The Downfall of Weil Gotshal

The leaders of Wild Godshaw, one of the most storied firms on Wall Street, are planning to dissolve the firm. What happened? A law firm is really only its talent, and so if they could get a better offer from somewhere else, or had a reason to leave, that can put any firm on unstable ground. Plus, official data shows China's economy is booming, but a growing number of economists aren't so sure that's actually what's happening. The Fed holds rates steady, but leaves the door open for a rate hike at its next meeting in December. It's Wednesday, October 28th. I'm Alex Osalep for the Wall Street Journal. This is the PM edition of What's News, the top headlines and business stories that move the world today. The Fed held interest rates steady today, like markets expected, but two officials dissented, saying the Fed should raise rates. The central bank also upgraded its assessment of the U.S. economy, saying that economic activity is expanding at a, quote, "strong pace." That's a bump up from how officials describe growth before, as, quote, "solid." WSJ Economics reporter Matt Grossman joins me now. Matt, no big surprises here in terms of interest rates, but two officials Lisa Cook and Cleveland Fed President Beth Hammock voted in favor of a quarter point rate increase. What does that tell us about what the Fed might decide at its next meeting in December and moving forward from there? It tells us that the momentum is still toward higher interest rates. The dissent from Hammock really wasn't a surprise. Hammock is one of the more hawkish members of the committee, and this is her third dissent this year in favor of higher interest rates. The dissent from Lisa Cook is a little bit more of a surprise. She's never dissented from the Fed's consensus decisions before in her four years at the Fed. In fact, she's probably better known as the governor that Donald Trump is trying to remove from the Fed, so I think her dissent shows you that it's an open discussion at the central bank about what the timing of further hike should be. Inflation hasn't moved more towards the Fed's target rate of 2%, and officials seem to be on board with raising rates again, as we just discussed. During his press conference this afternoon, Federal Reserve Chairman Kevin Warsh said the bank remains laser focused on inflation. Real activity is clearly pointing in the right direction. That's good news. So Matt, why didn't the Fed raise rates today? That was one of the tougher questions that Warsh got, because he really needs to persuade investors that the Fed is committed to getting inflation back to target. He said that the Fed has already done a lot of that works, and that the September rate increase demonstrated that the Fed is going to take action to get inflation back down. Having done that, Warsh said that he and his colleagues can now take advantage of some of the economic data that the Fed's going to get before their next meeting to basically confirm that that should be their next step and decide exactly what the path forward should be. Journal economics reporter Matt Grossman, thanks so much for joining us. Thanks. Short-term Treasury yields fell during Warsh's press conference. In stocks, the S&P and NASDAQ both closed up about 0.3%. And Wendy's stock jumped more than 15% today, after try-on fund management, the hedge fund run by Nelson Peltz, offered to buy the fast food giant for $1.4 billion. The fund, a long time shareholder in Wendy's, argued that it's that "a critical juncture" and would be better off as a private company. While Gotchall is one of the most storied law firms on Wall Street, it was founded in 1931 and built its business on restructuring, that is, bankruptcies. But in recent weeks, its problems have piled up, and now it's hit a breaking point. The journal has learned that this afternoon, while's leadership told partners that it plans to dissolve the firm. Legal Affairs reporter Erin Mulvaney joins me now to discuss just what happened at this law firm. Erin, while it's a white shoe firm that's been around for almost a century, it got famous by working on some of the biggest bankruptcies in history, like Lehman Brothers, General Motors, and Enron, seems like pretty solid footing. So when did you first start hearing that there were problems at this firm? There's pretty generally in the legal industry, partner churn, but this summer around August, we reported that there were these pretty big defections from the firm that a few insiders were pointing to as a pretty sharp signal that something was going on at wild. And it kind of snowballed from there, and it's a little shocking when I looked back at that first story because it was only August 20th actually when we wrote it. Last year, the firm brought in more than $2 billion in revenue, which seems pretty healthy, but you report that it's fallen behind other firms in profit. Why is that? And what did the effect on while? Their growth has stagnated over more than a decade. They actually did have revenue and profit gains last year, but both metrics were between say three and four percent growth. The top 100 firms was more like 14 percent. And some of the even top rivals, they were growing profits by 20, 30 percent. It's a healthy firm, but it didn't have the same catapulting success as other firms that are its peers. And so did that leave it vulnerable to having stars poached by rivals? Yes. So the firms that have those kind of enormous revenue gains do have the flexibility to poach some of the best talent. And a law firm is really only its talent. And so if they could get a better offer from somewhere else or had a reason to leave, that can put any firm on unstable ground. This snowballing that you were talking about seems like a really picked up speed in the past week or so. What was the impetus there? At the beginning of this year, the firm had been going through a leadership succession. And so there were just open questions about its future. And then while lost its largest and most influential top generator and deal maker, Michael IEllo, he had been at the firm for 20 years. It's a name that was often synonymous with while. When he decided to step down in September, there was just a big question mark of its future. If you lose an influential partner to that degree, could they survive? And honestly, with a financially healthy firm, the answer wasn't automatically no, but the series of events that followed really made it less and less likely that they were going to cull their way out of this while was actively looking for a merger partner. We saw even more defections from people who were on their management committee, which makes decisions and runs the firm. And then when there was news that the talks dissolved on this potential merger plan with another firm, it just was a run on the bank. So is while's downfall kind of a one off or is it indicative of this broader moment of instability in the legal field? I personally think that this story is not just about while. I think it shows how vulnerable, even the most reputable law firms are in the current legal marketplace, where these firms are making so much money, they're looking more like corporations, and the bigger ones are outstripping everyone at every level. And it's happening really fast. Other firms would be vulnerable if there is a loss of confidence from their partners that are the ones bringing in money. And this story shows what could happen if you really do lose your partners. That was WSJ Legal Affairs reporter Aaron Mulvaney. Coming up, Flavio Bolsonaro flees to Miami after losing Brazil's presidential election and a deadly train crash in Spain, more after the break. Flavio Bolsonaro, who lost the Brazilian presidential election on Sunday, arrived in Miami today. Last night, he fled to Argentina with his family, where he then boarded a private plane to the US. WSJ National Security reporter Vera Bergangruin has been following the story, and she says people close to President Trump helped orchestrate Bolsonaro's arrival. The Bolsonaro's have really deep relationships with a lot of people in Trump's inner circle, bringing people like Trump adviser Jason Miller, Steve Bannon and some others, have been helping out behind the scenes. And in terms of the US government involvement, it was limited largely to getting visas for them to be able to enter the country. But people close to President Trump and his inner circle helped coordinate all of this. We know that they helped him get into Argentina, that they helped set up this private plane to take him to Miami, and that they helped fast track a visa and other things to make sure that they could come into the country. So what does Bolsonaro plan to do now? Vera says he's not likely to return to Brazil immediately. For now, it looks like he does plan to stay in the US, and he plans to set up some kind of shadow government in exile, according to some people who he's spoken with. They are really hoping to rally the Trump administration behind their claims, which are proven that Lula somehow rigged the election. So far, President Trump has not acknowledged the results of the election, which more than 50 world leaders, including Latin American leaders from all sides of the political spectrum have acknowledged. Of course, it's important to remember, there's only a week until the US midterm elections. And what I'm being told is that the White House itself does not intend to spend much political capital on this issue. This upcoming week. But now we're going to see the Bolsonaro's really set up efforts to get Trump to come down on their side and try to invalidate the results of the Brazilian election. Turning to Europe, a high-speed train crash in Spain this morning killed at least 68 people and injured dozens more. A train that was traveling around 125 miles an hour rammed into the back of another train that had stopped on the tracks. The incident is the second major rail crash in less than a year on the high-speed line between the two. the capital, Madrid, and Andalusia, after 46 people were killed in a collision near Cordoba in January. Spain's Train Drivers Union said it would go ahead with a planned strike for tomorrow to protest the country's lack of rail safety. And Spanish Prime Minister Pedro Sanchez said in a press conference that it was unacceptable for Spain to suffer two high-speed train accidents in a year. There have been questions about the accuracy and reliability of official Chinese data for a long time. And now, the growing discrepancy between signs that China's economy is stagnating and that official data is making that skepticism even louder. For example, while Beijing says the economy grew 4.5 percent just in the third quarter, some Western analysts have a much dimmer view. Their estimates for the whole year have Chinese growth at 0 to 3 percent. NWSJ reporter Katrina Northrop says a growing chorus of Chinese economists also say the country's unemployment rate doesn't reflect the true state of the job market. The growing gait economy means that a lot of people have some employment so they might not be counted as unemployed, but they may be under-employed and have not very good wages, not very many benefits. Fewer working hours, that group of people is in the hundreds of millions. It is not accurately reflected in the unemployment rate. Katrina says that if the actual numbers are worse than the official statistics indicate, that could mean the Chinese government may need to do more to bolster the economy. Beijing has rolled out some stimulus this summer and fall, but mostly it's been incremental and economists have questioned whether it will really give China the boost it needs. China has been very reliant on exports for growth given that consumer spending and the property crash at home has really dragged on the domestic economy. So if the data is really worse at home than what is published, then this could make the reliance on exports more intense than it is today, which is already inflaming tensions with the rest of the world and with China's trading partners. China's national bureau of statistics didn't respond to a request for comment, but in the past, it's defended its economic data. And that's what's news for this Wednesday afternoon. Today's show is produced by Danny Lewis with supervising producer Tally Arbell. I'm Alex O'Solev for The Wall Street Journal. We'll be back with a new show tomorrow morning. Thanks for listening.