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Analogies are imperfect (that's why they're called analogies), but here's an interesting thought experiment tying together the wild rides investment banks have had on Wall Street during the past few weeks and the potential impact of the Legal Services Act in the UK, permitting law firms to go public and to take on public investors.

James Surowiecki, writing in the current New Yorker, talks knowingly about the repercussions of being a public company.

And he was writing before the most recent downward acrobatics occasioned by Congress' incomprehensible, profoundly irresponsible, self-serving, and altogether shocking rejection of the Treasury's rescue plan. Here at Adam Smith, Esq., we don't editorialize, but numerous analyses of the votes have shown that those congressional representatives facing contested elections voted overwhelmingly against while those with safe seats voted overwhelmingly in favor. You are at liberty to draw your own conclusions, but the word "courage" ought to be a part of your reflections.

Back to the repercussions of being public. Here's the intro:

Before the government stepped in last week, the bodies of financial institutions--Lehman Brothers, Merrill Lynch, and A.I.G., with Washington Mutual and even Morgan Stanley threatening to be next--were piling up so fast it seemed possible that Wall Street might simply cease to exist. The list of blunders that led to the carnage is by now familiar: firms succumbed to the frenzy of the housing bubble; relied on dubious mathematical models to manage risk; and leveraged bad bets with suicidal amounts of borrowed money. But the impact of these mistakes was made worse by a seemingly harmless decision that these companies made many years ago: the decision to go public. Doing so put the firms at the mercy of the stock market, and last week that mercy evaporated.

Once upon a time, investment banks were private firms, structured as partnerships, and relying on the capital provided by the partners in order to run their operations.

Sound familiar?

It only gets more so (interpolated text mine):

For Wall Street firms, going public was a deal with the devil, because it meant exposing themselves to what was, in effect, a minute-by-minute referendum, in the form of the stock price, on the health of their operations. This was fine as long as things were going well--the higher the stock price, the richer everyone got--but, once things started to go bad, that market referendum started to look like a vote of no confidence. And that made the problems that the companies were already facing much, much worse.

That's because the entire edifice of Wall Street is built on confidence. Investment banks [law firms] rely on short-term debt [people] to run their businesses, and their businesses consist of activities--trading, dealmaking, money management--that depend on people's faith in their ability to honor their obligations [continue to perform at impeccable levels]. As soon as the customers and creditors of a company like Lehman start to wonder whether it might collapse [the firm will lose top talent], they become less willing to lend or to trade, and more likely to demand their money back [take business away]. The perception of weakness exacerbates the reality of weakness. And although there are myriad measures of a company's health, nothing looks scarier than a stock price that's heading toward zero.

About now you may be arguing that the "stock price" of a law firm should reflect more than the inchoate and indefinable notion of "confidence" in its ongoing power as a magnet for talent, that, after all, the firm has serious clients and a genuine accomplishments and a powerful partnership and a strong pipeline of associates and robust and reinforcing systems of professional development, recruitment, knowledge management, business development, and so forth.

Nice try.

The problem is that if the "stock price" of a law firm drops, it mig