Tuesday, May 5, 2009

Wall Street Firms Will Revert to Pre-Crisis Model, Cohen Says

Wall Street, after getting billions of taxpayer dollars, will emerge from the financial crisis looking much the same as before markets collapsed, said H. Rodgin Cohen, chairman of law firm Sullivan & Cromwell LLP.

“The system will look more like what preceded the current environment than many people seem to believe,” Cohen said yesterday at a panel discussion on the future of Wall Street sponsored by Bloomberg News in New York. “I am far from convinced there was something inherently wrong with the system.”

Cohen, 64, joined Lazard Ltd. Deputy Chairman Gary Parr, 52, and Carlyle Group co-founder David Rubenstein, 59, in discussing the industry’s future after the deepest financial crisis since the Great Depression forced the government to take equity stakes in hundreds of financial institutions. The panelists projected a future led by core banking and lower risk for established firms.

“There’s a good chance there are five to seven or eight global institutions, of which three or four will be clear winners and then some others will be good, doing full-service banking and securities business sort of as we knew it five years ago,” Parr said. They will operate “with a lot lower return on equity and a lot lower risk profile,” he added.

Banks and other financial institutions reported more than $1.37 trillion in writedowns and losses since the mortgage markets collapsed in 2007, and Parr said more are ahead. “There is still hundreds of billions of dollars of losses to be realized at a number of financial institutions,” he said. “There will be a need for substantial capital raising.”

Wall Street ‘Reshaped’

Rubenstein said that while Wall Street will likely rebound after the recession, competition probably will emerge from global banks being formed in China and the Middle East as well as from so-called boutique investment banks at home.

“Wall Street will be reshaped,” Rubenstein said. “People once thought that American brand-name institutions could do no wrong and that if they sold a product, it was a good product, and if they said something was worth a certain value, it was worth a certain value. Now that has changed.”

U.S. Treasury Secretary Timothy Geithner has urged broad changes in regulating the U.S. financial system to address a lack of confidence caused by the credit crisis.

President Barack Obama in the New York Times Magazine May 3 called for “an updating of the regulatory regimes comparable to what we did in the 1930s, when there were rules that were put in place that gave investors a little more assurance that they knew what they were buying.” Obama stopped short of calling for a restoration of the Depression-era separation between banks and brokerages created by the Glass-Steagall Act of 1933, which was repealed in 1999.


“Some people say, did all of this arise due to the elimination of Glass-Steagall and we should put Glass-Steagall back into place,” Parr, a specialist in advising financial firms, said at the panel. “I’ve observed that that had little or nothing to do with this crisis.”

Rubenstein said private-equity firms will take advantage of the financial crisis by investing in “smaller” financial companies.

“This is a good opportunity for private equity to show what it can do,” Rubenstein said.

Carlyle is preparing a bid for BankUnited Financial Corp., a Florida lender deemed “critically undercapitalized” by federal regulators, with Blackstone Group LP and billionaire Wilbur Ross, people familiar with the offer said April 22.

“Whenever there is disequilibrium or imbalance in a system, there is always opportunity,” Rubenstein said, declining to comment on BankUnited. “Opportunities will be in smaller banks where you can do the due diligence and where you can have some involvement in management and you can effectuate some changes in the way the company is run.”

Stress Tests

Results of the bank stress tests on 19 major U.S. banks may lead some lenders to raise more capital than they require, which he said is “not necessarily a bad thing.”

The Obama administration is relying on “blunt instruments” to ensure banks have a sufficient cushion to withstand a souring economy and some institutions are going to be pushed. “Being overcapitalized is better than the alternative,” Parr said.

Cohen withdrew his name from consideration to become deputy Treasury secretary in March, according to a Democratic official. Cohen, who joined Sullivan & Cromwell in 1970 and became chairman in 2000, has worked on bank regulatory matters with U.S. governmental agencies on behalf of financial institutions and trade associations, including the Troubled Asset Relief Program.