In a few days, we’ll celebrate the 1st death anniversary of Lehman Brothers – the investment bank whose collapse triggered the worst financial crisis since after the second World War. Money has been lost following enormous drops in the stock market, but money has also been made from the massive infusion of capital into the system. More than 90 small banks have collapsed and the big ones are still standing. Ponzi schemes have been unfolded and some markets are still behind change for transparency. Bankers have been criticized, bonuses have been capped. While many things have happened, we cannot say we are seeing a fresh and new financial system. It is hard to contest the fact that we’re still seeing the same ol’ Wall Street that existed prior to September 14, 2008.
On the regulatory front, Democrats’ efforts to rework the rules for finance have bogged down amid infighting between federal regulators, fury among bankers and opposition from many lawmakers who believe that further expanding the government’s reach will only create new problems. The all-consuming debate over health care has damped enthusiasm for tackling such complex legislation.
Meanwhile, major U.S. banks have regained their footing, and some of their swagger. Profits are off their lows. Large compensation packages are back. And so is risky business.
From the market lows and the damages we’ve seen, we hoped for a recovery. And recovery we got. But in hindsight, has recovery actually helped? Maybe consumers are a little more confident, manufacturing is a little higher, and bank profits have reached stellar levels yet tracing the problems of the past, those which have contributed to the worsening conditions of the global economy. Also maybe, recovery has brought out the forgetfulness among people. More than being concerned about the possibility of another bubble forming or another collapse from happening, more are looking into the correction, which investors believe will come in no time. Sure, the markets have climbed up so much so fast almost everywhere that those who were lucky enough to get in during the worst of times have seen their portfolios erase the losses they’ve made when the crisis struck or some may have made money when they decided March 9 was an ideal day to begin investing or make better use of money on the sidelines. But people are quick to forget about the toxic assets, the regulatory loopholes, and the excessive risk-taking. As that WSJ piece pointed out, risky business is back.
The world’s central banks were quick to act on the crisis – pumping stimulus when deemed necessary and bailing out firms lest they cause an even bigger catastrophe than what’s already been made. They argued, those measures were better for the long-term. That if we save some institutions from failing and the economy from further collapsing, we will be better off. But would we be? When panic abounds, it is much easier to argue for what seems to be long-term solutions. In the case of the United States, the Congressional debates ended up looking like sheer formalities to be able to claim that a solution has been thought of or debated well. That they would improve the situation.
A year into this crisis, with nothing much changed, it is perhaps not inappropriate the question the “long-term benefit” that was argued for several months ago. Instead of solutions for the greater good, have people been deceived into believing that everything that was done was indeed necessary? Are we not merely seeing in place short-term faulty propositions under the guise of long-term panacea?
On the one hand, the G20 meeting of finance ministers over the weekend have discussed capping bonuses and increasing capital requirements. On the other, individual countries are talking about increasing regulations to “ensure” financial institutions no longer take advantage of similarly mistaken consumers. That said, there are two fears lingering in my head:
First, that we’ll have more but unnecessary legislations passed by the Congress. We have to be careful about the kind of reforms we seek. Maybe capitalism has exposed its flaws during this crisis, but in no way should man-made laws stand in front of it and neglect the good sides of the ideology. With a Democrat-led Congress, there truly is a huge risk that the new laws would hinder mainly financial institutions from prospering the way they did prior to the crisis. They have made mistakes, no doubt about that. But worry comes from possible over-legislation as well as what other CEOs have branded to be the danger of “painting everyone with the same brush”.
Second, with the “recovery” in place, the necessary changes now the least of concerns of many, and reforms lagging, we are simply setting ourselves up for another version of a financial crisis. Banks have begun deleveraging but without significant rules as to how much leverage one firm can take, we’ll probably find ourselves on the same road again years from now. Anyway, what has happened to PPIP, the program designed by the Treasury to remove the toxic assets from the ailing banks? What has happened to legislations aimed towards ensuring that compensation and risk-taking go hand in hand? I have made my point in the past that I do not really care about bankers being paid as much as they do for as long as they don’t earn them from activities with only short-term results. Risky business is back and so is big compensation but nothing has been set up to ensure that excessive risk-taking is capped. I don’t mind the esoteric and complex financial instruments. They are part of financial innovation and I like them. The point where I begin to dislike them is when they are being used to deceive and take advantage of uninformed and uneducated public. And legislations to correct that mistake has my backing. Without any of the wrongs in the financial system corrected, potential inflation within the next couple of years, it shouldn’t come as a surprise if this cycle of boom and bust repeats itself.
History repeats itself but it doesn’t have to be the same kind of history because history can be made and it has to made now. Otherwise, let’s welcome Financial Crisis 2.0.
(Read the cited WSJ article here.)