Wall Street guru H. Rodgin Cohen has words for Detroit

New York -- H. Rodgin Cohen is perhaps the most important man you've never heard of in the world of international finance.

The senior chairman at the Sullivan & Cromwell law firm in New York City, Cohen -- known as Rodge -- was intimately involved in no less than 17 banking deals in the dark days of the financial collapse in 2008.

Now, a year-and-a-half year later, Cohen, 64, said he believes that if more isn't done to shore up the ailing housing market and to create more jobs, the potential for civil unrest and political turmoil is very real.

"We have a history of being very law-abiding, being governed by the rule of law," he said. "But at some point, if people become desperate enough, laws won't make any difference."

In the end, he said, all the bailout money in the world will amount to very little unless we can create the type of good-paying manufacturing jobs that made Detroit the engine of the American economy.

"In the end it is about jobs, jobs, jobs," he said. "(It) goes back to Detroit. We did borrow too much and that obscured the real problems that we had in the economy because we could keep everybody afloat and everything afloat through excessive borrowing. We ignored what was really happening at the base. We were having our industrial and manufacturing and commercial base being reduced significantly."

And the need to re-create a solid American manufacturing sector is more the reason Washington is pushing green jobs than the need to save polar ice caps.

Why listen to a man who is a shill for Wall Street bankers who were dancing on a tightrope of doom one year only to make billions of dollars in bonuses the next, thanks to trillions in taxpayer bailouts?

"He is inside the inside," said Sen. Ted Kaufman, D-Del.

Among many deals, Cohen counseled the financial behemoth Lehman Brothers on their bankruptcy that sent the markets into a tailspin in 2008. He also represented AIG in its $85 billion bailout by Washington and advised Fannie Mae on its seizure by the federal government. Besides former Treasury Secretary Henry M. Paulson Jr., current Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke, Cohen may have played the biggest role in the bailouts.

"Every time I looked up, it seemed like Rodge was in the room," Paulson recently told the New York Times.

In fact, Cohen's name was on the short list to be No. 2 at the Treasury, but his long tentacles were seen as a political liability.

"He is the classic guy who is the fixer, regardless of the party in power, of the intersection of money and politics," said William K. Black, the former deputy director of the Federal Savings and Loan Corp. and author of "The Best Way to Rob a Bank is to Own One."

"In Indonesia under Suharto, you hired a relative; in the U.S., you hire Rodge. You don't have to, but he is the best and you can make some really big money."

Cohen gave an expansive hour-long interview in his Wall Street offices overlooking the Statue of Liberty just days before the Senate Banking Committee introduced a sweeping financial reform bill this week that would establish a consumer financial protection bureau within the Federal Reserve, create new rules governing the trade of derivatives and allow the government to take apart large companies on the verge of failure. The bill now goes before the full Senate and its prospects are far from a sure thing.

Kaufman argues that the proposed reforms don't go nearly far enough. Nothing short of breaking apart the big banks that Cohen helped create will prevent another cataclysm.

"I'm not running so I've got no reason not to be honest," Kaufman said. "Right now (in Washington) it's the Banks 2, the People 0. The banks have a big say about what's going on.

"We bailed them out. Now they're back in business doing the same things, taking very high risks. In Detroit, people are still losing their jobs, still losing their homes."

Cohen, who helped craft the banking deregulations in the late '90s, disagreed that the banking conglomerates have become too big to fail or that there is a need for a new regulatory body.

But what happened to get us here in the first place? Cohen said it all began with cheap American monetary policy and a flood of Chinese money looking for a return.

This allowed easy money to people with bad credit. Sketchy loans were made to people to buy houses.

Those bad mortgages were bundled with good ones and sold as investment grade bonds. Regulators -- who Cohen said did not understand the complexity of the situation -- turned a blind-eye.

What made them look so good? They were insured by places like AIG. Except AIG didn't have the money to pay when it collapsed. So who paid? The taxpayer. In full.

"The cocaine analogy is quite a good one," said Cohen, a bespectacled, understated man. "Because this stuff was addictive. A lot of people couldn't resist."

When 20 percent of the people defaulted on their subprime loans, the whole system teetered on insolvency.

"An arithmetic problem became an exponential one," Cohen said.

It ended with an American taxpayer bailout to the tune of $14 trillion in cash and guarantees. A gambit Cohen likened to a poker game.

"It was very much 'All In,' " he said. "We have not fixed it. I strongly believe that unless we get it right, we're jeopardizing ourselves and who knows how many generations to come."

In the end, Cohen echoed what many workaday Americans already know: the only way to pay off the resulting debt is through good jobs. "Manufacturing jobs," Cohen said. "But these have to be smart jobs. ... I don't at all want to denigrate muscle power, but that is something that can be done too cheaply in too many other countries."

If things are so dire, Cohen was asked, then why has the stock market rebounded so spectacularly? "I don't know," he said. "That's why I don't play the stock market."

Travels with Charlie