Our view: What has Amer­ica learned in 10 years? Not much


Satur­day marks the 10th an­niver­sary of the col­lapse of Lehman Bros., and it would be nice to re­port that Wall Street and Wash­ing­ton had learned the lessons of the Great Re­ces­sion and put in place mea­sures to pre­vent a re­cur­rence. Nice, yes. Ac­cu­rate, no.

In fact, lit­tle has been done to ad­dress the struc­tural prob­lems in mar­kets that were so ob­vi­ous dur­ing the bank­rupt­cies, bailouts and bank runs of the last cri­sis. Even less has been done to an­tic­i­pate the prob­lems that will lead to the next cri­sis.

It’s not as if Congress, the Fed and suc­ces­sive pres­i­den­tial ad­min­is­tra­tions didn’t see the prob­lems. In the months af­ter the Lehman col­lapse, all man­ner of re­forms were con­sid­ered. But af­ter pass­ing the rel­a­tively nar­row Dodd-Frank Wall Street Re­form and Con­sumer Pro­tec­tion Act in 2010, law­mak­ers con­sid­ered the job done, and lob­by­ists be­gan chip­ping away at the changes.

That lack of ac­tion en­sures that the next cri­sis is a mat­ter of when, not if.

To be sure, Dodd-Frank did take some im­por­tant ac­tions, most notably in re­quir­ing that banks main­tain stronger bal­ance sheets to pro­tect them in the event of wide­spread loan de­faults. But im­por­tant parts of that law — in­clud­ing a sec­tion bar­ring banks from mak­ing casino-like wa­gers on such things as in­ter­est rates and currencies — have been wa­tered down in the en­su­ing years.

More omi­nous is the fact that sig­nif­i­cant ar­eas of the fi­nan­cial sys­tem were not ad­dressed in Dodd-Frank. And com­pan­ion leg­is­la­tion to fix these vul­ner­a­bil­i­ties never ma­te­ri­al­ized. Among the re­main­ing ar­eas of con­cern:

❚ Bond rat­ing agen­cies. These firms, led by the likes of Moody’s and Stan­dard & Poor's, gave ster­ling rat­ings to se­cu­ri­tized bun­dles of toxic mort­gages for the sim­ple rea­son that they were paid by the is­suers to do that. In the past 10 years, there has been much hand-wring­ing but pre­cious lit­tle progress in elim­i­nat­ing the ob­vi­ous con­flicts of in­ter­est rife in the rat­ings game.

❚ Money mar­ket funds. These ul­tra­con­ser­va­tive bond funds are still treated like bank de­posits, which means that in­vestors have ev­ery in­cen­tive to pull their money out if they hear that some of the fund’s bonds have de­faulted. This hap­pened in 2008 with some­thing called the Re­serve Pri­mary Fund, prompt­ing a 1930s-style bank run. And it could very well hap­pen again.

❚ Gov­ern­ment-spon­sored en­ter­prises. Opin­ion is di­vided on the role that three un­usual com­pa­nies — Fan­nie Mae, Fred­die Mac and Gin­nie Mae — played in the Great Re­ces­sion. But it is clear they pose a se­ri­ous threat go­ing for­ward. Thanks to their spe­cial con­nec­tions to gov­ern­ment, they can bor­row money more cheaply than other com­pa­nies, and have used this to dom­i­nate the busi­ness of guar­an­tee­ing mort­gages against de­fault. They are on the hook for $6 tril­lion in out­stand­ing mort­gages in Amer­ica, a dis­turb­ing con­cen­tra­tion of risk. Ef­forts to delink these com­pa­nies from gov­ern­ment to en­able a broader and more di­ver­si­fied in­dus­try have gone nowhere.

De­fend­ers of the fi­nan­cial sta­tus quo ar­gue that reg­u­la­tion is not the an­swer. To some de­gree, they have a point. Even the rel­a­tively light reg­u­la­tion of banks in­cluded in Dodd-Frank has prompted a fair amount of games­man­ship. This is ev­i­dent in how banks are slowly ced­ing much of the home loan orig­i­na­tion busi­ness to non­bank in­sti­tu­tions such as Quicken Loans.

Nev­er­the­less, given what the years

2007 through 2009 showed about how frag­ile fi­nan­cial mar­kets can be­come dur­ing crises, it is amaz­ing how lit­tle the na­tion has learned.


Protest in front of Lehman Bros. on Sept. 15, 2008, in New York.

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