NEW YORK (Reuters Breakingviews) - Over the next few weeks, Breakingviews will publish columns and features, produce a series of podcasts and hold a special live event to mark the 10-year anniversary of the global financial crisis. Some readers may consider this overkill. We beg to differ, for a simple reason: When people forget what went awry in 2008, they risk repeating the errors of the past.
In that spirit, welcome to “Ten Years After,” a multimedia editorial package that officially kicks off this week. Our inaugural column reflects on how little home-loan reform has been accomplished since Washington took over Fannie Mae and Freddie Mac, the mortgage-finance giants whose demise preceded Lehman Brothers’ bankruptcy by mere days. And in our first podcast, Columbia University history professor Adam Tooze joins the dots from the 2008 collapse to Brexit and the election of Donald Trump to the U.S. presidency.
This Breakingviews series will retrace some of the frightening days of 2008, when nearly every morning’s market open brought worries of a bank, investment fund or insurer going under. Ultimately, the crash led to almost 9 million job losses and millions of home foreclosures in the United States alone. It cost the country some $30 trillion in lost GDP, according to the Federal Reserve, and brought the global economy to its knees.
As you will read and hear in our conversations with policymakers, regulators and bankers caught in that maelstrom, we will also reflect on lessons learned. The hope is that by revisiting the crisis today, the more robust global financial system that emerged in its wake will endure. For that to happen, however, policymakers, investors and watchdogs need to continue to investigate the causes and examine the lingering impact of the 2008 fiasco.
To that end Edward Chancellor, financial historian and founding Breakingviews columnist, will examine five critical, still unresolved, problems stemming from the crisis response, particularly the move by global central banks, led by the Federal Reserve, to drastically lower interest rates to zero. These include speculative financial bubbles, widespread misallocation of capital, the return of the so-called carry trade, China’s shaky finances and the rise of populism due to wealth inequality.
Lehman’s collapse sits at the epicenter of the tumult a decade ago. As Antony Currie will explain, its bankruptcy offers a sobering lesson in the destructive power of hubris. Chief Executive Dick Fuld and his lieutenants had successfully navigated several earlier financial crises. That bred overconfidence, prompting them to ignore their own risk-management tenets, not to mention the critiques of short-sellers, while regulators stood idle.
The consensus today is that banks are more stable, largely thanks to the failure of Lehman and others, prompting lawmakers and regulators to demand institutions hold more capital. But for investors in some of the companies that limped out of the crisis that’s of little comfort. American International Group, for one, still isn’t back to profitable growth, and the insurer trades at a discount to book value. As Richard Beales will observe, “Investors don’t yet accept that the company’s dismal recent past is behind it. Maybe that’s something AIG can achieve in 2019, its centennial year.”
Peter Thal Larsen reflects on how the loss of confidence in bankers sparked a broader crisis of trust that has since afflicted economists, politicians and the media. Edward Hadas writes that the crash taught excessive credit growth is dangerous but it left many big questions unanswered. For instance, what drives inflation? Are big trade deficits dangerous or irrelevant? Are derivatives and hedge funds evil, irrelevant or stabilizing?
The news isn’t all gloomy. Our columnists examine the institutions that emerged from the crisis with smart deals under their belts. Buying troubled lenders Washington Mutual and Wachovia transformed JPMorgan and Wells Fargo, respectively, into national retail-banking giants. Santander advantageously gobbled up UK lenders. And Mitsubishi UFJ Financial’s September 2008 decision to buy a 20 percent stake in Morgan Stanley has yielded a good financial and industrial return for the top Japanese lender.
And for the first time since the subprime mortgage crisis began, small banks in America are now paying about the same amount to fund their businesses as the biggest ones, those once deemed be too big to fail. That fact, revealed in a recent Federal Deposit Insurance Corp study, is one piece of evidence to suggest the market has confidence regulators could unwind a large financial institution without resorting to a taxpayer-funded bailout.
Though regulators may have the tools they need to approach another crisis, the profound influence of the financial industry may prevent them from using them. That’s a point Sheila Bair, who ran the FDIC, makes in our “Ten Years After” Exchange podcast series. Similarly, former Bank of England Deputy Governor Paul Tucker argues that preserving central bankers’ independence requires a fundamental rethink of the limits of their power.
These conversations will be released twice a week through the middle of October. They include key figures, such as former U.S. legislator Barney Frank, whose name adorns the primary Wall Street reform act. He believes regulation has made finance substantially safer, but politics could make it more fragile. Frank argues that the swift, bipartisan response that met the near-collapse of the financial system would be impossible today.
Democratic Congresswoman Maxine Waters tells Washington columnist Gina Chon lawmakers had no Plan B when they voted for the $700 billion bailout package to save the U.S. economy in 2008. She discusses the emergency education she received about derivatives and other complex financial instruments. If she becomes head of the House Financial Services Committee after November’s midterm elections, she vows to tackle some unfinished business from the crisis.
Greg Fleming, who engineered the sale of Merrill Lynch to Bank of America on the same day Lehman went bust, argues the system is more robust. Yet he has shifted his career away from capital-dependent businesses and towards offering advice, now as the head of a new venture with the Rockefeller family. So, too, has Vikram Pandit, who led Citigroup through the crisis and into recovery. Pandit has been investing in financial startups taking on the big banks, including the one he formerly ran, with better technology and a focus on customer service.
These candid podcast conversations, insightful views and feature and more will be available on Reuters Breakingviews as the world reflects on the events of 10 years ago. Those clients who need something stronger can attend a Reuters Newsmaker one-on-one live discussion with Gary Cohn, the former Goldman Sachs president who recently left his role as Trump’s chief economic adviser. Drinks will follow. Happy anniversary.
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