Providing The Tools To Protect Clients From The Impact Of The Crisis

Thursday, January 1, 2009 - 01:00

Editor: Mr. Gerkis, would you tell our readers about your professional experience?

Gerkis: I have been a corporate lawyer for 25 years. Over the last half dozen years I have focused on M&A, including private equity transactions. I have also spent a fair amount of time working on various types of financings, including joint ventures

Editor: What attracted you to Proskauer Rose?

Gerkis: I came to Proskauer just over six years ago and was drawn by the opportunity to work for a well-established, well-known firm committed to growing its corporate transactional practice. I wanted to be a part of that growth.

Editor: In October the firm announced the formation of a multi-disciplinary response group to counsel clients affected by the current turmoil in the world's financial institutions and markets.

Gerkis: What is happening in our economy is unprecedented, requiring a high level of focus and interdisciplinary collaboration. Our firm has extensive capabilities in many areas affected by the downturn. Many of our lawyers are working with clients on related matters, counseling them generally on what is currently occurring in all facets of our economy. Tackling this crisis is a collaborative matter encompassing our various practice groups. This is exactly our approach to serving our clients (much as we have always done in the past). Our Economic Crisis Response Group (the "ECRG"), a multi-disciplinary response group, is a way to leverage our resources and communicate effectively and quickly to our clients and among ourselves. The Group helps to monitor, analyze and disseminate information on new developments as they arise.

The ECRG includes lawyers from our financial services, litigation, corporate transactional, corporate governance, white collar, insurance coverage, employment and labor, executive compensation and employee benefits, securities regulation, bankruptcy and restructuring, real estate, finance, private investment fund and personal planning practice groups. These include lawyers with extensive experience in representing public and private companies, institutional investors, financial services companies, hedge funds, commercial banks and individuals, all of whom have been affected by the current financial crisis. Seven of our partners are working together daily to facilitate the efforts of this group. I would estimate that we have between 50 to 60 lawyers world-wide who have expertise in the areas most affected by this crisis.

Among our many efforts to keep our clients up-to-speed, we have published many Client Alerts (short articles) summarizing and analyzing the recent developments so that our clients are well informed with respect to the crisis. The ECRG has worked with our partners to assemble the best possible team to approach our clients. For example, before the Treasury Department changed the focus of TARP, we worked on one pitch for a client who was being considered to serve as an asset manager for the Treasury Department in connection with the "whole loan" portfolio of "poisonous" assets.

ECRG has also allowed us to do a better job of focusing on "hot topics" we address in our targeted seminars and "webinars." It also ensures that these efforts are brought to the attention of the broadest audience of our clients and potential clients. Currently, we have pulled together partners with experience in the bank regulatory field in order to put together a webinar and other presentations for clients interested in investing in banks or bank-holding companies or becoming deposit-based institutions (such as some of the investment banks).

We have put together targeted, deal-oriented materials for clients who want to maximize opportunities offered by the crisis or to minimize potential losses.

Editor: How has this initiative been received by the firm's clients?

Gerkis: Very favorably. They appreciate our counsel and ability to offer them a wide range of services - to understand their businesses, trends in the marketplace and our ability to provide them with access to the top practitioners in any given area.

Editor: Who are the clients? How have they been affected by the crisis in the world's financial markets?

Gerkis: I would imagine there is not a single client that has not been affected by this crisis. They include public and private companies in a myriad of industries, institutional investors, financial services companies, hedge funds, lenders, commercial banks and individuals, all of whom will be affected by the new legislation and regulations being enacted, as well as by the investigations being pursued by Congress, the SEC and other regulatory authorities. Even some of our clients who have no exposure to assets likely to be devalued, such as the newly formed "opportunity funds" holding pools of cash, are cautious in doing deals in this market.

Consolidation in the investment banking and financial services industry resulting in the displacement of talent continues to be a major factor affecting even the healthiest of companies. On the bright side, surviving market participants have a unique opportunity to grow their market share; we are seeing this in discrete market segments.

Currently, we are representing the Depository Trust Clearing Corporation in connection with Lehman's Chapter 11 bankruptcy, as well as a number of executives in the financial services industry in connection with various investigations and enforcement actions. We also represent the management group at Neuberger Berman that put in the winning bid in the bankruptcy court auction for Lehman's asset management division, where they have been employed.

Editor: What in your view has led us to the current cycle of massive de-leveraging, institutional stress and governmental intervention to a degree we have not seen?

Gerkis: There are several factors in my view: (1) financial sector regulation that did not sufficiently monitor major systemic risks; (2) reduced capital requirements for lending institutions, and (3) loose monetary policy in the aftermath of the 2001-2002 recession. Other factors include the cost of borrowing, especially mortgages, which reached historic lows, resulting from aggressive lending policies with limited underwriting safeguards and from a public policy of encouraging home ownership.

The "subprime" crisis was simply the catalyst for the crisis. Since World War II, balance sheets have been swollen with debt relative to incomes and this accelerated dramatically beginning in the 1980s. This catalyst put the brakes on the entire system with the value of household wealth in real estate and corporate equities declining sharply.

Editor: How do we get through this with the least amount of damage?

Gerkis: In my view, until inter-bank lending resumes, private investment will not recover. The Federal Reserve has acted aggressively (and to the limits of its statutory powers), slashing interest rates, facilitating liquidity injections, brokering mergers and extending bridge loans to institutions in order to ward off a systemic collapse. Using the $700 billion bailout package to recapitalize the banks by taking equity stakes, together with the Fed's other moves, will help, but more major fiscal policy and regulatory actions will be needed to stop deleveraging and to stimulate the economy. In its December 16 press release, the Federal Reserve announced a cut in the benchmark interest rate to near zero and outlined the other tools available to it - for example, purchases of large quantities of agency debt, mortgage-backed securities and longer-term Treasuries, as well as the Term Asset-Backed Securities Loan Facility, which will be implemented in 2009. These steps should facilitate the extension of credit. In addition, President-elect Obama has entered into discussions with members of Congress regarding an economic stimulus package that may include $850 billion in new spending and tax cuts over the next two years. Editor: How do clients affected by the crisis get through it with the least amount of damage?

Gerkis: Clients need to understand the total effect on their business and, more importantly, what their future exposure might be. What areas are likely to be affected the most? What is needed to operate more efficiently and what are the legal implications of new methods? Which areas are most vulnerable to litigation from employees, investors and governmental agencies? Now is the time to implement strategies and policies to put in place so as to minimize adverse effects.

Editor: Is governmental intervention our only panacea?

Gerkis: I believe that the magnitude of the loan losses in the financial system necessitated governmental intervention to prevent mass bank insolvencies and the total collapse of the credit markets. The current deleveraging spiral has passed the point where market correction is possible without massive government intervention. The government's action will prevent collapse of the financial system and partially buffer damage to the rest of the economy. Without government intervention, things would be far worse.

Editor : Do you see such intervention as a permanent response to address financial instability in the future?

Gerkis: I think there will be a higher level of government involvement in business and the markets for the foreseeable future, both in terms of direct involvement in those companies participating in TARP and more oversight through increased regulation and legislation. I believe we shall see more transparency and accountability. We need a smarter approach to regulation than what has been the case - regulation that is more targeted and cohesive, allowing regulators to assess risks more accurately.

Editor: What are the implications of the crisis for globalization?

Gerkis: Overt protectionism by any country is unlikely since trading partners could immediately retaliate. So far, protectionist policies have not been adopted. The hope is that international efforts to coordinate government responses to this and future economic crises will gain traction.

Editor: What are the implications of the crisis for Proskauer? Do you think the ECRG will become a permanent practice group?

Gerkis: The concept of collaborating on behalf of our clients is embedded in the firm's culture, but this is not a practice group in the traditional sense. I think there will be a need and a place for the ECRG - both within the firm and without - for some time to come.

Please email the interviewee at jgerkis@proskauer.com with questions about this interview.