On Thursday, I had the pleasure of attending a lecture by H. Rodgin Cohen, chairman of Sullivan & Cromwell LLP, as part of the University of Charleston Speakers Series. Cohen, a native of Charleston, is regarded as one of the, if not the, best banking and financial institutions lawyer in the country.
By way of background, Cohen is the subject of this month’s cover story in The American Lawyer, which identifies him as "The Man To Call." The magazine also named him as its Dealmaker of the Year for 2008. Cohen also gave this interview a few days ago to Dan Freed of TheStreet.com. Lastly, in advance of his lecture, (Charleston, West Virginia) Daily Mail Business Editor George Hohmann interviewed Cohen for this article.
Cohen divided his speech, entitled "The Financial Crisis – Causes, Cures and Prevention" into five sections: an overview of the crisis, its causes, the response, potential cures, and the prevention of future crises.
Here are a few of the causes he identified, which he described as a "search for solutions rather than villains":
- Gorging on leverage almost unchecked;
- A sharp decline in credit standards and a virtual abdication of the credit review function;
- A change in the basic business model from originate-to-hold to originate-to-sell;
- Diversification of risk without transparency;
- Human failure, greed, and corruption; and
- The failure to recognize the enormous impact of the sharp decline in housing prices, which he described as the factor that had the greatest impact:
In discussing the government’s response, Cohen said that it was inappropriate to conclude that the programs have been unsuccessful because the situation would have been a lot worse without them. But he agreed that the response appeared to be reactive rather than proactive.
He noted another flaw in the government’s response in that the Federal Reserve followed the classic approach of providing additional liquidity to the market without recognizing that this was not a classic situation.
Cohen proposed several potential cures, including a willingness to recognize that $700 billion (for the bailout last fall) is not sufficient and to act accordingly. He predicted that the markets and the American people would accept, with transparency, another Troubled Assets Relief Program of $300-500 billion. He also thinks that an enhanced mortgage foreclosure mitigation program is essential.
Cohen was critical of what he called "AIG Hysteria Week," when the House of Representatives passed legislation last month that imposed a 90% tax on certain AIG employees’ bonuses, and showed a willingness to act "contrary to the rule of law" and to enact "indiscriminate and devastating legislation."
In terms of preventing future crises, Cohen noted a corollary to Gresham’s law that no regulation or bad regulation drives out good regulation.
As a fundamental solution, Cohen proposes the creation of a super-regulator or super-regulatory body that would serve as a systemic risk regulator. He said the critical questions for such a body are what should a super-regulator do, who should the super-regulator be, and who should be subject to a super-regulator. From his perspective, the obvious choice is the Federal Reserve, which is the only entity that is set up to take on such such broad duties.
Cohen criticized corporate governance, which he said failed at risk management, and proposed three reforms: every financial institution should have a separate risk management committee; risk management at a financial institution should be a separate staff function with a direct reporting line to the risk management committee; and a board of directors must understand that when a unit is experiencing growth that is not shared by the rest of the corporation, that is a red flag.
He also pointed out that compensation should be the responsibility of a corporation’s board of directors, not legislators or regulators. Cohen admitted that it was difficult to understand why a successful CEO who makes whatever amount of money is objectionable when compared to the salary of a utility outfielder in major league baseball. (In discussing proposals in Congress to limit a CEO’s compensation to the president’s annual salary of $400,000, Cohen shared what Babe Ruth said in 1930 when asked how he felt about making $80,000 a year when the President of the United States made $75,000: "I know, but I had a better year than Hoover.")
Cohen declined to explain why he withdrew his name`from consideration as deputy Treasury Secretary, the No. 2 position in the department, except to say that his wife was delighted and his dog was even happier. (There has been speculation that Cohen’s representation of many banks and financial institutions would have been problematic for his confirmation.)
A couple of other observations:
Cohen noted that nationalization of certain banks is a possibility, but is a last resort because "government is not a good owner," and said that key metrics for him in gauging the nation’s recovery from the crisis are a firming-up of housing prices and the level of foreclosures.
I’m not aware that the text of the speech is available, but if it is, I’ll upload it. Cohen’s remarks are certainly worth reading and studying.