Philly's Cohen & Co. deal cuts its losses

Cohen & Co. is based at Cira Centre. CEO Daniel G. Cohen said the deal would "free up the ability to invest in the growing parts of our business."
Cohen & Co. is based at Cira Centre. CEO Daniel G. Cohen said the deal would "free up the ability to invest in the growing parts of our business."
Posted: August 05, 2010

The bursting of the nation's credit bubble, inflated in large part by housing values, showed itself in dramatic fashion last week in an announcement by Philadelphia financier Cohen & Co.:

It sold investment businesses it had seeded with $219 million for just $5.4 million.

Daniel G. Cohen, its chairman and chief executive, said Tuesday in a conference call on second-quarter earnings that the deal would "free up the ability to invest in the growing parts of our business."

The buyer was Fortress Investment Group L.L.C., a New York firm with $42 billion under management. The deal for management contracts covering $3.8 billion in assets allows Cohen to receive more if certain targets are met. It calls for Cohen to provide up to $13.6 million in services to Fortress over the next three years.

Another deal with Fortress is pending. It covers the management contracts for an additional $3 billion in Cohen assets.

Together, the two deals represent nearly half of Cohen's $14.5 billion in assets under management June 30. At the peak of the credit bubble in 2007, Cohen, which has headquarters in the Cira Centre, reported $44 billion in assets under management.

Cohen was founded in 1999 as Cohen Bros. & Co. by Daniel Cohen and his brother, Jonathan Z. Cohen, who sold his 50 percent stake in the investment bank to older brother Daniel in 2003.

Both are sons of Betsy Z. Cohen, who founded the former Jefferson Bank and is now chairman of RAIT Financial Trust in Philadelphia and chief executive of The Bancorp Inc., in Wilmington.

Cohen & Co. grew quickly during the real estate boom by helping small banks raise money through the sale of hybrid securities - which share characteristics of debt and equity - and packaging them into CDOs, or collateralized debt obligations.

Most Americans became familiar with CDOs in 2008 when they were mentioned prominently as ingredients in investments that sank Lehman Bros. Holdings Inc., perplexed the rest of Wall Street and the banking industry, and greased an economic collapse that still torments homeowners and anyone with a 401(k).

Nationwide, $37.7 billion worth of those securities issued by banks hungry for capital to take advantage of booming real estate markets were packed into CDOs beginning in 2000, according to Fitch Ratings.

Cohen CDOs provided money to 718 small and midsize banks, thrifts, and insurance companies. At the end of last year, 49 of them had defaulted, and 91 were deferring interest payments, according to Securities and Exchange Commission filings.

As Daniel Cohen explained to an investor on this week's conference call, CDOs were basically companies. They are seeded with some equity and then borrow money to buy other loans or bonds that pay interest. The profit is the difference between the interest received and the interest paid by the CDO on its own debt.

Cohen & Co. merged in December with Alesco Financial Inc., another Philadelphia company started by Daniel Cohen. Alesco had invested $218.6 million in the equity of eight CDOs launched in 2006 and 2007. Those investments were written down to virtually nothing before the merger.

CDOs also have managers who determine what assets a CDO will hold. In Alesco's case, Cohen & Co. was the manager of the eight CDOs in last week's deal with Fortress. Cohen's second-quarter management fees on those CDOs were $1.4 million. An additional stream of fees from the CDOs had previously been lost because too many banks defaulted, deferred interest payments, or were downgraded.

"The trust-preferred CDOs for the banks were not a growth opportunity for us, and their monetization allows us to pursue real growth," said Daniel Cohen on the conference call. Focus areas include bond trading, other types of asset management, and investment banking.

Before merging with Alesco, Cohen & Co. was a private company, so it's hard to know what it was worth during the credit bubble. But Alesco's stock-market value peaked at $483 million in March 2007, just as the financial turmoil started.

The combined companies were worth $62.5 million Wednesday. The stock closed at $6, up 21 cents.

In 2008, Cohen's base salary was cut from $5 million a year to $1 million a year, according to SEC documents, but the executive was awarded a $2 million bonus for last year's work, when the merged company lost $11.7 million on $84 million in revenue.

By comparison, Lloyd C. Blankfein, chairman and chief executive of Goldman Sachs Group Inc., which earned $12 billion on $45 billion of revenue, received a $600,000 salary and no bonus.

Cohen & Co. had no comment on Cohen's pay.

Contact staff writer Harold Brubaker at 215-854-4651 or

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