The business press may be full of record profits on Wall Street but the mood among Manhattan's top lawyers is decidedly more ambivalent, as Legal Week found during a recent tour of the city. Following a (sort of) record year in US M&A, some firms have seen substantial rises in both revenue and profits, meaning double-digit growth from some of Wall Street's finest. But there are also many – mainly Manhattan-centric firms – that have only managed average profit rises of around 5%.

There are a number of obvious causes for the cautious current mood on Wall Street. Yes, the US enjoyed some of its biggest deals in 2006, but the total volume of deals has not risen dramatically. A handful of big-ticket private equity bids have bumped up average deal size, but the number of deals has remained largely static. In addition, the other key component of the US law firm model – litigation – is not firing on all cylinders, at least not by the notorious standards of the plaintiff bar.

US profits have also been hit by cost rises, largely through the hikes in associate salaries and bonuses, which both went up significantly in 2006 (and have gone up again this year). As one head of a top-tier New York firm says: "The associates deserved more pay, but it hit our bottom line."

More striking than the uneven spread of corporate work is the increasing focus among lawyers on when the US economic downturn is going to come.

Cadwalader Wickersham & Taft's hire this month of a respected four-partner restructuring team from Weil Gotshal & Manges is currently dominating conversation in New York, crystallising the anxious repositioning among US firms as they move to beef up their bankruptcy teams in preparation for an economic downturn.

"Our bankruptcy group is poised," says one New York office head. Another sums up the consensus: "Every managing partner is talking about acquiring bankruptcy lawyers."

That Sarbanes feeling

Other topics high on the agenda include the drift of securities work away from New York, not to mention wider concerns regarding the city's very future as the world's financial capital. The US Chamber of Commerce's announcement this month that it would be suggesting listed companies could forego the need to provide quarterly estimates reflects how lively the debate has become.

"Long-term, the markets will correct themselves," was one managing partner's view – echoed by some, who believe (or hope) Manhattan will regain its dominance over time.

This school of thought runs that securities regulation has played only a minor role in the dearth of New York floats. Instead issues such as shareholder activism, the end of the current tech boom and the rise of rival exchanges are to blame, though this reading in many ways looks even more pessimistic. Securities regulation can be changed – not easily, but it can be changed. Fighting entrenched market trends such as the rise of hedge funds and America's hyper-litigious business environment is another matter entirely.

And others are more gloomy, citing underlying trends. The head of one of America's biggest firms was even more downbeat, saying he did not think New York would ever regain its former dominance, commenting: "Sarbanes-Oxley hastened what would have happened anyway."

Whatever the reason, the current challenge to New York's status is having its impact on its city's legal profession. And changing attitudes in the city that has produced the most lucrative and influential legal market in the world will inevitably have an impact on London, one way or another.

See Deal Week blogs for more Manhattan comment.