Cohen: learn the lessons of Lehman
12 October 2009 | By Matt Byrne
31 January 2014
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Iconic Sullivan & Cromwell chairman on the ‘contagion of fear’. By Matt Byrne
Last month The Lawyer popped down to Manhattan’s financial district to see Sullivan & Cromwell chairman Rodge Cohen, the man who saved the US banking system.
Okay, that might be overegging it a touch, but probably not by much. Arguably Cohen did more than any other lawyer to help avert a full-scale financial meltdown one year ago. So what is his take on how the world looks now?
“Well, I guess the best way to put it is 12 months ago we were looking down a true financial abyss,” says Cohen. “It was clearly the case [on 15 September] and it was clearly the case almost every weekend for six to eight weeks.
“Today, if you continue the metaphor, we’ve taken a number of steps back, but we haven’t climbed off the cliff.”
Cohen says he is “somewhat of an outlier” because the popular press seems to be of the opinion that nothing has really has changed. He points to stories about the return of the big bonus as proof.
“That I find inconsistent with my own observations,” Cohen continues. “Obviously there have been fundamental changes. Major companies have failed or been merged out of existence. But for those that remain there is a far greater recognition of the risks in the system and a far greater recognition of some of the flaws in the system, which were deep-seated.”
According to Cohen, the executives of the world’s top financial institutions are now acting accordingly.
“You can’t have lived through last year without having learnt a lesson,” he adds. “You’d have to, I don’t know, somehow have created a shell around yourself.”
Highly respected though Cohen undoubtedly is, not everyone agrees with him that the financial services landscape and its inhabitants have either changed or learnt their lesson.
“The only real change is that implicit government (taxpayer) guarantees have become explicit, and the ‘system’ has enshrined the Too-Big-To-Fail doctrine,” argues one poster on Thelawyer.com.
There are also signs that the mega-profits and big bonus culture is coming back. So who better than Cohen to give his views on whether or not this is really the case?
“Okay, let’s deal with that,” he begins. “They [financial institutions] definitely are more profitable than they were for a few months, and in fairness for those that were best prepared for what happened it’s not surprising that once the crisis passed they’ll have risen in profitability.”
Cohen agrees that there is a lot more attention being paid to compensation philosophy these days, but argues that there are two views, “and I think the press often gets them confused”.
“One is that compensation is bad if it’s too much,” he contends. “Even the President made it clear, in what was regarded by some as a stern speech [on Wall Street on 14 September], that compensation in and of itself isn’t bad.
“There’s no more reason to cap the full amount that an investment banker can earn than there is for a CEO of a Silicon Valley company or an NFL football player. So to me that’s not where the issue resides.
“To me the issue is the structure of compensation, and does it encourage undue risk-taking?
“When you see [Goldman Sachs CEO] Lloyd Blankfein’s speech in Germany - and he’s a person who does what he says - I think you’ll see how the philosophy has changed. And the philosophy is that you need to make sure your compensation system doesn’t unduly encourage excess risk.
“Risk is part of the financial culture. If a bank never had a default on a loan a lot of good loans wouldn’t be made. So you’ve got to take some level of risk.”
Cohen believes bankers’ compensation should be heavily equity-based, either vesting over a lengthy period of time or with clawbacks.
“And - although you’ll get a lot more disagreement about this one - in my view a very sizeable percentage of the compensation package needs to be tied to the institution’s overall results as opposed to a single unit,” adds Cohen. “That doesn’t mean it should be exclusively tied, but you shouldn’t have it tied 100 per cent to a unit.”
Cohen knows as well as anyone that the impact of the meltdown was not only on financial institutions, but also on law firms such as his own.
Memorably he describes it as a “contagion of fear” that overtook the markets, which saw firms firing associates, deferring entries and cutting or eliminating summer classes.
At Sullivan it has also meant a degree of retooling, with much more of an emphasis on restructuring, for example among its corporate partners.
“We tend to try to do things organically,” Cohen says. “We’ve asked several younger partners to take an active role.”
These partners include more general corporate and securities lawyers such as New York partners Andy Dietderich and Neal McKnight, Hydee Feldstein in Los Angeles and bankruptcy specialists such as Jay Clayton and Erik Lindauer, also in New York.
Does Cohen think the worst is over?
“I’m hopeful that we’re probably near the bottom of that,” he says, but adds: “That doesn’t mean we’ll ever regain where we were.”
For Cohen, at least as chairman of Sullivan, that question will soon be largely academic. At the end of this year his time at the head of the firm comes to an end, at which time he will hand over the reins to vice-chairman Joe Shenker.
As one of the best-known lawyers in the world right now, what advice would Cohen give to a young lawyer starting out?
“Well, for two dollars and 25 cents you can go anywhere on the New York subway system,” deadpans Cohen. “If there were any one piece of advice, it’s to try to have the greatest breadth of work as possible, because that’s what really makes it interesting and fun.
“I think for lawyers who get burned out, it’s not the intensity, it’s the sameness sometimes.”
Cohen is not ready to reveal what he plans to do next, but on this particular morning, as a bell rings in his corner office overlooking the tip of Manhattan and the Hudson, he is off to deal with one more emergency. Sullivan will miss him.