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Wall Street’s firemanIn the first part of an exclusive two part interview with Banker Middle East, Rodgin Cohen, the legendary lawyer who was a key figure during the events of 2008 that saw the collapse of Lehman Brothers and the near collapse of capitalism, looks back at the events that saw some of Wall Street’s biggest names nearly ‘go to the wall’ and gives Mike Gallagher his views on sovereign wealth funds and international regulation

H Rodgin Cohen (the H is for Henry) is quite possibly the single most powerful lawyer on Wall Street. His hugely

influential role in the 2008 banking crisis was chronicled in Andrew Ross Sorkin’s heart-stopping fly on the wall account (Too Big To Fail) which documented what some say was capitalism’s darkest hour.

The New York Times memorably called him ‘The Trauma Surgeon of Wall Street’, although Cohen, in his typically self-effacing, low key style says he was more like “one of the scrub room nurses.”

In March 2010, Cohen was named one of the ‘Decade’s Most Influential Lawyers’ by The National Law Journal. The publication noted that he has been “a superstar in the legal industry for years.”

Cohen is a partner at Sullivan & Cromwell (S&C). He was Chairman of the firm from 1 July 2000 through 31 December 2009 and has served as its Senior Chairman since 1 January 2010.

The primary focus of Cohen’s practice is acquisition, corporate governance, regulatory and securities law matters for major US and non-US banking and other financial institutions and their trade associations. S&C’s reach means it does business everywhere from Beijing to Frankfurt, Hong Kong, London, Los Angeles, New York, Paris, Sydney, Tokyo and Washington DC.

In the acquisitions area, Cohen has been engaged in most of the major bank acquisitions in the US including Wells Fargo-Wachovia, BlackRock-Barclays Global Investors, Mitsubishi UFG-Morgan Stanley, Barclays-Lehman, Allianz-Dresdner, UBS-PaineWebber and Credit Suisse-First Boston, to name but a few. If it is a really big deal (or borderline catastrophe), then there is a good chance the low key lawyer will have been present.

Cohen (Rodge to his friends) has worked on a significant number of major cross-industry and private equity acquisitions, including JPMorgan Chase-Bear Stearns, Merrill Lynch-BlackRock and JC Flowers-Sallie Mae.

He has worked on a wide variety of bank regulatory matters with the four banking regulatory agencies, as well as other governmental agencies, on behalf of many of the largest US and non-US financial institutions, and trade associations. These matters have included the TARP and liability guarantee programmes.

Cityfile New York, in its list of New York’s ‘2,144 most notable’ observes that Cohen oversees more than 600 lawyers at S&C’s 12 offices and says “it remains the gold standard” when it comes to M&A. Some of the all-star attorneys with whom Cohen works closely include Ben Stapleton, David Harms, Bob Giuffra, John Bostelman, Vince DiBlasi, Karen Patton Seymour, and M&A Group Head Jim Morphy.

Reprinted with permission of CPI Financial, Banker Middle East and Mike Gallagher.

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Wachtell, Lipton, Rosen & Katz Co-Chair Ed Herlihy, another key player in the events of September 2008, is widely seen as Cohen’s big Wall Street intellectual rival and a report in Fortune magazine pointed out that both men went “head-to-head in 18 of the 25 major bank mergers during the ‘90s.”

Both men seemed to be everywhere at once during the dark days of September 2008 and in the same month The Deal was quick to make a note of the comings and goings of the two firemen.

“Every time I looked up, it seemed like Rodge was in the room,” said Henry (Hank) Paulson, the former Treasury secretary.

“If you need any more proof that H. Rodgin Cohen and Edward Herlihy are the country’s leading banking M&A lawyers, look no further than this month’s financial services firestorm. The two attorneys have been almost as ubiquitous as Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson in the recent shotgun weddings, collapses and bailouts that are reshaping the sector,” The Deal said in September 2008.

Herlihy and his team were flat out trying to save Fannie Mae, Freddie Mac and AIG, while simultaneously advising Bank of America on whether it was wise to spend $50 billion on a rapidly weakening Merrill Lynch (something its team managed to sort out in less than a day) and almost immediately after that helped Morgan Stanley in its negotiations with Mitsubishi UFJ Financial Group.

At the same scary time, Cohen was leading a strike force around Wall Street in a race against the clock to shore up Fannie Mae, Lehman Brothers and advise Barclays in its dealings on a rapidly ailing Lehman. He also managed to find time to advise JPMorgan in its Government-brokered acquisition of Washington Mutual.

Cohen was there when Wachovia was sold to Wells Fargo, and he was also instrumental in helping to turn Goldman Sachs into a bank holding company.

“By our count--he has lost track--he advised on at least 17 global

credit crisis-related mergers, bailouts, and cash infusions in 2008. He was in the room when Bear Stearns was sold, when Fannie Mae was nationalised, and when Lehman Brothers died,” Ben Hallman, writing in The American Lawyer said.

Cohen, who was one of a small group of people who somehow managed to save capitalism during its darkest days since October 1929, surprisingly comes across as being low key and is actually quite affable for someone who must have felt the weight of those momentous times. He admits that he felt the pressure of the hour during those frantic days as many of the biggest names in banking faced oblivion and the world looked on nervously.

“Oh, absolutely,” he said. “One of the biggest dangers we will forget (memories will dim), is how close we were to the edge of the precipice. Had it gone over, had that happened, there would have been a financial calamity and an economic calamity. If you look at the 1930s as a model/precedent, there could have been major social and political dislocation.

“It was, at the risk of exaggeration, the most serious situation I have seen, and

there have been a number of them over the past four years, but they were nothing like this.”

But for all the pressure and stress of those grim days, Cohen does not believe it was quite as apocalyptic as it seemed to many others. He dismisses the ‘darkest hour’ suggestions and is, if anything, given to playing down his role in the tumultuous events.

“I’m not sure it was capitalism’s darkest hour. It was the financial system’s darkest hour, at least since the 1930s and there clearly was trauma.”

Cohen and his team, which must have been working around the clock, frenetically racing from the headquarters of one bank to another, with visits to the offices of the New York Fed in between (where Tim Geithner and Hank Paulson were hammering out rescue plans) were probably putting in the same painful hours as junior doctors. However Cohen in his unassuming way instead cracks jokes about his New York Times nickname-‘The Trauma Surgeon of Wall Street.’

“At the risk of being inappropriately modest, but I think more accurate, I think I was more like one of the scrub room nurses, whereas the real surgeons were Paulson and Geithner and Bernanke.”

Tim Geithner and Hank Paulson

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What was the toughest part? “I think the most critical aspect was that so much was coming at the policy makers and regulators at once,” he said from his office in New York, which rather handily sits nearby that of one of his clients, Goldman Sachs, on 125 Broad Street.

“There was no game book. No one had a plan ahead of time for any of these institutions, much less full financial contagion. It was the cumulative impact. I think you could have handled any one of these, but what you couldn’t handle was the whole facade cracking and everybody being at risk.”

Cohen is well used to being thrown in at the deep end of unprecedented situations (he was instrumental during the Iran hostage crisis in 1980 in helping to free US captives) and if lawyers of

his ilk are anything to go by, probably enjoys tackling the kinds of emergencies that would give most politicians and central bankers a heart attack.

He even advises sovereign wealth funds (SWFs) in their delicate and extremely low key business dealings. Cohen praises the funds for their sophistication and once again, as is part of this character, plays down his role in his dealings with them.

He is quick to acknowledge the SWF’s canny, long-term investor attitude. Some Western bankers have come to the SWF table with promises

of all kinds of advice and suggestions of which kinds of products make the best investment, but Cohen cautions otherwise.

“The sovereign wealth funds generally have people who are very sophisticated in financial terms. They do not need advice at all, certainly not on how to handle financial transactions. They come to us for what I call ‘deal technology.’ How do you structure a deal to make the most sense and they come to us in particular because the US regulatory system is very complex, difficult to navigate.

“There is often as much lore as there is law and they want to know how to deal with the US regulatory system; how you structure a transaction and so on. If you need approval, how do you go about getting it?”

He is also quick to praise the move towards greater transparency that people like Hank Paulson, during a trip to Abu Dhabi in 2008 pondered on. “As economies change, uncertainty can create resistance to openness. It is critical to understand, however that in the long run openness to trade and investment will not only bring prosperity, but will also improve stability by better enabling economies to manage external shocks and smooth out business cycles,” Paulson said at the time.

At the same time, while recognising that some funds may have been stung by investments that are now worth less than when they acquired the stakes, Cohen, who has probably seen (and dealt with) more crises than most politicians have had hot dinners, in his nearly 40 years in the business, takes the historic view in such matters.

“I think there has been a push, which to a significant extent has been successful, in more transparency coming from the sovereign wealth funds,” Cohen opined.

“They certainly had losses, but some of these sovereign wealth funds, at least the ones that I am closest to, exemplified that famous story when Henry Kissinger met Zhou Enlai and asked him what he thought had been the impact of the French Revolution and Zhou Enlai said it was “too early to tell.”

“These sovereign wealth funds are very long term investors. The answer to their success can’t be measured now - 2014/2015 is the time to look. Nobody can time the bottom precisely.”

But a lot of people think that Warren Buffet tends to time the bottom better than many other people. “Yeah, but even Buffet makes mistakes from time to time. Of course, there is a question as to whether Buffet is human anyway,” Cohen says, laughing.

When asked if any many Middle Eastern banks come to him for advice, Cohen admits that they haven’t, “and I am not surprised at that because at the end I think that regulatory systems differ, cultures differ and what makes sense for the United States may, or may not make sense for anyone anywhere else in the world.”

In the next edition of Banker Middle East, two years on from the grim days of September 2008, Rodgin Cohen talks about whether Lehman should have been allowed to fall, his views on M&A and MAC clauses and offers the readers of Banker Middle East a few suggestions on what can be done to create a stronger global banking system. n

I think I was more like one of the scrub room nurses, whereas the real surgeons were Paulson and Geithner and Bernanke.

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The drownedand the saved

In the second part of an exclusive interview with Banker Middle East, Rodgin Cohen gives Mike Gallagher his views on the demise of Lehman Brothers, preventing another meltdown, M&A, MAC clauses, and the role of a global regulator

It is just two years since Lehman Brothers collapsed spectacularly and nearly brought with it many of Wall Street’s most established names. There are plenty who have argued that little has been done to prevent a reoccurrence, while others say that even two years could never be enough

time to get to the bottom of what happened, let alone create a fail-safe mechanism.

Rodgin Cohen is one man whose ring-side seat during the grim events of 2008 has given him a unique insight into what went wrong and what could still go wrong.

Has the Anglo Saxon model of capitalism been shown up by more cautious emerging markets as nothing but a sham? The decision by Germany to ban short selling was a case in point and French President Nicolas Sarkozy has been another detractor.

“The much-touted miracle of Anglo-Saxon capitalism turned out to be a mirage. At least, that is the widespread perception, in Europe and beyond,” said The Economist in its Bagehot column.

“Let us rebuild capitalism in which credit agencies are controlled and punished when necessary, where transparency ... replaces opaqueness. We can do this on one condition; that we all work together in our globalised world,” Sarkozy said at the

G-20 summit in Toronto in late June 2010. “It is a fascinating question because each culture is different

and each country is different,” Cohen said when the question of what kinds of lessons emerging markets could learn from the developed world’s financial debacle came up. Rodgin Cohen

Reprinted with permission of CPI Financial, Banker Middle East and Mike Gallagher.

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“If there is a more macro issue, it is how you can deal with asset bubbles. I am not sure there is even a good view in the US or the UK, but I think the lesson which can be learned is that everybody seems to agree that monetary policy is a too blunt and inexact instrument to deal with asset bubbles.”

Cohen admits that there is a belief that regulatory policy couldn’t be an appropriate methodology for dealing with asset bubbles, which he admits “is unpopular.”

Cohen is not alone. Many have echoed the line from William McChesney Martin, the Federal Reserve chairman from 1951 to 1970 who memorably said that the job of the Federal Reserve is “to take away the punch bowl just as the party gets going.”

Cohen believes rather forthrightly that it is easier when one uses regulatory tools which are “more directed and less massive.”

“Frankly (and this Cohen admits is “probably a bad analogy to apply to the Middle East”), but instead of taking away the entire punch bowl, maybe what you have to do is limit the amount of alcohol.”

Was the 2007-2008 crisis which first saw Bear Stearns and then Lehman Brothers vanish from Wall Street a case of corporate governance failure? A paper by David Erkens, Mingyi Hung and Pedro Matos at the University of Southern California, Marshall School of Business in Los Angeles said that, “Consistent

with outside pressure for short-term profitability encouraging managers to take on more risk, which eventually led to the losses, we find that firms with higher institutional ownership took more risk and experienced higher performance before the crisis.”

The paper entitled, ‘Corporate Governance in the 2007-2008 Financial Crisis: Evidence from Financial Institutions Worldwide’ found that CEO compensation packages that rely more on annual bonuses, and less on long-term equity-based compensation are associated with greater losses during the crisis and higher risk taking before the crisis. They said their findings were consistent with a deficiency in corporate governance mechanisms having played a significant role in the financial crisis.

“There were several problems and they were big gaps,” Cohen said. “Number one, the shadow banking system was not regulated. There were many causes of the financial crisis, but the origins were clearly in the shadow banking system in the US, with the mortgage bankers and brokers who were basically unregulated. You had this big regulatory gap.

“A second problem was what I referred to earlier - there was no plan in place to deal with individual institutions.

“A third problem was that there was no real system to deal with the failure of a major financial institution, other than for a bank. I think it was not so much a corporate governance failure; it was something more systemic.

The shadow banking system was not regulated. There were many causes of the financial crisis, but the origins were clearly in the shadow banking system in the US, with the mortgage bankers and brokers who were basically unregulated.

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“The system simply had not been enhanced to deal with the realities of the modern financial system. The system worked rather well for banks in terms of dealing with the problem. It didn’t work well for anyone else.”

Cohen has seen more than his fair share of banking crises and they range from local US failures to ones which could have had a much wider impact on the global banking system, even back in the 1970s, when the whole concept of globalisation was a dream and banking systems were much more isolated.

“The first one I worked on was the collapse of Franklin National Bank in the early 1970s, which at that point was the largest US bank to have failed. It was relatively small, which you are going to hear is a constant theme, is that these were simply single incidents. The banks could get together, rally around and help with the resolution. In that case they provided a line of credit to Franklin which managed to keep it alive until the Government could intervene and sell it. The same thing happened a couple of years later with Pennsylvania National Bank.”

Cohen suggests that the big one was that of Bank Herstatt. The privately-owned Cologne-based bank went bankrupt in the summer of 1974 and almost pulled the rest of Europe’s banks down with it.

“The most serious failure in that decade was that of Bank Herstatt which really did bring the world’s payment system to a halt for two days,” Cohen says thoughtfully. “Herstatt was one of the two or three incidents which had the potential to bring about a financial collapse. But again, the regulators got together. It was a small institution and they were able to do a work around.”

What have we learned from the events of the past two years? Has there been a silver lining to the cloud?“It’s a good question. It is hard to say there is much of a silver lining, because there is still a lot of dry tinder out there, not the least of which is Europe right now. The silver lining, to the extent it exists, is that we have learned something. I do think the US legislation, albeit flawed, will address many or indeed most of the regulatory problems, which caused this financial crisis. There were unregulatory problems and financial reform legislation can’t deal with those.”

The collapse of Lehman Brothers still haunts Wall Street; and there have been differing opinions over whether it should have been allowed to fail. There are more than a few who believe that the bailout of Bear Stearns only increased the risk of moral hazard that people like former Treasury Secretary Hank Paulson had warned about.

And Cohen’s views on whether Lehman Brothers should have been allowed to fall are unambiguous.

“In my view that was absolutely a mistake. I don’t think there was, as some have suggested, a conscious decision to let Lehman fail. Having read all these books and the one I am reading now is Paulson’s, and his view of what happened is consistent with my own, although maybe more appropriately, mine is with his, that they did want to salvage Lehman. They did not want it to fail. They understood, at least generally, vaguely what the implications would be. They thought, incorrectly, that a private sector deal would be there and they got very close.”

“The major banks, much to their dismay, were prepared to put up a very large fund to help out any buyer of Lehman. Then Barclays was very interested in doing the deal, but the British Government said no. There is a point at which you have run out of time and they said ‘no’ very late and at that point there was nothing left to do,” he said.

I don’t think there was, as some have suggested, a conscious decision to let Lehman fail.

Have Wall St’s bulls been tamed?

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“It was a mistake to let it fail, but I’m not sure if that was a conscious decision.”

Cohen’s comments were echoed by Paulson in November 2008 after the collapse of Lehman when he said, “I tried to put together an industry consortium to facilitate the transaction by purchasing the off-loaded assets, but once the potential buyer failed to obtain regulatory approval, the entire transaction disappeared. Without any federal authority to intervene, we had no choice but to do everything possible to try to mitigate the consequences of a Lehman failure.”

The likes of Cohen, Paulson, Tim Geithner, Ben Bernanke, Ed Herlihy and most of the other participants probably realised that they were stuck between a rock and a hard place and that no matter what they did, it would never be enough.

Was it a case of ‘damned if you do and damned if you don’t?’ “Yes. There was no question. You have raised a very good point. There was no question that if Lehman failed there would be a catastrophe, which occurred. It was very difficult for the Government, at that point, to put taxpayer money at risk. What the Government would have had to do would have been massive.”

Are governments trying to create a set of ‘never again’ rules? “Absolutely yes. I think they are trying to do two things. They are trying to get as close as possible to never again, but the smartest of them realise that the real objective is to minimise (eliminating entirely is an impossibility) a financial crisis. But you also need better tools to deal with the crisis if it occurs,” Cohen said.

However, some governments (understandably) kneejerk reactions to the events of the crisis has been to bring in questionable levels of legislation, some of which could be seen as nakedly populist, while others have been a little more pragmatic.

Some Wall Street watchers have warned that getting rid of certain types of derivatives could have a detrimental effect on financial innovation and could drive banks into emerging markets.

Cohen seems to agree when he says, “The danger is what you say, that people will throw up their hands and say, we can’t figure out how to regulate, so we will just prohibit. That is a failure of intellectual rigour; it is also a failure of common sense because you are right, innovation, new instruments, new products, will move. If they can’t be done in one sector, they will move to another sector. The most foolish idea of all is to move these activities into the shadow banking system or to jurisdictions where regulation is less vigorous and transparency less regarded.”

When asked if he has any advice/tips for the readers of Banker Middle East, Cohen says, “I would think that if there was one, it would be that we have a global financial system and that means that the global leaders, both in the private and public sector, have to act together to get an international regulatory and resolution system.

“The problem we have today is that even if the US regulatory system works, it will be in jeopardy if it is not accepted internationally. We need more in the way of private sector collaboration to get systems which work. The world is so global that when the US, Germany, China, the Middle East or whatever sneezes, everybody gets a proverbial cold.

There was no question that if Lehman failed there would be a catastrophe, which occurred. It was very difficult for the Government, at that point, to put taxpayer money at risk.

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“Dubai had its problems until Abu Dhabi came in and helped. There was a lot of worry in the rest of the world. Private sector collaboration is something that could be done a lot better than it is today.”

Cohen, who knows a thing or two about M&A, especially between banks (and there are plenty of countries in the Middle East which are heavily overbanked) gives his opinion on why some M&As are stillborn.

“They are stillborn in the sense that (I don’t know what the ratio is) for every eight to 10 deals there are initial talks but they never go beyond that because this is very much a zero sum game. For every dollar the seller wants, the buyer doesn’t want. Even if there is what I would call ‘industrial logic’ for deals, the logic still has to translate into who runs the institution and who wants the relative interest in the institution.

He also cautions about Material Adverse Change (MAC) clauses.

“M&A by definition is very difficult, but once deals are signed, clearly the great majority do come to fruition. MAC clauses, because they have been interpreted the way they have, you need them but no one should engage in over-reliance on them.”

The 65 year old Cohen, despite his quiet demeanour and formidable grasp of numbingly complex financial legislation admits that he still gets a

thrill from taking on the biggest challenges. His ideal transaction, he says, would be nice and simple, but “the nice and simple are not necessarily memorable. Those are the ones you enjoy because the client benefits the most.”

“Let me give you three. One was First Union and Wachovia because the logic was incredible, the ultimate transaction was a great success and we had to beat an intervener who was a very strong, powerful intervener and I thought that the intervener would break up the deal.

“The second was Bank of New York buying Irving Trust. It was a very prolonged deal that everybody said couldn’t be done because Irving fought very hard. They were extremely well-advised, but the deal was so compelling, it proved to be a huge success. It was one of these transactions where people think they won’t happen and can’t happen, but they do.

“The third was when Mellon Bank, now part of Bank of New York Mellon bought Dreyfus. It was the first time a bank had bought a mutual fund complex and again, everybody was saying it couldn’t be done and we were successful in getting it done.”

Who inspired you?“I don’t think there is a particular lawyer who did so. I would say it is more the political leaders who are my heroes, such as Lincoln and Roosevelt and both of the older Kennedy brothers, John and Robert. I never met John, but I did meet Robert and he was a truly inspiring individual.”

The events of September 2008 will likely be the subject of several films and Cohen’s character will no doubt feature prominently.

“If he was still alive, I would like Cary Grant [to play my part], but aside from that, I would say Dustin Hoffman. I do think that the Weinstein brothers should do the movie because I think they are about the most creative around.” n

Robert F. Kennedy at the White House, 1964. Photo by Yoichi R. Okamoto

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