Ten years after collapse of Lehman Brothers, have we learned anything about preventing the next economic crash?
September 16, 2018
Chronicle news & opinion
2007 photo of the former Lehman Brothers New York headquarters. Photo by David Shankbone (David Shankbone) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/)], via Wikimedia Commons
(NATIONAL) – There are many retrospective pieces out this week about the collapse ten years ago this weekend of the heritage investment bank Lehman Brothers.
A collapse which signaled the depth and seriousness of the financial crisis wrought by Wall Street excesses over the years which followed deregulation of the financial markets.
The Motley Clue begins it’s piece by saying, “Ten years after Lehman Brothers filed for bankruptcy, the investment bank's failure is a reminder of some of the dysfunctions in the financial and regulatory apparatus that brought the world to the edge of the abyss -- and of dysfunctions that still exist today.”
The British newspaper The Guardian has a published a number of guess commentaries. One, by Yanis Varoufakis the former finance minister of Greece, starts out by saying:
“Ten years after its near-death experience, capitalism is back to its old ways. Bailouts for the few and austerity for the many have caused global debt to rise 40% since 2007. Yes, British and European banks have contracted (as US authorities required Barclays, Deutsche Bank etc to shrink their dollar business) and tougher national rules constrain balance sheets.
However, this has caused financial intermediation to shift from banks to capital markets. By making some banks safer, the risk has been moved to the shadow banking system, which has grown from $28tn in 2010 to $45tn in 2018, and from the west to emerging markets, which have borrowed $3.7tn in the last decade – with the results we now see in Turkey and Argentina. In short, risk has not been diminished, just taken out of sight and dispersed geographically. Moreover, toxic politics has ensured that the two states that saved capitalism in 2008, the US and China, cannot repeat that double act.”
CNN Money asks the question, where were the regulators back then? Lehman’s demise, “Underscored the wild risk-taking that regulators and CEOs had allowed to become rampant across Wall Street. Consider, for example, the 2000 deregulation of exotic financial instruments known as derivatives. Regulators had little window into how these trades linked banks to one another. When one bank failed, other financial institutions fell in a kind of domino effect.”
“Even a month before Lehman's bankruptcy, officials at the Fed were still seeking information on the bank's 900,000 derivative contracts. And they were clueless about the risk posed by AIG's enormous book of derivatives...the people charged with overseeing our financial system were flying blind as the crisis developed.”
And one of the more interesting retrospectives on Lehman is an opinion piece by Senator Elizabeth Warren published the other day in various newspapers titled, “10 years after Lehman collapse, Washington is back to its old tricks.”
Some points the Senator makes:
……."Washington is back...cozying up to big banks and loosening rules just like it did in the run up to the crash."
…….”Even though banks of all sizes are making record profits, Washington is taking orders from bank lobbyists and checking off all the items on banks’ wish lists. For Christmas, giant banks got billions in tax giveaways. About a month after Easter, Congress and President Trump rolled back the rules on the very same giant banks that helped wreck our economy 10 years ago. The nonpartisan Congressional Budget Office said this rollback would increase the risk of another taxpayer bailout — but Washington didn’t care.”
……”Federal regulators are also working overtime to roll back critical rules and capital requirements that protect taxpayers and investors. And no wonder — a lot of these regulators used to work for the very banks they’re supposed to be watching. And who knows, maybe some of those regulators are planning to go right back to working for the big banks after their stint in Washington.”
…….”At its root, the financial crisis was built one lousy mortgage at a time. Big financial institutions had figured out that they could juice their profits by selling mortgages that tricked, trapped, and outright cheated many people. The Consumer Financial Protection Bureau was created after the crash to end this kind of fraud, and it has already returned more than $12 billion directly to people who were cheated by banks and predatory lenders. But now, political appointees at the CFPB are trying their best to leash up the consumer watchdog and let cheaters off the hook. “
…….”We know what happens when financial rules are rolled back and regulators look the other way: American families pay the price. Back in the early 1980s, the Savings and Loan industry got deregulated and taxpayers had to bail out the industry within a decade. In 1999 and 2000, Congress repealed the Glass-Steagall Act and deregulated derivatives, and the financial crisis hit in less than 10 years. And now Washington is following the same deregulation playbook, even as many families are still struggling to recover from the last crisis.”
If you are laboring under the illusion that this country is NOT ripe for another massive financial crash, then you need to read Warren's piece here and a few of the many others that have been published as a retrospective and a warning.
A warning that Washington’s politicians have set us up once more for another Great Recession type event.