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Financial Planning > Behavioral Finance

5 Years After Lehman Crash: ‘Dark Times’ Ahead

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Dread and disgust seem to be the dominant emotions marking the fifth anniversary of the Lehman Brothers bankruptcy, as the financial commentariat lament that the U.S. has not altered the conditions that triggered America’s historic financial crisis.

A sampling of expert opinion on where we stand today in relation to the time Lehman filed for bankruptcy on Sept. 15, 2008, suggests a consensus view that Wall Street got bailed out while ordinary Americans are worse off; that the financial system remains unreformed and dangerous; and that the crisis’ culprits have gone unpunished.

Structured finance expert Janet Tavakoli makes many of these points about the lack of any indictments or meaningful reform on her Tuesday blog post.

Tavakoli characterizes the root of the problem:

“The sheepdogs that are supposed to protect the flock from the wolf pack are really wolves in sheepdog clothing. They exit the regulatory revolving door in expensive bought and paid for wolf-skins.”

She laments the bailouts of the financial sector, which she says “destroyed capitalism,” and dimly foresees “dark times for the future of the republic.”

In a retrospective report, the Wall Street Journal notes that despite slow economic progress there are still 1.9 million fewer jobs, one in six mortgage holders still owe more than their home is worth and that household income is 5% less than in September 2008.

While the government rescued large financial institutions like Bear Stearns, AIG, Goldman Sachs, Citigroup and Bank of America, Fannie Mae and Freddie Mac and the U.S. auto industry, the Journal quotes the Troubled Asset Relief Program oversight committee’s report:

The bailouts gave the impression, it said, “that any company in America can receive a government backstop, so long as its collapse would cost enough jobs or deal enough economic damage.”

Neel Kashkari, who ran TARP, is quoted as saying: “To save the economy, we had to violate a core American principle: You bear a risk, you suffer the consequences.”

Writing for The Atlantic, banking law expert James Kwak expresses the view that the government has not undertaken meaningful structural reforms needed to avert a future crisis.

Kwak describes the root of the problem as an ideology of unregulated financial markets, which took root in the Clinton era of the 1990s and continued in the Bush years. That period was characterized by “derivatives nonregulation, consumer nonprotection, the end of Glass-Steagall, creative capital accounting, regulatory arbitrage, and, ultimately, tens of thousands of empty houses rotting in the desert,” Kwak writes.

Meanwhile, despite the five years that have passed since the Lehman debacle, bank capital requirements “will at best increase from laughable to amusing,” Kwak writes. And he laments the plodding regulatory response to technology risks that could bring down the financial system (such as the Excel-based faulty risk modeling at the root of the London Whale debacle) while noting that “in China, they ban people for life for this sort of thing.”

Kwak is further appalled that the president’s apparent first choice to succeed Federal Reserve Chairman Ben Bernanke is Larry Summers — “the Clinton administration’s point person for financial deregulation” and the Obama administration official who, with former Treasury Secretary Tim Geithner, “chose not to press for the structural reforms that could have made a difference.”

A third commonly voiced theme in crisis anniversary coverage is that the culprits got away scot-free. The Center for Public Integrity’s Alison Fitzgerald, writing in the Huffington Post, examines the post-crisis careers of five former top executives and concludes:

“None are in jail, nor are any criminal charges expected to be filed. Certainly none are hurting for money.”

For example, former Merrill Lynch CEO Stanley O’Neal turned his brokerage firm into a major manufacturer of collateralized debt obligations (CDOs) backed by subprime mortgages.

“By 2006, it was the biggest underwriter of CDOs on Wall Street, and a year later the company had $55 billion worth of subprime loans on its own books that no one wanted to buy,” Fitzgerald writes.

“O’Neal floated out of Merrill comfortably, however, buoyed by a golden parachute worth $161.5 million. In the eight years leading up to his ouster, O’Neal earned $68.4 million in cash salary and bonuses, and he sold Merrill stock at a profit of at least $18.7 million, according to a Center review of annual reports and SEC filings.”

Fitzgerald goes on to describe O’Neal’s Park Avenue apartment, Martha’s Vineyard vacation home and Alcoa board of directors seat.

Check out this related story in Research magazine about Janet Tavakoli: Finding the Culprits of the Crisis


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