Financial crash anniversary recalls the risk of corporate greed

On this date, nine years ago, the Wall Street investment bank Lehman Brothers collapsed into bankruptcy, triggering the worst financial crisis since 1929 that too many Americans are still recovering from today.

An unimaginable series of events followed that failure, which brought the economy and the financial system to the brink of collapse:

• The federal government bailed out the insurance giant AIG for a total of $182 billion dollars;
• a run on money market funds caused the government to bailout the $3.7-trillion industry;
• Citigroup alone received almost $500 billion in bailouts;
• Goldman Sachs and Morgan Stanley were rescued from the verge of bankruptcy;
• Washington Mutual, Merrill Lynch, Wachovia and other financial institutions were forced into life-saving mergers facilitated by the government; and
• Congress passed the TARP bill, authorizing the government to spend up to $700 billion of taxpayer money just to bail out banks collapsing mostly due to their own high-risk, reckless and, at times, illegal activities. 

Ultimately, the federal government and U.S. taxpayers spent, lent, pledged or used tens of trillions of dollars to prevent the collapse of the financial system and a second Great Depression.

• Still, the real unemployment rate jumped to more than 17 percent;
• there were more than 16 million foreclosure filings;
• 40 percent of all homes were underwater;
• food stamp use skyrocketed more than 50 percent; and
• tens of millions of Americans were saddled with tens of billions of dollars of student loans when they couldn’t find jobs.

All this economic and human wreckage is going to cost the U.S. more than $20 trillion in lost GDP. Hardly anyone in Washington, however, is talking about any of that. In fact, almost everyone acts as if it never happened.

Rather than learning lessons from Lehman and the crash, the biggest Wall Street banks, their lawyers, lobbyists and political allies are all pushing to roll back the financial protection rules that were put in place to prevent future crashes and bailouts.

Dismantling those rules will enable Wall Street’s biggest firms to operate very much as they did before the crisis: taking outsized risks and gambling with taxpayer-backed money. What will happen then? Future Lehmans, another financial crash, more bailouts and possibly a second Great Depression. 

With banking revenue and profits higher than ever and lending also reaching new highs, why the intense push for deregulation? The answer is simple: bonuses. The push to roll back financial protection rules really comes down to Wall Street wanting to return to the pre-crisis days of bigger and bigger bonuses. Almost everything else in banking is back to pre-crisis levels, but the bonuses just aren’t what they used to be.

The pursuit of quick, unimaginable riches is what incentivized so much of the irresponsible, reckless and illegal behavior at Wall Street’s biggest financial firms. The prospect of big bonuses is why lenders lowered (and, in some cases, eliminated) their lending standards, which resulted in hundreds of billions of dollars in subprime mortgage loans.

{mosads}Those often-worthless loans were packaged by Wall Street into complex derivatives and sold to unsuspecting investors. As they passed the risk off to someone else, they pocketed huge fees, juicing their bonuses. 

It’s not a coincidence that in the years before Lehman’s collapse, Wall Street’s biggest banks showered their executives with hundreds of billions of dollars in bonuses. This reached a peak in 2007 when Goldman Sachs handed out historically high bonuses to CEO Lloyd Blankfein ($68 million) and the President and COO Gary Cohn (now top economic adviser to President Trump) ($70 million).

The deregulatory push by the Trump administration, Republicans in Congress, Wall Street and its allies is based on the false claim that financial protection rules have hurt banks’ revenue and profitability, thereby limiting their ability to make loans and help the economy grow.

Objective facts prove this to be entirely wrong. As the evidence shows, including the FDIC’s most recent quarterly data, banking revenue and income are at or near all-time highs and loan activity is strong and steadily increasing as well. 

The unavoidable conclusion, then, is that the industry’s deregulatory push is really about getting the bankers’ bonuses back to pre-crisis levels. That explains why the deregulatory focus is on weakening the capital, liquidity and derivatives rules along with the ban on proprietary trading (the Volcker Rule).

Those rules rein in the banks’ highest risk and most dangerous activities, which also happen to be the most lucrative activities that lead to the biggest bonuses.

With revenue, profitability and lending all up, there simply is no merits-based case to be made for deregulation. Equally important, the anniversary of the collapse of Lehman Brothers and the events that triggered the 2008 financial crisis should remind everyone of the dangers to a country forgetful of its past. 

Dennis M. Kelleher is president and CEO of Better Markets, a Washington-based independent organization that promotes the public interest in financial reform, financial markets and the economy.