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The Financial Crisis One Year Later: The More Things Change, the More
They Stay the Same
By Robert Weissman
September 16, 2009
One year ago, Lehman Brothers declared bankruptcy, bringing to a head
the growing chaos on Wall Street.
In the days and weeks that followed Lehman's September 15, 2008
collapse, credit markets would freeze, the stock market plunged, the
government took a controlling interest in AIG, Wachovia and Merrill
Lynch merged themselves out of existence, the Congress approved a plan
to spend $700 billion to bail out Wall Street, the Federal Reserve
innovated an array of programs involving trillions of dollars worth of
support for Wall Street and the credit markets, and the national economy
-- and much of the global economy -- declined precipitously.
As the crisis unfolded, it quickly became commonplace to suggest that
nothing would ever be the same, on Wall Street or in the national
economy. The Wall Street goliaths had been humbled -- and many had gone
out of business, via merger or bankruptcy. Deregulation went out of
style and even former Federal Reserve Chair Alan Greenspan indicated
that the conceptual underpinnings of his deregulatory approach had
proven flawed.
One year later, it is clear that the conventional wisdom emerging as
the crisis developed was wrong.
Some things have changed dramatically -- notably in the real economy --
but Wall Street's political power remains intact. No new rules are in
place to prevent a recurrence of the crisis. Major questions remain
about whether any such rules commensurate with the scale of the crisis
-- with the important exception of a new consumer financial protection
agency -- will be seriously considered.
The financial crisis has had a devastating impact on regular people --
and the situation continues to worsen, even as the economy enters what
may be a potential recovery.
Overall economic growth fell by more than 5 percent (on an annual
basis) in the fourth quarter of 2008 and by more than 6 percent in the
first quarter of 2009.
Thanks to this economic crash, the official unemployment rate is racing
to 10 percent, with many believing it will persist at or near double
digits through the end of 2010. The actual unemployment rate -- taking
into account underemployment and discouraged workers -- has topped an
astounding 16 percent. A staggering one in six workers is out of work or
underemployed.
The poverty rate has worsened dramatically, just based on the available
data for 2008 alone. The official poverty rate in 2008 was 13.2 percent,
up from 12.5 percent in 2007. There were 39.8 million people in poverty
in 2008, 2.5 million people more than the previous year. The 2008
poverty rate -- and things have surely gotten worse -- was the highest
since 1997.
The mortgage crisis continues to worsen. More than 1.5 million
foreclosures were filed through the first seven months of this year. By
mid-2009, roughly a third of outstanding mortgage borrowers were
underwater -- meaning they owed more than the value of their home -- and
the number is growing. Mortgage modifications -- almost none of which
touch principal -- do not come close to keeping pace. Goldman Sachs
projects there will be 13 million foreclosures between the end of 2008
and 2014.
The causes of the financial crash continue unabated and in some cases
have worsened.
Out-of-control compensation packages, linked to short-term profit
performance, drove top Wall Street and big bank executives and traders
to take reckless risks. For them, it was a game of heads we win, tails
you lose: If their firms registered short-term profits, they received
outrageous bonus packages; if there was a longer-term fallout, that
would hurt shareholders, but they would have already pocketed their
bonuses. Wall Street bonuses are already on track to match or exceed the
glutinous pace of 2007.
Banks and other financial institutions deemed "too big to fail" engaged
in wild speculation, secure in the knowledge that they would ultimately
be backstopped by federal support. These behemoths helped generate the
crisis as well by leveraging their political power to peel back the
regulatory restraints on Wall Street. Now, thanks to a series of shotgun
mergers, the banks are bigger than ever, and there is a greater
combination of commercial banking and investment bank operations in
single corporate entities.
The proliferation of exotic financial instruments led to massive
leveraging and complicated interconnections among top firms that no one
could track. The unraveling of these ties led to the downfall of AIG,
among other things. While financial derivatives are justified as helping
economic players hedge against risk, it turns out they are primarily
speculative tools used overwhelmingly by a small number of players. This
concentration of massive speculative betting continues, with five banks
owning more than four-fifths of the notional value of all outstanding
derivatives in the United States. The notional value of these banks'
derivatives exceeded $190 trillion in the first quarter of 2009.
Wall Street's go-go years earlier this decade were fueled by a housing
bubble and deceptive lending practices. Consumer rip-offs continue apace
-- and appear to be central to the banks' business model. Overdraft fees
alone will bring in more than $38 billion in revenue to the banks in 2009.
Meanwhile, the public is paying massively for rescuing Wall Street from
itself. The Special Inspector General set up to oversee the bailout
estimates that government agencies, including the Federal Reserve, will
ultimately put out more than $23 trillion in various programs and
supports related to the financial crisis. This total is almost three
times what was spent on World War II, in adjusted dollars.
Most of these trillions will return to the Federal Reserve or the
Treasury, but that hardly mitigates the scale of the public investment
and risk committed to save Wall Street. And the Treasury Department is
certain to lose tens of billions -- quite likely hundreds of billions --
in the deal.
The deregulation that led to the financial crisis, the bank-friendly
immediate response to the crisis and the failure to impose meaningful
restraints on Wall Street after the crisis can all be traced to Wall
Street's political power. Wall Street spent more than $5 billion on
federal campaign contributions and lobbying from 1998 to 2008, and its
fervent spending continues. The financial sector has spent more than
$200 million on lobbying in 2009 alone.
In spring of this year, the banks defeated a proposal, which had been
expected to pass, to authorize "cramdowns" of mortgages in bankruptcy.
This modest measure would have permitted bankruptcy judges to adjust
mortgage principal in bankruptcy, to help people stay in their homes. It
would have had relatively limited application and likely would have
helped the banks, which are hurt by foreclosures in an environment where
they cannot sell houses from which they have evicted borrowers. But
cramdown violates the banks' ideological commitment to preventing
adjustments of principal. They mobilized to defeat it, leading a
frustrated Senate Majority Whip Richard Durbin to say the banks "own the
place" -- meaning the Congress.
And now, the Financial Services Roundtable has openly announced its
intention to "kill" the most important reform measures urged by the
Obama administration: creation of a consumer financial protection
agency.
Perhaps one of the most telling statistics is the number of stand-alone
pieces of financial reform legislation passed, one year after the
collapse of Lehman Brothers: zero.
Robert Weissman is president of Public Citizen, <www.citizen.org>.
(c) Robert Weissman
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