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Bank M&A Lawyer Sees New Wave of Deals

H. Rodgin Cohen, one of the most active and influential bank merger attorneys in the world, talks to
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H. Rodgin Cohen is one of the most active and influential bank merger attorneys in the world, offering the Sullivan & Cromwell partner a unique view of the wreckage the credit crisis has reaped across the sector and economy.

Last year alone, Cohen worked on several multibillion dollar deals involving

Goldman Sachs



JPMorgan Chase









Morgan Stanley



Wells Fargo



PNC Financial Services Group


among other large institutions. He was considered a candidate to serve as one of Treasury Secretary Timothy Geithner's deputies, but eventually dropped out, according to several reports last month.

Cohen spoke with

last week. He declined to discuss his candidacy for the Treasury position and several matters affecting current clients. What do you think of the Obama administration's handling of the crisis so far?

Cohen: When you consider the depth and breadth of the crisis, I think the administration has moved with both alacrity and comprehensiveness to deal with the issues. Inevitably in a situation like this not every decision will be the right decision, but the way they have attacked the problem I think is exactly what the problem requires.

H. Rodgin Cohen

There are so many different government programs -- trillions of dollars being aimed at the crisis. Which are most important?

These are all integrally related. They all complement each other. The danger here is not in overshooting. That you can deal with. You should try and get it right, clearly, but the danger is not in overshooting. It is in undershooting. That is the lesson of every financial crisis. They become deeper and less controllable when you undershoot.

Andrew Ross Sorkin in The New York Times has expressed concern over the Federal Deposit Insurance Corp. insuring more $1 trillion in obligations as part of the plan to encourage private investors to buy toxic assets from banks. He says the FDIC is violating its charter. Mission creep, he calls it. Do you agree?

In terms of mission creep, very much to the contrary. I think it is essential that the FDIC be part of the solution and they have broad powers and I think it is definitely a positive if they use them. Nobody would advocate violating the law. I think being progressive at a time of crisis is a positive, not a negative.

What do you make of the proposed super-regulator?

The super-regulator is a very complex issue because there are at least the following three questions: Who should it be, what should it do and whom should it regulate? And I guess there's a fourth question, which is how should it regulate? A super-regulator if you can get the right answers to those questions probably makes sense. It's far less clear how those questions are answered. There's still a lot of work to be done on this but I think what is critical here is that there are serious gaps in our regulatory system and we need to make sure that those gaps can be recognized and filled.

What are some of the most important gaps?

Let's just look at specific examples. A gigantic percentage of all mortgages originated in this country in 2005-2006, the period of maximum toxicity, were originated by basically unregulated mortgage bankers and brokers. Another gap is that at AIG,

the financial products division was basically unregulated and maybe you can say that that's okay if it's a standalone company, but when it's a subsidiary of the world's largest insurer, that made no sense. So those are types of gaps.

What kinds of clients are you working with lately? Banks? Private equity firms?

We're working with banks and occasionally with private equity but at this point there still are significant barriers to private equity investing in banks and until those barriers are eased, there just won't be that much.

What is the most important barrier to entry?

Personally I believe that you should be able to let private equity develop what are called silo funds which are strictly segregated from the other funds and the portfolio companies that the private equity firm controls or is invested in. Because although I think the Fed was quite progressive in what it issued in September which liberalized the standards of control and they deserve a lot of credit for that, the problem is that for investors to invest in troubled institutions and be passive is very difficult. So we've got to come up with a structure -- maybe it's not the silo fund, maybe it's something else, but we need a structure to permit control investments by private equity.

Do you think we'll eventually see a major wave of bank M&A and how far off do you think it is?

Absolutely. I mean the industry still needs consolidation, but the huge problem that continues to exist is the accounting. If you go in and are buying a company at 100X -- whatever that is -- and that company had a book value of 100X one second before you closed and then it has a book value of 80X one second after you close, you can't live with that. It just brings down your tangible common equity ratio by too great an amount. This accounting anomaly is by far the biggest barrier to M&A in financial services.

So we need a change in accounting rules?

Yes. Nobody objected strenuously many years ago when we went to purchase accounting, because so long as loan values remained constant or went up there was no problem. You take a bank which is entitled to keep loans, so long as they're not impaired, at book value minus an appropriate reserve. That's what you're entitled to do. But if you are bought, in a sense, there should be even greater ability to hold those loans to maturity because you have a stronger institution, better ability to work them, etcetera, but yet you have this huge markdown. I just don't see how you can justify the logic of that, because there is certainly no decline in the value of those loans. If anything they've improved. But let's say it's neutral, so how can you argue for 10%, 15%, 20% reduction?