Top Bank Lawyer Cohen Says Current Crisis Like S&Ls, Not 2008

No lawyer was more at the center of the 2008 financial crisis than H. Rodgin “Rodge” Cohen. The then-Sullivan & Cromwell chairman was a key adviser as Treasury, the Federal Reserve and the nation’s biggest banks crafted the bailouts and mergers that pulled the system back from the brink.

Now Cohen, 78, and his firm are back in spotlight. Sullivan & Cromwell, where Cohen is now senior chair, is advising Credit Suisse Group AG in its $3.3 billion takeover by UBS Group AG, Silicon Valley Bank in its bankruptcy and also providing counsel to beleaguered lender First Republic on a $30 billion rescue plan from 11 major banks.

H. Rodgin Cohen during an interview in New York in 2018.

Photographer: Mark Kauzlarich/Bloomberg

But Cohen says, this time, it’s different.

“2008 was a credit crisis,” Cohen said in a Friday interview. “The problem was a lot of bad loans, particularly subprime mortgages, but there were others. This time there is not a credit issue. The banks’ portfolios - the left side of the balance sheet - is generally sound in terms of credit quality. This time, it’s an interest rate problem. Banks have traditionally had relatively long assets and have funded them with deposits which are typically short.”

The more apt comparison, Cohen said, is the thrift crisis of the late 1980s, in which nearly a third of the savings & loan associations in the US perished. Like now, the problem was that a change of interest rates created an imbalance between the banks’ long-term assets and their deposits.

No ‘Real Cracks’

“They invested in mortgages which are long-term fixed-rate,” he said. “Then the rate caps on deposits were eliminated. It didn’t happen immediately but as rates rose that same imbalance occurred.”

The similarities to the S&L meltdown also mean the current crisis will likely be more limited than in 2008, said Cohen, who thinks the situation can be contained “without real cracks in the banking system,” and without any impact on consumers.

Credit Suisse’s collapse stemmed from a series of long-term issues while SVB folded practically overnight. Another Sullivan & Cromwell lawyer who played a prominent role in the 2008 crisis also takes issue with the idea that we’re experiencing one big crisis.

Comparisons between the collapses of SVB and Credit Suisse aren’t “really fair,” said partner Mitchell Eitel, who advised JPMorgan Chase & Co. during its September 2008 $1.9 billion takeover of Washington Mutual after the Federal Deposit Insurance Corporation seized the thrift. WaMu, which was hit hard by the subprime banking crisis, was one of the biggest bank failures before SVB.

Changed Information Dynamic

“They’re totally different things,” Eitel, managing partner of the firm’s financial services group, said of Credit Suisse and SVB.

But Eitel says the speed of SVB’s collapse also highlights a major change from both the S&L and 2008 crises: how quickly news spreads.

“The information dynamic in our world today is very different than the information dynamic in the thrift crisis or 2008 financial crisis,” he said “Things are going to happen more rapidly. SVB had to be closed lickety-split so they were closed without buyers already lined up. With Washington Mutual, they had that deal locked up by the time the closure was announced.”

Veterans of the last crisis will likely look at any measures to shore up the bank system as a crucial given the turmoil of 2008, Cohen said.

“If you got 50 people in a room who were actively involved in the 2008 financial crisis and you ask the 50, ‘Can you think of a situation where we acted too early?’ I think no hand would be raised. I think if you asked if we were too late, 45 hands would be raised.”

To contact the reporters on this story:
Chris Dolmetsch in Federal Court in Manhattan at cdolmetsch@bloomberg.net;
Meghan Tribe in Arlington at mtribe7@bloomberg.net

To contact the editor responsible for this story:
Anthony Lin at alin364@bloomberg.net

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