In 2016, Zions Bancorp came to its lawyers at Sullivan & Cromwell with a problem. The Utah-based bank, with about $66 billion in assets, was among the smallest firms designated as “systemically important,” or too big to fail, under the tougher regulations that followed the 2008 financial crisis. But with that smaller size came no relief from the heightened scrutiny, which bigger banks subject to the same designation could more easily bear.
At Sullivan & Cromwell, a team including one of Wall Street’s most prominent lawyers, H. Rodgin Cohen, had an idea for a new legal strategy to pull Zions out of the Federal Reserve oversight.
The gambit called for restructuring Zions to shed its Fed-regulated holding company, a move that paved the way for the bank to appeal its “too-big-to-fail” designation to the Financial Stability Oversight Council. A first order of business was making sure the move would not irk Zions’ regulators. The strategy paid off. Earlier this month, the council agreed to drop Zions’ designation.
The National Law Journal recently caught up with Cohen and Sullivan & Cromwell partner Patrick Brown to discuss their approach to this first-of-its-kind case. The following is an extended version of a Q&A that ran in our Compliance Hot Spots newsletter.
NLJ: Your work in this case centered on the “Hotel California” provision of Dodd-Frank, which was designed to keep banks like Goldman Sachs and JPMorgan Chase from simply shedding their holding companies to avoid increased oversight. As the lyrics to the classic Eagles song go, “You can check out anytime you like, but you can never leave.” But Dodd-Frank does allow firms that remove their holding company to appeal their “too-big-to-fail” designation. How long had this potential escape route been on your mind?
Rodgin Cohen: When Dodd-Frank had come out, we had noticed the so-called “Hotel California” provision. We looked at it and said, ’This works.’ It may not be the clearest piece of statutory language ever written. But we think if you read it fairly and properly, you can go to FSOC and if you will get rid of your holding company, then you are no longer subject to the so-called enhanced prudential supervision regime, which was for the bigger banks, if you get FSOC’s approval.
How did you feel about your chances initially?
Cohen: I think everybody’s analysis was if there was ever an institution of $50 billion or more which was not systemically significant, it was Zions. It’s a great bank, but it’s just not of the same magnitude as the huge banks for which these provisions were written. So we were aware of that. We talked to them. They properly said, “Well, what’s the risk that somebody disagrees with you.” We said we’ll never know unless we go and ask.
That sense of risk—how did the bank get over that sense, and to what extent were you able to take the temperature of federal regulators before pushing forward?
Cohen: At the end of the day, whatever our legal interpretation was, the government had enormous discretion and if they didn’t want it to happen it wasn’t going to happen. The bottom line on this was that we did take the temperature. And it was less, I would say, about their willingness to do it or their legal analysis but, really, would they be upset if we tried. And it was clear the government thought about it and came back and said, “Look, we’re never going to guarantee you how we’re going to come out but we’re not going to be annoyed with you if you try.” It took going to the two regulators [the Federal Reserve and the Office of the Comptroller of the Currency] and then FSOC, to get that view. Any one of them effectively had a veto.
What went into that process of making sure the agencies wouldn’t be annoyed, as you said?
Brown: We reached out to all the various constituencies. In some cases it was by phone call. In some cases, it was in-person meetings, including on at least one, maybe two occasions, with Harris Simmons from Zions and Rodge and myself. In some cases, they would ask us to help them analyze the situation or help them understand the legal argumentation and we would do that as well. This took place over a fairly lengthy period of time. It’s probably fair to say that regulators’ views changed over time as administrations changed. Certainly, it was a different approach more recently.
Cohen: As we got further and further away from the enactment of Dodd-Frank and people had the perspective to see that treating all banks at $50 billion and over alike really did not make any sense, the attitude changed.
How involved was Simmons and Zions’ in-house legal team in the process?
Cohen: We had a very supportive CEO and a very supportive general counsel, who once we decided to go forward were fully supportive. The CEO and the general came to a key meeting in Washington. Without that, we never would’ve been here.
I think when the CEO, in particular, could speak as to his reasons for it, why it made sense for Zions to do this, it was made clear that this wasn’t some gimmick or about trying to set some sort of precedent. Why it made sense for Zions, the institution it was. That was a big meeting, many of the agencies were there. You could almost see the body language from a number of the senior staffers that they got it.
Brown: He made the point that Zions is a big bank and it’s a successful bank. But the way that they have always marketed themselves is they’re a collection of great community banks. I think he used the term “plain vanilla.” No non-banking activities that would be a problem. It’s just a very large regional community bank. So it just didn’t make sense for an institution like that to have to deal with the extra regulatory burdens of enhanced prudential supervision and the duplicative regulatory environment. He stressed Zions’ community bank qualities.
How long did this process take?
Brown: For anything like this, which was somewhat novel, a case of first impression, you would always expect the regulatory process, the regulatory wheels, to grind slowly. So you’d have a conversation at a given point of time and then you might not hear anything for weeks or months. And you’d check in again. It’s hard to say what was the official start point. Until it got some traction, maybe you could take the point of view it was just rumination and not more. It’s been 18 months-plus since we started the initial dialogue, maybe a little longer.
At the end of the day, how much convincing did it take for Zions to go for this?
Cohen: I don’t think it took much convincing. You’d have to know the CEO. He grew up with banking in his blood, literally. He succeeded his father, Roy Simmons. He is a very smart guy and understands how banking intersects with the law. I think once we pointed out to him that there was this path, and that this path could be taken on a risk-free basis and no one would be mad at us for trying, it didn’t take a lot of persuasion. The CEO and their general counsel were all for it.
Brown: They did want to know from us that we felt that this stood a good chance on the legal arguments. One of Mr. Cohen’s specialties is being able to persuade people of the right way to read a statute or the possible ways.
How much of the calculation was the fact that shortly after this process began, Trump won the election and brought in an administration that has a deregulatory bent?
Cohen: We weren’t on the other side of the table or the wall or however you want to look at it, but I truly believe had the election in November of 2016 come out differently, the result here wouldn’t have been different. Whether it took a little more time or not, who knows. But I don’t want to sound so self-confident, but this was clearly right. It made no sense for Zions to be regulated in this way. When you have the better side of the legal argument and the policy point is basically incontrovertible, I just think it would’ve ultimately made no difference who was sitting there. I can assure you there was no thought when we first started this process of let’s go ahead because there’s going to be a Republican president. The politics, actually, were not part of the calculus.
Recently, Congress raised the threshold from $50 billion to $100 billion—and an even higher threshold is coming in the future. With that in mind, do you expect other banks to piggyback on the approach Zions took in this matter?
Cohen: I think there were two reasons why they wanted to do this: One was to eliminate one of two federal regulatory schemes. First of all, one of the arguments we made was it was very unlikely that you would see a flood of institutions doing this. Many of the banks which are in the same ZIP code in terms of size—and there aren’t very many to begin with—they have non-banking activities which do not fit easily under the bank or maybe not at all. We thought there might be a couple of them, or three or four. What we’d like to think—but there’s no basis other than wishful thinking, perhaps—that maybe the fact this was coming down the pike was one further encouragement for Congress to do the right thing and raise the ceiling. I think we’ll see smaller banks decide to shed their holding companies. In a way, this shouldn’t be all that surprising, because prior to the late 70s, very few banking organizations had holding companies. It’s a relatively new phenomenon.
How did that claim—that there wouldn’t be many copycats—land with the regulators?
Cohen: It made them comfortable. If JPMorgan or Goldman Sachs could do it, we never would have gotten anywhere with them.
What’s next with FSOC and the systemically significant designation?
Cohen: I think what we’re definitely going to see is the federal reserve do something, I don’t know what that will be, for the banks between $100 billion and $250. Again, that was somewhat artificial. It was a compromise. But the Fed has been given discretion to deal with that. Whether they accelerate the time period for removing all of the current enhanced prudential supervision regime or the most difficult and burdensome pieces of it, certainly that is one change that I think we are likely to see.
In terms of de-designation, there’s only one non-bank left. And someday, probably, they’ll be de-designated. Because MetLife won in court, GE restructured, AIG restructured, so they were no longer subject to it. There just aren’t a lot of larger banks for which this is a feasible path. I’d like to say, “Boy, Pat and I blazed a trail, now all the people will come.” This was much more a one-off situation for the client. Maybe you see one or two more, but not a lot.