The Finance 202: Financial risk returns a decade post-crisis


WASHINGTON – With the 10th anniversary of Lehman Brothers’ collapse arriving Saturday, policymakers and industry insiders are reviving the debate over the regulation — or the lack thereof — of Wall Street. And over what could bring about the next financial crisis.

Here’s one bracing fact to keep in mind: Since the 2008 financial crisis, 30 percent of the lawmakers and 40 percent of the top staffers involved in forging the congressional response to the meltdown have gone to work for the industry. The figures, unearthed by my Washington Post colleague Jeff Stein, point to the coziness between the regulators and the regulated. It’s evident in a Washington debate now centered not over whether to tighten the screws applied since the crisis – but in how far to go in loosening them.

The details, from Jeff’s story: The Post analysis found that Wall Street, K Street and firms representing financial interests have hired at least 15 of the 47 lawmakers who left Congress after serving on the House Financial Services Committee and Senate Banking Committee in August 2008, just before the financial crisis entered its most intense chapter. That number includes six of the 10 senators to leave Congress after serving on the Banking Committee. Seventeen of the 40 most senior staffers who served on the House Financial Services Committee in August 2008, as well as 15 of the 40 senior staff who served on the Senate Banking Committee at that time, later joined or took jobs representing a large financial institution.

Just as significant, but unreflected in those numbers, are the Obama-era executive branch officials who have similarly gone on to jobs in the industry. As Jeff notes, that roster includes former Treasury secretary Tim Geithner (now at private equity firm Warburg Pincus), his successor, Jack Lew (at private equity firm Lindsay Goldberg), and former Securities and Exchange Commission chair Mary Schapiro (who serves on the board of Morgan Stanley).

Geithner – along with former Federal Reserve Chairman Ben Bernanke and Hank Paulson, President Bush’s last Treasury Secretary – argued Friday in the New York Times that the congressional response went too far in stripping regulators of their bailout authority. “Among these changes, the FDIC can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed’s emergency lending powers have been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds,” they write. “These powers were critical in stopping the 2008 panic.”

The trio also pointed to a more diffuse threat: Losing the healthy fear of risk the crisis instilled. Policymakers need to “resist calls to eliminate safeguards as the memory of the crisis fades. For those working to keep our financial system resilient, the enemy is forgetting,” they write.

But for the most part, it doesn’t appear policymakers spinning through the revolving door for jobs at the firms they once oversaw have brought with them any hard-earned caution. That sense has receded elsewhere, too, as The Wall Street Journal’s Greg Ip noted over the weekend. “One of the lessons of financial history is that risk-taking never disappears, it just changes shape, often to slip past the institutional and psychological defenses erected after the last crisis,” Ip writes. “Banks are certainly stronger than before the crisis, but innovation continues apace in the less-regulated ‘shadow’ banking system. For example, in 2014, regulators cracked down on bank lending to highly leveraged companies. A study by three economists at the Federal Reserve Bank of New York found that leveraged lending migrated to investment banks, private-equity funds and business development companies, many of whom borrowed from banks. So it’s not clear if the financial system is safer as a result.”

Ip issued a warning earlier this year about the rising threat posed by a laxer attitude toward the industry, writing that “federal regulators and legislators are. . . watering down, narrowing or declining to enforce rules passed after the financial crisis. The changes are modest and don’t foreshadow a crisis any time soon. But the timing is definitely awkward. They will stimulate lending and risk-taking at a time when the industry is lowering its own standards amid a near-record economic expansion.”

He pointed the deregulatory zeal of some of President Donald Trump’s key appointees, including Mick Mulvaney. As acting head of the Consumer Financial Protection Bureau, Mulvaney has dramatically scaled back enforcement of regulations; fired advisory board members; and most recently prompted the resignation of the administration’s top student lending watchdog.

And as the crisis-era policymakers’ moves into the industry indicate, the sector is once again flexing its lobbying muscle in Washington.

“A prime example: the push for the Federal Reserve to reconsider its capital surcharge for global systemically important banks, an additional capital requirement for the country’s eight largest banks,”American Banker’s Victoria Finkle wrote last month. “While Fed officials have not indicated that they have any immediate plans to recalibrate the surcharge, the fight is one that solely affects the industry’s largest institutions – a constituency that has garnered little traction in policymaking circles in recent years. It’s a sign, observers say, that the biggest banks are starting to reassert themselves, after absorbing much of the blame for the financial crisis a decade ago.”

Or as Camden Fine, former head of the Independent Community Bankers of America, told Finkle: “They’ve come out of the shadows. . . They’re becoming more vocal, more aggressive, more strident about the issues that are top priorities to them.”

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