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5 years After Lehman: Has Anything Really Changed?

Posted by Larry Doyle on September 10, 2013 7:07 AM |

The more things change, the more they stay the same.

For those in and around Wall Street and Washington who pretend that there has been meaningful change in the issues that brought about our crisis in 2008, I have endless archives to highlight all too much remains the same.

Rather than diving into the archives, though, let’s navigate a Bloomberg commentary that qualifies as a Sense on Cents instant classic (and would serve as a fabulous promo for my upcoming book).

The simple fact is both Wall Street and Washington remain very much the same as details within Banks Seen at Risk Five Years After Lehman Collapse attest. What is Wall street currently? 

. . .  a system still too leveraged, complicated and interconnected to withstand a panic, and regulators ill-equipped to head one off — the same conditions that led to the last crisis.

Three fundamental flaws stand out. Regulators stripped of power (more like willing bed partners if you ask me) allowed banks to embrace too much risk and load up on toxic debt with short-term funds. Insufficient capital left them little margin for error when those assets plunged in value. A system too large, opaque and interconnected meant they couldn’t fail without catastrophic consequences for the economy.

Industry and political insiders believe new legislation and oversight will stem another crisis.

The 2010 Dodd-Frank Act established a protocol that would, in theory, enable authorities to seize even the largest lenders and dismantle them without bringing down the entire system. An interagency group has been empowered to make sure banking supervisors work together to monitor systemic risk.

Please spare us the theoretical bu&*%$#!

Interagency group? Sense on Cents translation: “The inmates continue to run the asylum.”

The largest banks remain Byzantine, with hundreds of subsidiaries around the world, which could thwart efforts to unwind them. Six U.S. regulators with overlapping authority often clash and are besieged by an army of highly paid lobbyists. Leverage is still too high, some regulators and economists say.

The biggest risks could lie in the unknown: Five years after AIG was brought down by billions of dollars of credit-default swaps, there’s little transparency about banks’ trading and derivatives businesses or their counterparties.

“The basic model hasn’t changed much, and it’s still fragile,” said Anil Kashyap, an economics professor at the University of Chicago Booth School of Business. “The banks need much more capital and liquidity. They’re still way short of being safe.”

Why is that?

One reason is the intensity of Wall Street’s pushback. Bank executives, lobbyists and lawyers logged more than 700 meetings with regulators on a section of Dodd-Frank that seeks to curb banks’ trading for their own account, according to data compiled by Kimberly Krawiec, a Duke University law professor.

“At a point where politically you would think that the big banks are at their weakest, still they have had an enormous amount of influence,” said David Skeel, a University of Pennsylvania law professor. “There was no serious effort to neutralize the big banks. They were seen much more as partners than as problems.”

Ponder that last statement for a second.

Make no mistake, the very institutions both on Wall Street and in Washington that brought our global economy to its knees continue to conspire for their own benefit.

How does that make you feel?

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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