This week is the five-year anniversary of the bankruptcy of Lehman Brothers. That’s being taken to mean it’s the five-year anniversary of the financial crisis.
Wrong. Or, at the least, terribly incomplete. The focus on Lehman obscures the fact that there were really three crises. Sure, there was the crisis in the financial markets in late 2008. But there was also the ongoing financial crisis that would have happened even if Lehman’s failure didn’t cause any troubles. Meanwhile, there’s still a crisis of confidence over whether or not our financial markets are actually benefiting the economy as a whole.
This isn’t just academic. Emphasizing Lehman biases the conversation over financial reform in a subtle but powerful way. The implication is that if Dodd-Frank can prevent the events of fall 2008 from happening, then our work here is done. That view is dangerously wrong.
The first crisis: Failing firms
The popular narrative of the crisis comes down to two firms: Lehman Brothers and AIG. We’ve made real progress on the problems behind both of them.
Lehman Brothers basically became insolvent, and, in effect, suffered a bank run. There was no legal regime that allowed the regulators to kill the firm in an orderly way. Through Basel III and the new legal powers that the Federal Deposit Insurance Corporation (FDIC) has to impose losses, significant progress has been made on addressing these problems, although many regulators wisely argue that capital requirements should go above what has currently been mandated in Basel.
AIG failed because its derivatives position became impossible for it to manage. The Commodity Futures Trading Commission (CFTC) has made major progress in bringing the light of transparency to the over-the-counter derivatives market, making sure collateral and price transparency clean up the market.
They have hit resistance, though. As the economist Alan Blinder wrote earlier this week, the CFTC’s Gary Gensler “ran into a wall of resistance from the industry, from European regulators, and from some of his American colleagues when he tried to implement even the weak Dodd-Frank provisions for derivatives.”
It’s important to name the actual agents involved. Instead of a nebulous and nefarious blob of interests called “the industry,” there’s an actual human being putting pressure on Gensler to stop these cross-border regulations that tie U.S. firms in Europe to U.S. regulations. And, as Silla Brush & Robert Schmidt reported in a great Bloomberg piece, his name is Jack Lew, and he’s the Treasury secretary of the United States.
In case you think that doesn’t matter, remember that AIG’s derivatives were sold out of its London office.
The second crisis: The housing crisis
But let’s say we got really good at killing failing firms. Imagine if Lehman collapsed and nothing happened. No panic, no bailouts, no risks to the system as a whole, no Too Big To Fail. That doesn’t mean there wasn’t a crisis. Focusing on the financial crisis ignores the crisis in the housing housing market of the 2000s and what happened afterward.
Even if Lehman Brothers had collapsed without anyone knowing, we still would have had mass foreclosures devastating neighborhoods and underwater mortgages driving the Great Recession. There still was an entire Wall Street pipeline designed to deceive both borrowers and investors. There still was a derivatives market designed to distort the price of risk while also creating instruments designed to fail.
Reviewing the numerous stories of financial firms selling products they wanted to fail (start with what ProPublica found in its investigation of Magnetar, for a particularly important example), the financial industry not only failed in its responsibility to allocate our economy’s collective savings, it often actively set out to destroy value. Independent of interbank lending and living wills, this is just as important a crisis.
The third crisis: The culture of Wall Street
Those actions can be considered only in light of a business culture and set of institutional norms that were ongoing in the crisis. The "I'll be gone, you'll be gone” approach to what the financial industry was selling -- where it would make enough money to disappear before the consequences happen -- was rampant during the bubble. The toxic culture that has been exposed, and the subsequent crisis of legitimacy Wall Street faces, is a whole other crisis.
Concerns about the persistence of the “I’ll be gone” mentality is one reason why people wanted to see criminal convictions, rather than just a “perp walk” -- something that could have forced real institutional change in addition to bringing justice. When we see HSBC pay a small fine for money laundering for drug cartels, or another settlement on foreclosure fraud that is quickly ignored by the big banks, we are still living through this crisis of legitimacy.
There’s a list circulating of more than 300 books (!) written on the financial crisis. One that I think stands out for its moving human quality didn’t make it. That book is "The Trouble is the Banks: Letters to Wall Street," and it’s a project of Occupy the Boardroom and n+1. It consist of more than 150 pages of letters written to Wall Street executives from ordinary Americans on everything from the bailouts to foreclosures.
Though the letters are often angry, it’s remarkable how many of them are motivated by the basic notion of fairness. The sense of betrayal caused by Wall Street’s unwillingness to accept responsibility, much less shame, for its actions, as well as an urge to call out an institutional double standard tie together the wide range of different letter writers. They speak for most people I’ve talked to. Yet these kinds of things are notoriously difficult to change, and it remains open on whether or not that will happen.
It’s become commonplace for Wall Street executives to say that the chance of another crisis “is as close to zero” as it can be. And perhaps that is true, or will be if we tweak regulations a certain way. But remember: The crisis remains with us in every foreclosed neighborhood and ripped-off investor -- and in the suspicion ordinary people have that the economy as a whole is rigged against them.