Thumbs Up, Thumbs Down On Bank Reform

Rodgin Cohen was Wall Street’s deal-maker throughout the financial crisis, playing a major role in influencing legislation and the current landscape of the financial sector. He continues to represent the largest and not-so-large financial institutions, including JPMorgan Chase & Co., U.S. Bancorp, Goldman Sachs and Cullen-Frost Bankers. He is senior chairman of the law firm Sullivan & Cromwell LLP in New York, stepping back from his role as chairman of the firm from 2000 to 2009. He talked with Bank Director magazine Managing Editor Naomi Snyder about his views on regulation and what could be done to make it better.

BD: What aspect of financial reform was a good idea?

COHEN: There were three cornerstones of the Dodd-Frank Act, an effective resolution policy so there would never again be too-big-to-fail institutions, enhanced prudential supervision of all systemically important institutions, and improved regulation of derivatives. A fourth would be improved regulatory coordination through the Financial Stability Oversight Council and the Office of Financial Research, which were newly created institutions. The financial crisis demonstrated the need for enhancement in each of those areas.

BD: What is the worst aspect of Dodd-Frank?

COHEN: Amendments that came up later in the process. These include the Durbin Amendment on interchange fees, which had absolutely nothing to do with bank safety and soundness and was just a wealth transfer from the banks to the retailers. There was an amendment that created terrible problems for foreign banks and domestic banks with respect to derivatives. Foreign banks aren’t permitted to do any derivatives business in their U.S. branches. That was almost certainly inadvertent.

BD: And the Volcker Rule?

COHEN: I think the idea of not doing proprietary trading within the depository institution itself makes sense. To suggest it can’t be done anywhere in the organization is less logical. The most puzzling aspect is the prohibition on investments in [hedge or private equity] funds. One problem during the financial crisis was that when banks created the funds, they felt the obligation to support them when they got in trouble. There is what’s known as Super 23A in the Volcker Rule that prohibits that. That makes sense. The ban on investment in funds is difficult to understand, since no one lost money on those, however.

BD: How much of a game-changer do you think the Consumer Financial Protection Bureau [CFPB] will be?

COHEN: It’s in its regulatory infancy. It depends a lot on how they go about this. You can certainly understand why people felt like the CFPB was necessary. I don’t think anybody can argue that the consumer wasn’t ill-treated in a number of respects, particularly on mortgage lending. I think if the CFPB sees its mission as making sure consumers are fully and fairly informed, that is good for the consumer and it should actually be good for the banks.

BD: I’m surprised to hear you say that in the sense that the CFPB is creating more regulation.

COHEN: Regulation is not bad per se. There are differences in economic power and financial education and ability to spend time on matters. You can’t have totally unregulated markets, particularly when you’re dealing with consumers. At the end of the day, our clients are going to be better served if their consumers feel like they’re being treated fairly and I think my clients understand that. The question is, will the CFPB go beyond that and try to set prices for certain financial services? That becomes more problematic.

BD: Can you talk about JPMorgan’s trading loss and the impact on regulation?

COHEN: I really can’t.

BD: Have we ended too-big-to-fail and the concept that big banks enjoy implicit government support?

COHEN: No one can have absolute certainty we have ended too-big-to-fail, but it’s difficult to imagine how Congress could do a better job. If a bank goes into resolution, what will happen [going forward is what] would happen in a normal bankruptcy: Shareholders are wiped out and management is replaced and if there are losses, creditors bear the burden. If somehow there still isn’t enough money, than you go out and assess the large banks so there is no risk to taxpayers. The risk of a taxpayer bailout is reduced to de minimus levels. I think this has been one of the most bipartisan parts of Dodd-Frank. The two parties worked well to get it done. It can show you what can happen when political differences are put aside.

BD: Doesn’t the market offer better funding pricing for the biggest companies, proving that the big companies enjoy an implicit government guarantee?

COHEN: The studies I have seen demonstrate that large companies in almost all industries fund more cheaply than smaller companies.

H. Rodgin Cohen is senior chairman of Sullivan & Cromwell LLP.