Steven Davis

FORTUNE — For a guy who is supposed to be overseeing the meltdown of the law firm he runs, Steven Davis cuts a pretty mellow figure. Over the course of a one-hour sit down in the midtown Manhattan headquarters of Dewey & LeBoeuf on Wednesday morning, he offers a pretty believable refutation of many of the worst rumors floating around town and over the blogosphere in recent weeks. The venerable partnership is not on the verge of collapse, he says. And that’s probably true. What’s also true: they never saw this coming.

Davis defends the decisions he and his management team have made. He has answers for why the recent departures of dozens of talented lawyers won’t have a lasting effect on the law firm’s performance. If you’re willing to let him, he’ll even do a good job of convincing you that they knew things were about to get a little hairy inside the offices on 6th Avenue. What he didn’t know: that The New York Times, The Wall Street Journal, and legal blogs would pounce on the developments and blow them up into a full-fledged crisis. “Nothing these days remains confidential,” he says a little ruefully. “Every decision we make seems to be occurring in a total fishbowl. I had a call from a journalist yesterday asking what time our monthly partners’ meeting was today. I almost said, ‘You might as well come, as it sounds like you’re going to hear about it anyway.’ That never would have happened in the old days.” Welcome to tomorrow, Mr. Davis.

Allow us to back up for a moment, though, to those old days of which he speaks. To those not familiar with a world where every institution still seems to be required to have an ampersand in its name, Dewey & LeBoeuf was created by the 2007 merger of old-line law firms Dewey Ballantine (founded in 1909) and LeBoeuf, Lamb, Greene & MacRae (1929). At the time, it was the largest merger of two U.S. law firms in history.

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The goal was a simple one: to create a global platform that could serve the myriad needs of an increasingly globalized U.S. clientele (as well as cross-border needs of a growing roster of foreign clients.) Never quite mentioned in the same breath as their more “elite” counterparts like Cravath, Swaine, & Moore or Davis, Polk & Wardwell, the lawyers at the two combining firms decided that if they couldn’t grow their way to elite status, then they were going to merge their way there.

For a time, at least, things played out as they’d hoped. Whereas before, the two separate firms had lacked the reputation to be able to convince rainmakers from rival firms to jump ship, the combined firm finally had the heft to do just that. Their first big hire: Martin Bienenstock, the co-head of the bankruptcy department at the nation’s premier bankruptcy firm, Weil, Gotshal & Manges, came aboard in late 2007. Last year, they lured Mike Fitzgerald and his widely regarded Latin America group from Milbank, Tweed, Hadley & McCoy.

But the credit crisis took its toll. When banks start merging, one of the first things to go is law firms doing overlapping work. With the entire industry fighting for fewer scraps, Davis and his team were forced into rationalization mode when they’d only been talking expansion and aggressive hiring just months before. And while expenses did drop along with revenues for a time, D&L, like most law firms, saw a reversal of that trend in 2011. The result: they missed their financial targets. They informed the partnership in January of plans to shave headcount by 5%-6% in 2012 and that they’d be taking a long hard look at some deferred compensation they’d promised but not yet paid. Translation: those promises were going to be broken, whether through negotiation or outright fiat. When those “negotiations” began in earnest, so did the exodus that continues to this day. Heavy hitters like William Marcoux, co-head of the insurance practice, and John Cobb, head of leveraged finance, have landed at competitors eager to pick off angered top talent. (Davis says he has taken a pay cut along with his partners.)

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“Law firms of this sort operate much more like big businesses than they used to,” says Davis. “While there are good things about that, like the fact that we can provide legal services to GE in Russia, there are the not-so-good things as well. Like the fact that 1,100 lawyers can’t sit around the same table like we used to 35 years ago when we’re dealing with internal or external pressures.”

Well, there’s that, and more. One fundamental change in the way the firm has operated since the merger is that they moved away from the traditional lockstep compensation approach — where partners are basically paid in terms of tenure — and toward a star system in which the top moneymakers can out-earn their colleagues by a ratio of up to 10-to-1. Davis says the extremes shouldn’t define the system, though, and that the more “normal” band is about 6-to-1. Still, it must chafe to be the guy who’s earning the “1” and knows it. Hard to see oneself as a “partner” of the “6s,” let alone the “10s.”

Promises not kept are tricky whatever your milieu. “If you had somebody in here from a lockstep system, they would say that’s exactly why they have lockstep, that the issue doesn’t arise for them,” says Davis. Well, it has arisen in a very meaningful way for Dewey & LeBoeuf. Is it enough to threaten his job? Davis was just reelected for a five-year term last August, but could a mutiny be at hand? “If the direction we’re taking the firm in was somehow disapproved of, then the reality is that there ought to be a change in management,” he says. “But I don’t sense that.”

Davis’s partner Rich Shutran, who also attended the meeting, argues that the departure of 12 of the firm’s top insurance lawyers this month for Willkie Farr & Gallagher was the simple result of the fact that some lawyers couldn’t stomach not just the compensation changes but also the idea that more established practices were now subsidizing a global presence that they weren’t really part of. “They were creatures of an older and different law firm,” says Shutran. “I don’t think they were ever particularly comfortable in a larger and more complex place. Their practice didn’t require it. And the biggest piece of evidence is where they went—Willkie, Farr & Gallagher—a law firm half our size with no international presence. It’s a much simpler place.” (Those who once looked up at the “elite” are now apparently looking down. It’s probably a better view.) He can’t resist a zinger: “There’s also the fact that one of the partners in that group has an identical twin brother at Willkie Farr.” (It’s funny, but he’s also probably right.)

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According to people close to the firm, after missing those expectations in 2011—revenues came in a little shy at $935 million—D&L is on target for both top and bottom-line growth in 2012—trailing 12-month revenues through the end up February were up 6.1% over last year, with “demand” (basically, revenues adjusted for the time lag of billings) up even more, at 9.7%. So things actually are looking fine, even after one factors that the departing insurance group is going to take about $22 million in billings along with them. And Davis categorically denies all of the rumors about the firm being in financial straits, the most pointed of which have suggested that Dewey & LeBoeuf is at risk of violating some covenants on its outstanding $250 million or so in debt. “Those rumors are utterly and completely bogus,” he says.

So where did he go wrong? Other law firms are axing partners left and right—Linklaters doubled a previous estimate of a cull of 30 partners to 70 in January­—and a recent report in the UK suggested the industry needed a 5% cut across the board—the exact same that Dewey & LeBoeuf was aiming for. Why is some unsurprising turmoil in the midst of revolutionary changes getting so much attention? “It’s hard to know,” says Davis. “The impetus to make the changes we’ve made was very powerful, and I think the majority of the partnership are still on board with them.” Adds Shutran: “In every large organization, there are people who take issue with the current direction—people who are usually stuck in a comfortable rut. We are no exception to that.”

I point Davis toward a quote from a former partner in The Wall Street Journal: “Management tried to make the firm a Skadden or Cravath overnight. They tried to take Dewey away from its roots and make it into something it was never going to be.”

“That’s my favorite criticism during this whole time,” he says. “When Jennifer Smith of The Wall Street Journal called to ask me how I would respond to it, I wondered whether it was a trick question. Why is that goal a bad thing? We put this firm together and our fundamental objective and priority was to create an elite global law firm. We are closer to that today than we have ever been. And how did we lose sight of our ‘roots’? If the implication is that we were mediocre and should have simply accepted our mediocrity, then I don’t agree with that.”