It’s been a year since the financial system “collapsed like a botched soufflé” after Lehman Brothers went bust, said Eugene Robinson in The Washington Post. President Barack Obama marked the occasion by urging Wall Street to work with Congress to enact “the most ambitious overhaul of the financial system since the Great Depression”. He highlighted proposals including a new consumer protection agency to end mis-selling of mortgages, more demanding capital requirements, and greater supervisory powers for the Fed.
In Britain, Alistair Darling is planning legislation to force banks to make “living wills” – a blueprint for dismantling their operations so they can be wound down easily and without disrupting the financial system if they fail.
What the commentators said
Lehman’s collapse was supposedly such a seismic event that nothing would ever be the same again, said Simon English in the Evening Standard. But what’s really changed on Wall Street? “Almost nothing.” Not only are bonuses back but bankers have a “new wheeze”: they’re now packaging up and selling on life insurance policies. Lehman’s fall has consolidated power among a smaller number of players intent on carrying on precisely as before. The “too-big-to-fail institutions are even bigger”.
That’s the crux of it, said David Prosser in The Independent. Reform proposals on both sides of the Atlantic don’t tackle the basic problem: banks operating with an implicit guarantee that they won’t be allowed to go under because they are too important to the overall financial system.
That encourages banks to take “outrageous” risks with other people’s money, safe in the knowledge that if they go wrong, taxpayers will foot the bill, said Eugene Robinson in The Washington Post. Obama now proposes to put “more security cameras” in the casino rather than stop the gambling. And the problem is worse now, as The Independent pointed out. Banks used to gamble with depositors’ money, but now they are taking risks with taxpayers’ money; state guarantees help them raise cheap funds.
So the way to avoid further massive bail-outs is to break up banks that are too big to fail, as Prosser points out. This week financial academic Professor John Kay suggested splitting banks into strongly regulated retail banks (handling deposits and payment systems) on the one hand, and the “casino” on the other; the latter entity would be allowed to fail. This would also encourage banks to improve customer service, said Anthony Hilton in the Evening Standard. Most banks have never cared about that because they can make much more money doing more “exciting” things.