It's all over for Heller Ehrman.

One of the best single pieces of coverage comes from The San Francisco Chronicle.

Heller was founded in 1890, rode through the 1906 San Francisco earthquake (in the aftermath of which the nascent client Wells Fargo Bank set up a temporary headquarters at the home of founding partner Emanuel Heller), helped arrange financing for the Golden Gate Bridge, the Hoover Dam, and the Oakland Bay Bridge, and in more recent years took a pro bono case to the US Supreme Court that established the right of conscientious objection during the Vietnam War, took Levi Strauss public, and represented plaintiffs overturning California's same-sex marriage ban.

But it's over.

Here at "Adam Smith, Esq." we're not about sentimentality, not about pessimism, and not about optimism, but about realism. Heller's over. What can we learn?

We don't like to talk about it, none of us do, not me, not senior partners, not bankers or consultants to the industry, but the stark, glaring reality is that law firms are fragile institutions. Brobeck, Coudert, Heller, Shea & Gould, among the firms that didn't deserve it, and Finley Kumble and Myerson & Kuhn among the firms that did.  I could but won't go on. (Not to mention innumerable firms that were absorbed through merger in the nick of time to escape the guillotine.)

What went wrong?

Prefatory note: I don't have any inside information, but what follows is reading the tea leaves.

First of all, they should never have absorbed the Venture Law Group. It made no sense. Would it have made sense for VLG to be absorbed by another firm, perhaps Morrison & Foerster or Orrick? Perhaps, and of course we'll never know. But my instinct is that VLG was a sui generis creature that would never really fit within any law firm with a conventional legal industry business model. So Heller may have been ill-advised to take on the VLG group to begin with. Did this kill Heller? Of course not. Was it a strained fit from the beginning? Sure. And strained fits entail costs, economic and intangible.

Second, the Heller story should discredit, if more evidence or argumentation were needed, the notion of term limits for managing partners. Matthew Larrabee is of course the current, and final, managing partner, and Barry Levin was his immediate predecessor. What's wrong with term limits?,

Understand, as with the absorption of VLG, I'm not suggesting Barry could have saved the firm at this juncture any more than I'm suggesting Matt is responsible for its demise, but I'm strongly suggesting this:

• Your firm has a Chairman who is, by all accounts, widely respected inside and outside the firm;
• He has, as a matter of obligation to his Chairman responsibilities, let his practice go fallow, making him initially unproductive if he has to return to practice;
• The firm seems at the top of its game;
• There is no self-evident need to replace him;
• And you forcibly remove him anyway.

What sense does this make?  Why trade winning horses in mid-stream?

(Parenthetically, we are facing that same situation here in New York City as our term-limited Mayor Bloomberg will come to the end of his tenure on December 31, 2009, and everyone who is by self-anointment in line to stand for Mayor is, relatively speaking, a midget.)

Third, if you're in merger discussions at a moment of relative weakness, eschew hubris. Like to think that your firm is the firm that it was a decade ago or the firm that it could be a decade hence? Get over it. You're the firm you are today. So is your potential merger partner, and they might not be who you used to think they were.

I started this column by saying that I'm not an optimist and I'm not a pessimist, but that I'm a realist. I partly lied.

I am a realist, but I'm also an optimist, and I never have been and never will be a pessimist. You have the right to be optimistic about your firm, in merger talks or otherwise. More strongly: You have the obligation to be an optimist about your firm.

Fourth, fragility, again.

"Our assets go down in the elevator every night."

Take that bromide seriously.

You must give people a persuasive reason to come back "home" every Monday morning.

Make them believe in the ongoing vision of a vibrant institution, a living firm where they can make a contribution in their own way, where they have a voice, where they can matter, where they are part of a team, where there are new mountains to conquer and new clients to be won, new legal innovations to be created with your firm's imprimatur on them, new dimensions of professional development which you can create and with which you can inspire and energize your associates, new, heartfelt, admirable and groundbreaking commitments to pro bono, new, clear-eyed and profound commitments to client service and client relationships, new and innovative uses of technology to deliver cost-effective services clients increasingly will demand while at the same time sparing your associates scut-work. New, new, new.

Those are the things that will inspire people to come back on Monday.

Back to Heller.

What finally went wrong?

It's the same phenomenon, actually, that we've seen on Wall Street in the last few weeks: A failure of confidence. There doesn't need to be anything wrong with Heller, or Morgan Stanley, Goldman Sachs, or Merrill Lynch, for people and the market at large to perceive there's something wrong with any of those firms. It's the run on the bank mentality.

 JP Morgan put the bond between credit and character most memorably in the Congressional "Pujo Hearings" of 1912:

Samuel Untermeyer: Is not commercial credit based primarily upon money or property?
Morgan: No sir. The first thing is character.
Untermeyer: Before money or property?
Morgan: Before money or anything else. Money cannot buy character. A man I do not trust could not get money from me on all the bonds of Christendom.

In law firm land, this is how the breakdown of credibility (the "character" of the firm) goes:

• A few key partners leave
• Taking a few key clients with them
• Which makes other partners wonder
• And start looking around
• Finding, in this very liquid lateral partner market, ample opportunities
• Which some take advantage of
• Taking away more clients
• Making more partners, and associates connected to them, thinking about the door
• Leaving only the least mobile people with the smallest books of business at the firm
• And the vicious cycle has kicked in, with almost no meaningful chance of its being reversed.

The curtains come down and the lights go out when the abrupt exodus of partners, clients, and erosion of the revenue base, occasion breaches of bank lending covenants and a shut-off of credit.

Fragile institutions? More than a century old, and with north of $500-million in revenue?

Shhhhhh. We promise not to mention it again.