Dealmaker #1 – Bank Bailouts: H. Rodgin Cohen, Sullivan & Cromwell
H. Rodgin Cohen has never had a busier year. 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 nationalized, and when Lehman Brothers died. He helped American International Group secure an $85 billion bailout and told Wachovia’s board of directors that they should spurn Citigroup’s buyout offer in favor of one from Wells Fargo. More than any other lawyer, in a year when relationships with government authorities were invaluable, he knew which officials to call at the U.S. Department of the Treasury, at the Federal Reserve, at the Securities and Exchange Commission–the people, he says, to whom “you could bring a problem and they would help you find a solution.” For all this, and because he was Wall Street’s go-to lawyer during the most important months for the American banking industry since the Great Depression, Cohen is our top-ranked Dealmaker of the Year.
But this isn’t about celebrating a victory. Cohen, frankly, isn’t in a celebratory mood. At 64, he worked nonstop for month after month through the fall and into the winter. “It’s been a serious strain,” he says. Friends–old friends, good friends–lost their careers. The banking industry that he has advised on countless transactions through a long career is in shambles. Moreover, Cohen doesn’t think the storm has passed. The pessimism that he has felt about the economy for nearly two years is still there. And if Cohen, who knows as much about banking as anyone, is worried, maybe you should be, too.
Cohen’s first realization that something was seriously out of whack with the mortgage industry came in 2006. Late that year, he worked with several financial institutions reviewing new federal guidelines on issuing loans. He was shocked, he says, by the wide gulf between the lax standards that some of the banks wanted for issuing mortgages and the relatively strict guidelines being proposed. Then came the summer of 2007 and the near-failure of Countrywide Financial Corporation, which at the time originated more mortgages in the United States than any other lender. Most of those were issued outside the purview of regulators from the Office of Thrift Supervision at the Treasury Department and many, Cohen realized, were junk. “It was a mistake to have a major financial institution that integral to go largely unregulated,” he says. Soon, he began telling clients that they needed to prepare for a downturn. “Be ready for a difficult environment,” Gary Parr, deputy chairman of the investment bank Lazard Ltd., recalls Cohen saying. Parr says Cohen was one of the first to sound the warning.
The next year dawned with a stock market swoon. The markets temporarily bounced back, but the condition of the banks that had invested heavily in securities backed by toxic mortgages continued to deteriorate. The first to go was The Bear Stearns Companies. According to The Wall Street Journal, in the late evening of March 14, chief executive Alan Schwartz called Cohen at his home in Irvington, New York, to tell him that the 85-year-old investment bank was nearly out of money. “I should call the Fed,” Cohen responded. Cohen dialed Timothy Geithner, then president of the Federal Reserve Bank of New York, to urge the acceleration of a program for lending to investment banks. “I think I’ve been around long enough to sense a very serious problem, and this seems like one,” Cohen told Geithner, according to the article.
The loan went through, but that didn’t stanch the bleeding. Over the next two weekends, Cohen worked long hours, first trying to broker a deal to save Bear Stearns, then on a deal to save the deal. Court records from the ensuing litigation show that Cohen was intimately involved at all stages of the dealmaking, including, most crucially, communications with the New York Fed that led to the government agreeing to backstop $39 billion in potential losses.
Bear Stearns’s near collapse signaled the defining theme of the year. A financial institution, crippled by bad assets and facing a rapid loss of investor confidence, casts about for a capital infusion or a merger. Potential suitors refuse to help unless backstopped by the federal government. More often than not, the financial institution calls Cohen to advise the company and to serve as an intermediary with regulators.
Cohen represented the Federal National Mortgage Association (Fannie Mae), which had bought many of the bad loans issued by lenders like Countrywide, in talks that led to its being placed in conservatorship. He represented The Goldman Sachs Group Inc. when it converted to a bank holding company. He advised the Wachovia Corporation board of directors to accept an offer from Wells Fargo & Co., even though he knew it would undoubtedly mean litigation with Citigroup Inc., another suitor. He represented Lehman Brothers Holdings Inc. before it failed, then switched sides, and represented Barclays Bank plc when it acquired Lehman’s brokerage. (The failure to save Lehman, he says, was the low point of the year: “I knew it was the wrong decision, and I was unable to persuade people it was the wrong decision.”)
In September and October, the calls came in so fast that he had to turn away potential clients. Even Cohen, renowned for his equanimity, felt the pressure. On more than one day, he says, he felt that if the right thing didn’t happen, “we’d be back looking over the abyss and maybe starting to lean over it.”
Why did banks in crisis call Cohen, instead of one of the other dozens of highly regarded bank lawyers? Clients and colleagues say that he simply knows the intersection of finance and regulation better than anyone. “He probably has the most impressive reputation in terms of banking and work with Treasury and the Fed of any lawyer out there,” says Stephen Ashley, former chairman of the Fannie Mae board of directors.
“It’s like going to see a surgeon,” says Robert Steel, the former chief executive of Wachovia. “You want a surgeon who has seen a lot of these operations.”
There’s also Cohen’s business judgment, which Parr describes as “outstanding.” Parr says that he has seen Cohen give great advice to clients so many times over the past 20 years that when he first considered leaving Morgan Stanley, where he was cohead of M&A, Cohen was the only outside person whose advice he sought.
Cohen’s high standing among his peers and his prescience in predicting the economic downturn make his current mood all the more troubling. On a recent weekday, as fog and snow swirled outside, Cohen told us that many of the problems that caused the banking crisis remain. He then outlined what he thinks must be done to right the listing economy.
He thinks that injecting capital into the banks is necessary as part of a broader rescue plan, but that capital injections alone are never going to spur lending. He describes the Troubled Assets Relief Program (TARP) as “bad packaging” that exhibits “unrealistic expectations by the sponsors of the program.” The banks, he says, have used the money to slow their deleveraging rather than to lend (the banks, meanwhile, say that lending is picking up). Cohen supports increased funding for the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF), which lends money to investors who then use the money to buy securities backed by consumer loans. (The goal is to liquefy the markets for consumer debt. Geithner, now Treasury secretary, recently said he will increase funding from $200 billion to $1 trillion.) Cohen also thinks that federal authorities should take a page from the Great Depression, when the government evaluated the health of the nation’s banks and made capital injections into all of those deemed healthy enough to survive. He also is strongly in favor of the bailout for mortgage foreclosures. “Until we arrest the decline in the housing market, we are never going to come out of this,” Cohen says.
These are grim times, but Cohen, a Democrat, trusts President Barack Obama’s economic appointees to ease the country out of the recession. He describes Geithner and Lawrence Summers, Obama’s chief economic adviser, as “extremely capable people.” They understand “the importance of comprehensive solutions, vast solutions,” he says.
He’s worried, but he also has hope. “As pessimistic as I have been for two years now, I think the odds favor considerably that we will come out of this,” he says.
And if Cohen has hope, maybe you should, too.
See all 25 of our Dealmakers of the Year, from the April 2009 issue of The American Lawyer.