When times get desperate, the desperate turn to the lawyers. Only sometimes the lawyers are desperate, too.

On Monday, for example, a specialist housebuilder told me that a lawyer aiming to buy a £2.5 million mansion had just cancelled the deal. “His firm has a big exposure to Lehman and he isn’t expecting to see any of his bills paid.” Meanwhile, there were behind-the-scenes discussions in law firms acting for Goldman Sachs about whether it would be prudent for them to ask for upfront payment — a development that would have been unthinkable just a few months ago.

But that’s just a small part of the story. On the bigger chaotic picture, the activity level is almost frenzied. Linklaters’ lawyers in particular have been run off their feet. They are acting on the UK end of the Lehman collapse and are also involved with Lloyds on the HBOS takeover. So expect jubilant postings of more record profits.

Another firm that has found itself in the right place at the right time is Lovells, which has picked up the Financial Services Authority’s Lehman work. “It has been hectic — put it that way,” said David Hudd, head of finance at Lovells, at 5 o’clock last Friday afternoon in what may have been the biggest understatement of the week. Among other things, the pressure was coming from counterparties to derivative trades with Lehman Brothers who were anxious about where they stood. “Understandably their inquiries were urgent and it was useful that I’d had experience of one or two other crises — such as the Baring collapse — so we knew how to deal with this volume of work.”

While there are some precedents, there is general agreement that there has never been anything on this scale. “We’re in uncharted waters,” Howard Morris, CEO of Denton Wilde Sapte, said. “All the ‘givens’ are gone and, what’s more, I don’t see this as the end.” The anxious discussions on Tuesday about the prospects for the proposed US “bad bank” confirmed Morris’s point. Meanwhile, the ban on short-selling, so widely welcomed by politicians and commentators, was characterised by Denton Wilde Sapte –— and, indeed, many other lawyers — as largely showboating. Jonathan Herbst, head of financial services at Norton Rose, went even farther: “It is the most significant intervention in the market in the post-Big Bang history of UK regulation. Time will tell whether it was the right response or just another nail in the coffin of London’s reputation as a light-touch regulatory regime. The jury is out on this but no one should be under any illusions — any flight of mobile brokerage and asset management expertise from London would have devastating results for the real economy.”

Meanwhile, significant litigation was appearing inevitable. “It will take a year or so to emerge and then three to four years to sort out,” one litigation expert said. This view was echoed by the former Lord Chancellor, Lord Falconer of Thoroton, who was quoted as saying: “There is going to be litigation on a scale that we have not seen before”, leading to “a new era” for litigation and dispute resolution.

“Many of these financial instruments, as we know, are new and, until now, have not been stress-tested,” Rhodri Davies, QC, of One Essex Court, said. “Once disputes arise they are put under the microscope and all kinds of unpleasant features may be detected. Often these agreements have been signed in the early hours of the morning. They are long and complicated. Sometimes they contain internal inconsistencies or duplications of the same point in a slightly different form. In normal times nobody bothers or has occasion to go back and examine them; in the crisis conditions we have seen in the past week, where phenomenal amounts of money have been lost, then problems are raised that people could not foresee. The fight can get very ferocious over whatever money is left.”

Hedge funds, too, are likely to get in on the litigation act because, as Lord Falconer put it: “Hedge funds are starting to regard litigation as an asset class.” In any case, “hedgies” were bombarding their specialist advisers last week — and not only about the new short-selling regime. Rupert Boswall, of Reynolds Porter Chamberlain, for example, was inundated with inquiries from hedge funds concerned to move their prime brokers. “If they normally use, for example, Morgan Stanley, then they might be thinking of moving and would want to know their rights and the issues involved in coming out,” he explained.

When the dust settles on the European and US economies there will still be people with money who will be ready to reinvest, but they will be the sovereign wealth funds from the Middle East, Japan and China. “They’ve had their fingers burnt over the past few months so they will be very cautious,” Morris said. “But they will have cash and they will buy. At the end of it we’ll find that many of our most important institutions are foreign-owned.” And that may be the most important legacy of these extraordinary weeks.

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