Top 5 Dangers That Remain After the Financial Collapse, Lessons Learned

PHOTO: Lehman Brothers
Ben Stansall/AFP/Getty Images

On the fifth anniversary of Lehman Brothers' bankruptcy filing, which many say catalyzed the financial collapse that began in 2008, five experts share the biggest lessons from that era and dangers that could spark another crisis. We asked how much has changed since the crisis that nearly brought down the world's financial system and whether it can happen again.

Biggest Losers: U.S. Taxpayers and the Uncle Sam

The thing that drives Dennis Kelleher, president and CEO of Better Markets Inc., "crazy" about the bailouts, he says, is the idea that the government made a profit after the $700 billion Troubled Asset Relief Program, or TARP, plus the trillions of dollars in commitments it made.

Better Markets hosted a conference on Thursday in Washington, D.C., posing the question: are we better prepared for the next financial crisis?

"The number one lesson learned is that we must do whatever is necessary to prevent another financial crash because the crash and economic crisis it caused is going to cost the American people tens of trillions of dollars," he said.

Kelleher said it's a "lie and a fraud" to say the government made money from the bailout with a "1 percent return,"

"It's like saying you and I went to the bank and I got a one percent return and you got 50 percent return," he said. "It's true: we both got a return, but you did a lot better but I look like a fool. And I am a fool if you got 50 and I got 1 percent; that's the U.S. government."

Former Senator Ted Kaufman was one of the panelists who spoke at Thursday's Better Markets conference. As former chair of the congressional oversight committee for TARP, Kaufman reflected on working on Dodd Frank Wall Street reform in 2009 and 2010.

He said there was "little agreement" on most issues between the Democratic and Republican Senators.

"In spite of this, there was one thing all the Senators agreed on; the American taxpayer should never again have to bail out a big bank," he said. "Here we are five years later and the big banks are bigger than ever, much bigger than they were in 2008 when we know they were too big to fail. Many respected bankers, including both Fed Chair Ben Bernanke and Bank of England head Mark Carney have said that our banks are too big to fail. In spite of this, the President and the Congress are doing nothing to fix this basic problem."

A Banking System That's Too Interconnected?

Back in 2009, Federal Reserve Chairman Ben Bernanke defended the multi-trillion direct and indirect bank government bailouts by explaining, "it wasn't to help the big firms that we intervened . . .when the elephant falls down, all the grass gets crushed as well."

"Yet, today, the elephants are even larger than ever and the grass is still crushed," says Jennifer Taub, Vermont Law School professor.

In addition to the large size of many banks, Taub is concerned that giant firms are still permitted to borrow excessively, up to $97 for every $100 in assets they own.

"Of greatest concern to me is a point often overlooked -- in addition to size and leverage, banks are still dangerously interconnected and prone to wholesale runs due to their excessive dependence on short-term, often overnight lending," said Taub, author of the forthcoming book, "Other People's Houses: How Decades of Bailouts, Captive Regulators, and Toxic Bankers Made Home Mortgages a Thrilling Business."

Taub points out that the run on Bear Stearns in March and the run on Lehman in September 2008 was by other financial institutions through the wholesale funding market, known as the tri-party repo market. Yet today there's nearly $2 trillion in this "fragile" funding outstanding, she said.

Regulators and bankers have also expressed concerns about the risky conditions of the financial industry. Goldman Sachs CEO Lloyd Blankfein testified at a Financial Crisis Inquiry Commission hearing in 2010, saying, "Certainly, enhanced capital requirements in general will reduce systemic risk. But we should not overlook liquidity. If a significant portion of an institution's assets are impaired and illiquid and its funding is relying on short-term borrowing, low leverage will not be much comfort."

"It is high time to consider restrictions on short-term funding throughout the system," Taub said. "This is the tinderbox that awaits an asset reversal or shock to ignite."

Lehman Was Symptom, Not Cause, of the Financial Crisis

Norbert Michel, research fellow with The Heritage Foundation, said the "key policy failure" that led to the crisis was the government's bail out of Bear Stearns investment bank in March 2008. Michel said it set the expectation that Lehman would also be bailed out, "setting up investors and creditors for a fall," he writes in a Heritage report.

"The notion that allowing Lehman to file bankruptcy caused the financial crisis is both wrong and dangerous," Michel said. "The danger in this myth is that it perpetuates the policy of bailing out financial institutions with taxpayer money—and that it allows policymakers who caused the crisis to escape responsibility for their actions."

The Power of Banking Lobbying

John Coffee, professor at Columbia Law School, said some regulatory agencies have put forward "cosmetic" changes in assuring history does not repeat itself with another financial crash.

"My view is that we've made at best uneven and modest progress towards curbing systemic risks for a variety of reasons," he said.

The most important barrier, he says, is that the financial services lobby "is most powerful interest group in U.S. and doing everything possible to slow down the pace of change," he said.

Coffee said he has dozens of examples where lobbyists have prevented regulatory action to support financial stability. For example, without a required capital buffer by law, Coffee is concerned about a future run on money market funds.

He blames lobbyists for influencing Congress, which oversees federal agencies.

"The SEC won't dare move in that direction. Congress would curb their budget if they move in that direction," he said.

Households on Shaky Savings Ground

James K. Galbraith, author of "Inequality and Instability: A Study of the World Economy Just Before the Great Crisis" from Oxford University Press, said the single most-important lesson most Americans have learned is that they cannot completely rely on personal saving, on private pensions, or on the value of their homes.

Some programs "still provide the most fundamental support to American working people and their families," he said. These include Social Security, Medicare, Medicaid, unemployment insurance, deposit insurance, and now the Affordable Care Act.

"So long as these programs survive most people will hang on, however little we reform the banks or prosecute the criminals who broke the system," said Galbraith, professor at the Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin.

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