Though celebrations have been a little muted, the fifth anniversary of Lehman’s demise should not be allowed to pass without remark. The imponderables of Armageddon, financial melt-down and economic catastrophe seem to have been avoided for the time being at least. The masses may continue in poverty, with huge numbers unemployed, but the Bob Diamonds are OK, and some valuable lessons have been learned.
The banks should obviously not be allowed to sell sub-prime mortgages or other derivative securities whose risk is deliberately obscured. Government agencies should not be allowed to support the loans for such purchases. Banks should clearly be reduced in size to less than too big to fail and be required to carry sufficient capital to make them safe to carry the risks they incur. They should not be allowed to trade on their own behalf with other people’s money. The fundamental ingredients of financial derivative assets must be clearly stated so their riskiness can be assessed, or their sale made illegal. Financial transactions should be subject at least to a nominal tax to reduce automated ultra-fast transactions, and help rebalance the economy from the derivative to the real. Ratings agencies, auditors and regulators must be legally liable for the reasonable truth of their various statements of approval.
Though none of this is new, these lessons have all been learned afresh since 2008. But there has been little practical application. In many areas progress has been negative. For example, the banks which in 2008 were deemed too big to fail, have grown considerably bigger. The risks they carry are now even more difficult to assess. The speculative financial sector continues to take investment out of the real economy at an increasing rate. The global swaps and derivatives market which was at the core of the 2008 crash, has grown from $59tn to $67tn, according to the Financial Stability Board, roughly the size of global GDP and many times greater than the global value of stocks and shares. The financial system is far too big, too risky, too dependent on short term money, too opaque and too intertwined so that financial failure in part will bring the whole system down with incalculable results.
All this is well known. So why is nothing done to put things right? Why have the politicians been persuaded to accept business as usual, without substantive change? One example will serve to illustrate the whole problem: banks proprietary trading, ie being allowed to trade with depositors’ money on their own behalf for their own gain. This activity was not allowed prior to the 1986 automation of stock markets and deregulation of the financial sector. Proprietary trading was not only a prime cause of the crash, but also resulted in corruption of the financial sector and much economic destruction. Political leaders across the globe have explicitly committed to ending the practice, as proposed by US Federal Reserve Chairman, Paul Volcker. President Obama explicitly dedicated himself to enacting the ‘Volcker rule’ which was enshrined as a section of the Dodd–Frank Wall Street Reform and Consumer Protection Act. But nothing has been achieved.
The leading banks and financial intermediaries have, of course, been extremely concerned at the attempted limitation of their carefree risk-taking which is underwritten by the tax payer. So they have lobbied mercilessly against the outlawing of proprietary trading. A report in the Financial Times recently referred to more than 700 meetings lobbyists had with regulators about banks proprietary trading. That’s a lot of expensive lunches. And more than 18,000 letters were generated on the subject. The result is that the proposed restriction now has so many exemptions and exclusions that it has been rendered more or less totally ineffective.
Goldman Sachs, JPMorgan Chase & Co and the rest, clearly still rule the world with politicians their willing puppets. But the lessons learned from Lehman’s demise suggest an alternative future is possible. As we celebrate this fifth anniversary we should demand that alternative be implemented.