Still no consensus or major reform after global financial crisis

By Steven Pearlstein
Wednesday, April 7, 2010

NEW YORK I attended a conference at Columbia University earlier this week that wound up focusing on how the mainstream business press contributed to the recent economic crisis with fawning, uncritical coverage of the financial sector that ignored the evidence of abusive lending and bought into the myth that unregulated markets are more innovative and self-correcting.

It's a common view these days, particularly on the Internet, and although it's a bit overdone, I'll admit there is a dollop of truth in it. To demonstrate that we still haven't learned our lesson, one of the speakers held up a story from last summer about the close relationship between J.P. Morgan Chase chief executive Jamie Dimon and top officials of the Obama administration -- so close, in fact, that White House Chief of Staff Rahm Emanuel had agreed to speak privately at an upcoming meeting of the bank's board of directors. That these ties were reported without the requisite amount of outrage was cited as proof that "legacy" media continue to glorify and suck up to Wall Street titans.

It was left to Chrystia Freeland of Thomson Reuters to point out that the story was seen by both Dimon and his gleeful rivals as a public relations disaster and caused such a ruckus that Emanuel was forced to cancel his appearance.

Three years after the onset of what was then thought of as the "subprime crisis," there remarkably is still no consensus on why it happened, who is to blame, how necessary the government bailouts were and what needs to be done to prevent such a cataclysm from happening again. Over time, the issues have been overwhelmed by populist anger, infused with political ideology, distorted by partisan maneuvering and special-interest pleading, and ultimately eclipsed by economic recovery. Any reforms that emerge from the political process are likely to reflect this collective confusion.

Over the past year, there has been a steady stream of books trying to make sense of the crisis. The latest, and perhaps the most accessible and even-handed, is Roger Lowenstein's "The End of Wall Street." A decade ago, Lowenstein chronicled the last global financial meltdown in "When Genius Failed," which retold the rise and dramatic fall of Long-Term Capital Management, a giant hedge fund. In reporting on this latest crisis, Lowenstein says the one thing that kept jumping out at him was how little the world had changed.

"The lessons are pretty much the same," he told me. Too much leverage. Overreliance on mathematical models. Excessive and behavior-distorting fees and compensation. Overconfidence that trading positions could be unwound quickly if markets turned.

One of the strengths of Lowenstein's account is that he resists the temptation to paint with too broad a brush. Although many of the titans of finance come across as arrogant, intolerant of dissent and shockingly uninformed about the activities they were meant to oversee, he's quick to point out that there were exceptions, chief among them the aforementioned Dimon.

Under Dimon, J.P Morgan saw the subprime mortgage bubble early and moved quickly to reduce its exposure. It never got into playing games with off-balance-sheet vehicles nor did it traffic in collateralized debt obligations, real or synthetic. Dimon insisted that his bank have access to enough liquidity to get through two years without having to tap short-term credit markets, if necessary. And when other executives were confidently telling shareholders in early 2008 that the future looked bright, Dimon was acknowledging that underwriting had gotten dangerously sloppy, that too much of what passed for financial innovation served no useful purpose, that growth rates in the industry were unsustainable and that serious turbulence lay ahead.

But three years of industry vilification now seem to have taken their toll on Dimon. His latest shareholder letter, released last week, still has plenty of candor, some of it refreshing and some of it self-serving, but there was also an undercurrent of defensiveness. It may be true, as Dimon claims, that J.P. Morgan would have survived in even better shape if the government had not stepped in to bail out the industry, although that is only conjecture. And although he is right to push back against the populist notion that, when it comes to banking, big is always bad, he also clings to the free-market fiction that the benefits of scale and scope are passed on to customers rather than captured by the banks' shareholders and employees. The levels of trading profits and compensation surely suggest otherwise.

Like other Wall Street titans, Dimon is eager to demonstrate that he supports reform of financial regulation even as he opposes many specific ideas proposed by the Obama administration and Democrats in Congress. What's missing, however, is even a hint of acknowledgment of how wrong the industry has been in its lobbying on such issues.

After all, the industry opposed registration and disclosure requirements for hedge funds, just as it opposed all regulation of energy and credit derivatives. When bank regulators in the George W. Bush era took the first steps to put the brakes on runaway real estate lending, the industry put up such a stink that implementation was delayed until the bubble had burst. And when the government proposed rules to make sure new "structured products" were not used by corporate customers to evade regulation or mislead investors, industry pressure resulted in watered-down rules that allowed such abuses not only to continue but flourish.

Given this track record, why should we listen to them now?

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