Internal Revenue Service—that their clients are in compliance with the law. They get paid, in effect, for engaging in the business of being a gatekeeper.

“Lawyers want to be partners with the company, but they also have a larger responsibility to society and to the profession—not just in a technically ethical sense, but in a more broad ethical sense,” says Heineman, the former senior vice president and general counsel for General Electric. “They don’t have to lie down on the rug. They should at least have enough guts to be wise counselors. Where are the statesmen who see something smelly and can go up to the senior lawyer or the general counsel and speak the truth to them?”

Post-Enron, many lawyers object to being forced to play the role of the reliable gatekeeper. They do not want to snitch on their clients, so they often buck the job requirement of serving as crucial intermediaries between the legal system and their clients. Still, lawyers are the means by which the law is strained and diffused. They are the instruments of compliance with the law.

“The role of the lawyer is very complex. Lawyers are not like other gatekeepers and other service providers, like audit firms. Audit firms have a very clear public responsibility. Their duties run to the public, they are public accounting firms,” says Arthur Laby, an associate professor at Rutgers University School of Law–
Camden who has written on this topic. “The lawyer’s fidelity generally must be to the client and not to the public. Some gatekeepers are independent, and they have to act independently from their clients.

“Auditors and analysts are examples—they look at a situation and analyze it independently from their own clients,” Laby adds. “Lawyers are dependent gatekeepers. They depend on the client to determine the nature and purpose of their work. They have to be confidential loyal advisors and advocates for their clients.”

Lawyers are strategically situated to do a great deal of good for their corporate clients as well, experts say. Their good judgment provides an additional value to clients, and it is both a logical and ethical conclusion of their relationship with the client. In serving this function, a lawyer’s prime goal is to ensure the well-being of the client’s company. That good health is determined not just by the legal prowess a lawyer brings to his or her post, but also by the ability to recognize pitfalls lying ahead and to encourage a client to avoid them. “If the lawyer is to avoid the good and to encourage executives or clients to take huge risks with other peoples’ money, that really seems like a perversion of the lawyer’s function,” says Gordon, the Yale Law School professor.

“All we’re trying to do is give a view of the law, but then you say the view of the law is hardly an objective view. It’s one that is stretched and slanted in favor of your client,” Gordon adds. “Objective legal advice has to assume that some outside eyes are going to be focused on this transaction, and the client has to know how the relevant outside world is likely to react to a transaction.”

Evaluating the success or failure of an attorney or law firm in its most basic sense comes down to whether the firm is able to keep the client out of trouble, some observers say. Those attorneys who would focus exclusively on the technical aspects of the law risk imperiling their clients—corporate boards and shareholders. If a venture requires a huge legal or business risk, then it is hard to see how a lawyer is adequately able to discharge his or her duty by smoothly assisting the client into a collapse.

A Competitive Atmosphere
There is a certain nostalgia in the corporate legal community for the “old days,” when the custom was to give objective legal advice based on a long-term relationship with a client that often encompassed that client’s entire line of business. By encouraging a long-term association, the firm got a chance to befriend the client in a way that is not possible today. Clients almost never switched firms, and this partnership created an environment where candid advice was shared without negative consequences for the law firm because no one feared losing their standing.

Today’s competitive business climate—and this was true before the economy faltered—makes it tricky to sustain long-term relationships between clients and outside counsel, or even in-house counsel for that matter. It also makes it difficult to give advice to clients who may not want to hear it. “It’s a lot harder than it used to be to stand up to clients and tell them there are serious risks entailed by the course they want to embark on, and they should reconsider,” Gordon says. “Every lawyer wants to give positive advice to clients. It’s part of their job to help clients. In the past, law firms and top executives in the firms knew each other personally, so it was easier to deliver bad news.”

The hallmark of those relationships was the substantial amount of trust and confidence shared between lawyers and clients. What has replaced that camaraderie is fragmentation. Lines of business are auctioned off to different law firms, and there is much less opportunity for attorneys to become knowledgeable about a company’s business plan. This new type of relationship produces narrower guidance that is confined to technical issues, and often divorced from the political and public relations consequences of certain business activities.

That was the case with Enron, where executives were adept at spreading their business around so broadly that nobody, including its own general counsel, had a clear picture of the whole field of the operation. Enron’s executives were skilled at seeking advice for discrete transactions, thus blocking anyone from taking an objective, comprehensive look at the entire business plan. Many observers believe the same thing happened during the financial crisis, but again they say that the attorney–client privilege may obscure all of that from view.

With all this as a backdrop, it is no wonder that lawyers have a tendency to pull in their horns, focusing their advice on technical legal requirements in an effort to dodge tough questions about broader risk. If clients want to take a business or political risk, that is a decision for them to make. “I do think that more and more lawyers are simply playing the role of an obliging butler to their clients who believe their function is to serve up whatever their clients want to hear,” Gordon says. “With the apparent competition among lawyers for clients, clients do feel enabled to shop around for law firms that will give advice they want to hear. We know that happened in the Enron case. I think this is a casualty of the increasing competition for lawyers’ services, and the tendency of clients to shop around for very compliant advice.”

The Boom Mentality
It would be too easy to fault lawyers for experiencing their own “irrational exuberance” in the past decade as they watched stock values climb to altitudes never before experienced. After all, the boom mentality spread throughout corporate America like a virus, obliterating even the mightiest sense of caution or reserve. “In the boom market, everybody thinks that being creative and aggressive is the way to go. In such an atmosphere, there’s no room for traditional lawyers and their conservative approach to business and risk,” Gordon says. “Traditionally, some of the value lawyers added to market and business transactions was the invaluable role of the doom-and-gloom guys.”

In decades past, lawyers were the people who were there to encourage their clients to think about the things that could go wrong. In fact, lawyers were the specialists in knowing about things that could go wrong. In the boom market, clients were less interested in listening to people who brought bad news to the table. Faced with clients looking for fair-weather friends, law firms chose to shed their old-fashioned décor of responsibility and solidarity, redecorating, instead, with the same buccaneering and risk-taking approach as their clients.

Over the past five years, this became a potent combination. Before the housing bubble burst, anything seemed possible, both for corporations and their legal counsels. The only problem for the buccaneer attorneys, of course, was that they also were expected to keep an eye on their adventurous clients. Gillers, in his February 2009 speech, said:

Most American lawyers are not trial lawyers. They are counselors or advisers, operating where there is no judge and no adversary. No one is watching. And there may never be. Then, the temptation is to push the limits, sift the language of the law, find hidden meanings. Now, our social understanding is that law is not endlessly pliable in this way. But the problem is this: It can be made to be because law, after all, is only a language and language is pretty pliable. In the hands of a creative, motivated lawyer, with a demanding client, the language of the law can have astonishing elasticity. Through interpretation, the rule of law can be turned into what it is not. A fine exercise perhaps if you are interpreting Shakespeare or Kafka. But not for law.

With lawyers matching the mood of their clients, it is possible they failed to sufficiently warn the latter of the downside risks and adverse consequences of exotic derivatives and other transactions—that is if they knew what those even were. The motto for the boom times was: Next year, I’ll be gone and you’ll be gone. That proved especially prescient in a negative way at the end of 2008 and the first half of 2009, as corporations and law firms ejected their staffs by the hundreds.

Despite the hard-won lessons of the past year, everyone still seems to be focusing on grabbing as much bonus money or as many fees as they can, forgoing any long-term payoff. “What we keep running into is the casino mentality of our stock market, but that casino mentality is not sustainable,” says Griggs, the Morgan Lewis partner. “Short-term thinking isn’t good for law firms. You have a much more sustainable practice if you develop a long-term relationship with clients. Maybe its not as much fun because you’re not involved in the sexy, new derivatives markets. Short-termism remains a huge problem in our economy.”

A Cautionary Tale
Short-term thinking was likely at the heart of the deal—and the subsequent troubles plaguing the deal—between Bank of America and Merrill Lynch & Co., Inc., a merger that has turned out to have all the twists and turns of a John Grisham potboiler, with its firings, secrets, rogue judges, and obsessive prosecutors.

Bank of America agreed to acquire Merrill Lynch more than a year ago for $50 billion in stock at the height of the financial meltdown. The deal was controversial for a number of reasons, most prominent among them the government’s intense pressure on Bank of America to buy Merrill Lynch to avert an even greater economic disaster if the latter were to fail. What has only become clear with the subsequent SEC investigation is that Bank of America failed to inform shareholders, before they approved the deal, that Merrill Lynch was scheduled to pay up to $5.8 billion in bonuses before the deal closed. Bank of America also was allegedly keeping projections from its shareholders that Merrill Lynch likely would hemorrhage more than $10 billion in the fourth quarter of 2008. (It eventually lost some $21.5 billion.) Those losses hurt Bank of America’s bottom line, and the company was able to collect another $20 billion in U.S. government bailout funds to offset the losses.

“The deal was in the best interest of the financial system, the economy, and the country,” Brian T. Moynihan, Bank of America’s president of consumer and small business banking, told the U.S. House of Representatives Committee on Oversight and Government Reform at a hearing on November 17, 2009. “… The failure of Merrill Lynch, particularly on the heels of the failure of Lehman [Brothers] and other firms, could have exacerbated the systemic havoc the country faced.”

After months of investigation, the SEC reached an agreement to fine Bank of America $33 million for withholding the bonus information. But all bets were off when Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York rejected the settlement in October 2009, noting that it “suggests a rather cynical relationship between the parties: the SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger, the bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.” The trial is scheduled for February 2010.

Meanwhile, there are a number of lawsuits pending against Bank of America for not sharing information about the growing losses at Merrill Lynch in the fourth quarter of 2008. “Recent testimony to Congress suggests that [Bank of America] executives knew that Merrill Lynch was suffering billions of dollars of widening losses before the shareholder vote, yet improperly withheld this information from investors,” said Ohio Attorney General Richard Cordray, lead plaintiff in a shareholder class action lawsuit against Bank of America, in a written statement.

Meanwhile, the House Oversight Committee has been dissecting the merger for most of the past year, holding its fourth hearing in November. Three of the key executives active during the merger were there to defend themselves and the company’s decisions. A fourth witness was former Bank of America general counsel Tim Mayopoulos who now serves as general counsel for Fannie Mae. Mayopoulos was fired on December 10, 2008, without explanation and just days after telling the bank’s executives that they did not have a good legal case to invoke an escape clause in the merger due to Merrill Lynch’s anticipated losses. In testimony, executives claimed Mayopoulus was a surprise victim of a 10 percent reduction in Bank of America executive staff.

Lawmakers were skeptical. “I want to make an observation, with regards to Mr. Mayopoulos, who was abruptly fired in the middle of this transaction. He does not know why he was fired. His boss, Mr. Moynihan, says he does not know why he was fired. The board members present don’t know why he was fired. Either it was divine intervention or someone didn’t like his legal advice,” said Edolphus Towns (D–N.Y.), who chairs the House Oversight Committee. “Being I’m from Brooklyn, I’m leaning towards that last one. It looks to me like [former Bank of America CEO] Ken Lewis and others at the company weren’t about to tolerate someone who might get in the way of what they had planned to do at this shotgun wedding.”

To complicate the story, Bank of America agreed to waive attorney–client privilege and work-product protection in the pending trial on Merrill Lynch’s bonuses to argue that it was just following in-house and outside counsel’s recommendations when it put information about the bonuses in a secret, undisclosed schedule, a standard industry practice. The decision to drop the attorney–client privilege after asserting it earlier in the year is viewed by many as an opportunity to chip away at the privilege.

In the past decade, it has become progressively more common for prosecutors, the SEC, and judges to pry open the sanctity of the attorney–client privilege and work-product protections. Investigators have felt especially emboldened because the cases involve massive amounts of fraud. “When you have prosecutors coming in and sitting down and saying they’re going to throw the book at you unless you waive the privilege, that’s problematic,” says the U.S. Chamber of Commerce’s Anderson.

It may prove problematic for Bank of America as well, since it has waived the privilege on the bonuses but retains it for Merrill Lynch’s losses, as a myriad of lawsuits move forward this year.

Lessons to Be learned
Even as the beleaguered attorney–client privilege faces assaults from prosecutors and investigators alike, it remains strong enough to impede a panoramic view of the financial collapse of 2008. Whether lawyers did their jobs, went beyond the call of duty in alerting their clients to the dangers ahead, or stood by and quietly refused to act, the answer remains an unknown. “We don’t know how many times the general counsels of some of the firms that imploded may have advised quite strongly about the potential risk and advised executives and boards against it,” Laby says. “We may never know because of the attorney–client privilege and client confidentiality. That’s definitely the tradeoff of our venerable privilege.”

Despite the void of vital information, there are still some clear lessons to be learned from the calamity, even if the exact dimensions of the crisis’ origin and lifespan are not yet clear. “I think the lessons we have learned as attorneys is to try to look at the worst-case scenario and try to imagine what would happen next. Maybe people didn’t do that enough, and maybe that’s what we all need to learn,” says Griggs, who encourages colleagues to trust their instincts and to be vigilant. “Hopefully everybody has learned to imagine the worst and operate with that knowledge. Will we continue to remember that when the economy improves? I don’t know.”

Going forward, some have suggested that the best way to handle these ethical issues in corporate America is to have higher expectations of attorneys—demand that their advice on financial transactions be informed by a wider knowledge of complex accounting principles and a deeper understanding of how to balance their roles as guardian and gatekeeper. But others reject such suggestions, saying that lawyers are first and foremost legal experts, and that their focus must always be on the law and their clients’ needs.

Unfortunately, Bank of America may be the only company required to share its legal secrets with the world, making it nearly impossible to pick apart the role of lawyers during the crisis. This prospect has some worried. “Not only have we not necessarily managed to punish anybody, we haven’t made a whole heck of a lot of progress in learning exactly what happened,” says Dunbar, who authored the Center for Public Integrity’s investigative report. “People have short memories, and we’re losing our window of opportunity. Where are we right now? We’re in the same position we were a year ago, and any damn thing could still happen.”

Sarah Kellogg wrote about the Obama administration in the March issue of Washington Lawyer.