For many, the bankruptcy filing of Lehman Brothers in September 2008 was the formal commencement of the Great Recession. Within days, we learned that American International Group and Merrill Lynch would be next in line.
The world economy—and life as we once knew it—was walked up to the edge of a great, dark abyss and one step from oblivion. Due to a federally inspired shotgun wedding and the government’s unimpressive bailouts of the too-big-to-fail Wall Street behemoths, we avoided the abyss and settled for the Great Recession.
Fast forward five years. If the financial services industry is the grid that powers our economy, how are we doing? Have sufficient safeguards been put in place to protect consumers and investors in the event of another catastrophic breakdown of our financial system? Is excessive risk-taking by investment banks and Wall Street a thing of the past? Has the lack of transparency and oversight issues in our financial markets improved?
For the big banks, the answer is simple: Not much has changed since five years ago.
In 2012, JP Morgan’s “London Whale” event lost more than $6 billion by betting on the same type of credit-default swaps responsible for leading to the original great power failure. Mortgage giants Fannie Mae and Freddie Mac, still under government conservatorships, went on to sue many of the big banks for creating the fraudulent mortgages that ultimately put Fannie’s and Freddie’s lights out.
As for Congress, its knee-jerk reaction to the Great Black Out of 2008 was the Dodd-Frank Wall Street Reform and Consumer Act. However, instead of creating the fundamental financial reform that it intended, Dodd-Frank became so watered down by Wall Street lobbyists both at the adoption stage and in the rule-making process that its additional wattage would barely power a lava lamp.
As for America’s six largest banks, they now have about 30 percent more assets than in 2007. So while these financial behemoths are substantially bigger, they still lack meaningful regulation over the problems that caused the last financial crisis.
Meanwhile, the government’s chief regulators, led by the Securities and Exchange Commission, continue to be about 10 steps behind in that they fail to have any meaningful power to avoid the next big blackout.
With this as our new reality, is there any doubt that the too-big-to-fail are now simply too bigger to fail?
Perhaps, however, there is just a little bit of light at the end of the tunnel. Consumers are becoming more reluctant to take on personal debt, and banks seem to be requiring better credit and some down payments in order to make new mortgage loans.
The days of the ridiculous and absurd NINJA mortgages (No Income No Job No Appraisal) seem to be a thing of the past.
For its part, the SEC is taking steps to require securities law violators to actually admit their misdeeds, as opposed to dodging behind the traditional practice of neither admitting nor denying breaking the law.
In the end, as long as the lights remain bright at the Wall Street casinos, where unregulated bets can still be made on credit-default swaps and other exotic and speculative investments, all of us remain at risk of another event that could very well plunge us into the next Dark Age.
How long will it take for the lights to finally go on in this country so that we actually learn from our mistakes?•
Maddox is the founder of Maddox Hargett & Caruso, where he concentrates on securities arbitration, litigation and regulation. He served as the state securities commissioner from 1989 to 1991, and is a past president of the Public Investors Arbitration Bar Association. Send comments on this column to firstname.lastname@example.org.