Can It Happen Again? Emphatically, Yes

The last few weeks the financial press has been filled with articles noting the passing of the 10th anniversary of the Lehman Brothers bankruptcy. A few of the articles have been hand-wringing of the sort that if Lehman had only been rescued – like AIG – or merged with a strong commercial bank – like Merrill Lynch – the crisis would have never happened, or at least it wouldn’t have been so severe.

That’s wishful thinking. There was plenty of reckless and irresponsible behavior taking place on Wall Street to create the crisis that did develop, whether Lehman was saved or not. Like giving home mortgages to anyone who asked while creating securities backed by these often worthless loans, which only magnified the risk by a huge factor, then slapping a triple-A credit rating on them, so everyone was assured that everything was fine.

But most of the recent articles have been about whether such a crisis can happen again. And the answer is, unfortunately, absolutely. We may already be seeing the seeds being planted right before our very eyes, although I’m not sure how close we are to the next crisis. It certainly bears careful watching.

Boom-and-bust cycles are endemic to any free-market capitalist system anywhere, unfortunately, since they’re largely based on self-interest and, too often, greed. The only system where that is not the case is a planned or Communist one, where the economy is perpetually in bust mode. When the next bust will hit is anyone’s guess, but it seems with each passing day that we keep moving closer and closer to it, and not a whole lot is being done about it.

What’s worrisome is that bad behavior by people in the banking industry and Wall Street has gone on unabated since the crisis and now seems to be getting even worse, if the daily financial headlines are any indication.

Case in point: the money-laundering scandal unfolding at Danske Bank, Denmark’s largest bank. The bank itself now admits that more than $230 billion – that’s billion with a B – of mostly Russian money was laundered through its tiny Estonian branch, possibly dating back as long as five years or more, and nobody there bothered to look. This during a time when bank regulation and oversight has supposedly never been more intense and more strict as a result of the financial crisis.

But it’s hardly the only one, although it may be the biggest (let’s hope).

Last week the Commodity Futures Trading Commission (CFTC) hit Bank of America with a $30 million fine for trying to manipulate the ISDAfix, which is used to settle options on hedging and interest-rate swaps. That was the agency’s ninth enforcement action – and second in just two days – against firms trying to manipulate that same obscure benchmark.

And before that, we had a much bigger scandal over firms trying to manipulate a much more well-known benchmark – the London interbank offered rate – which is now in such ill repute that international authorities such as the Federal Reserve are trying to come up with a new standard to replace it.

Right here at home, we’ve had the various scandals at Wells Fargo, with a new one seeming to crop every few weeks. Plus dozens of others, major and minor, at other institutions. There’s a constant flow of them.

Prospects for the future don’t hold out hope for positive change. The Washington Post reported recently that “about 30% of the lawmakers and 40% of the senior staff who crafted Congress’ response [to the financial crisis] have gone to work for or on behalf of the financial industry. The pattern, which applies about equally to both parties, is a stark illustration of how policymakers sought to profit from the financial sector after dealing with one of the worst financial episodes in U.S. history. Critics of the revolving door say it helps explain why Congress — even as it deployed hundreds of billions of dollars to bail out Wall Street — didn’t take tougher steps to rein it in.”

What exactly will ignite the next crisis is anyone’s guess. But what’s clear is that the motivations that caused the last one haven’t changed at all – and probably never will.

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George Yacik Contributor - Fed & Interest Rates

One thought on “Can It Happen Again? Emphatically, Yes

  1. Well written. I think we are most likely at about the same spot we were in 2006. With interest rates rising, federal, city, county and state debt at all time highs, real estate development up, bad car loans, bad student debt, margin accounts up, credit card debts up, oil prices up, S & P PE at 32, etc. This bust will probably be a little slower in coming and the market will probably drop slower than in 2008 in that more money is available to pump up the market as it falls. Just my thoughts.

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