5 years later: is Wall Street still too big to fail ?

The global financial crisis of 2008 has been explained by the media as the result of the subprime mortgage crisis, predatory lending and the burst of the housing bubble. Dramatic pictures of traders rushing out of landmark financial buildings with a box containing their personal belongings flooded the internet on the eve of a financial crisis of an unprecedented scale. The most evocative image perhaps is the collapse of market maker Lehman Brothers, declaring chapter 11 (bankruptcy) in September 2008, in the midst of a perfect storm on the financial markets.

 

Big business practices and dramatic headings constituted the front pages of every newspaper and terms such as “too big to fail”, “toxic assets” and “collateralized debt obligations” were constantly being thrown around. Media frenzy and overall public outrage sparked a debate on financial deregulation and the role of investment banks in the economy following what might be called the biggest failure of capitalism in history. Lame duck president Bush signed into law the Troubled Asset Relief Program, bailing out almost every major American financial institution and costing the taxpayers $ 700 billion. 

5 years, several public demonstrations, lawsuits and many enraged op-eds later, what has changed?  Is Wall Street still governed by cronyism, self-interest and Gordon Gekko like figures? Obama coined the term “casino-style mentality” to describe the practices of big business major investment banks and assured that it would be made illegal for big banks to gamble with the taxpayers’ money.  

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed as a legislative response to the recession and presents itself as the contemporary counterpart of the Glass-Steagall Act that became law after the crisis in the thirties and strictly separated commercial banks from securities firms. Under the impulse of Robert Rubin, former secretary of treasury, and Alan Greenspan, former chairman of the Federal Reserve, this legislation was repealed, and is believed by many to be one of the factors of the global financial crisis. Ironically Hank Paulson had to deal with the result after advocating financial deregulation for years as CEO of Goldman Sachs.

Nowadays the task of steering the economy is up to Jack Lew, former COO (Chief Operating Officer) of Citigroup, one of the main recipients of the bailout. All these financial heavyweights have strong ties to Wall Street and stem from a long tradition of laissez faire economics. The media event went so far as to speak of a “government Sachs”, referring to the contribution former employees have made to top level economic posts in US government and European financial institutions.

Even though the world economy is only slowly recovering from the recession, Wall Street doesn’t seem to have lost any of its habits. AIG, a major insurance corporation, even stirred up controversy when it planned on paying out major bonuses after being rescued by taxpayers’ money and a quick bailout given with little oversight. Yet - end of the fiscal year - bonuses have been steadily rising and many major banks show no modification in policy or behaviour. 

The financial sector still swears by deregulation and prominent economists argue that the legislative framework set up after 2008 is insufficient to prevent it from clashing with “Main Street”. Regulators are still debating what the best possibilities are to prevent another economic meltdown, but in the meanwhile these banks remain too big to fail. 

 Precious few are still beating the drum for financial reform and breaking up or limiting the economic governance of these major investment banks. Lately E. Warren, a US senator from Massachusetts and fervent anti-Wall Street politician, has gained prominence in the Democratic Party and is called upon by some to run for president in 2016. In the meantime the private sector, in accordance with the American tradition of distrust in big government, seems to be living the good life. Many hoped that during Obama’s second presidency a major overhaul of the finance system would be launched, but the republican victory in the midterms makes this highly unlikely. Especially when you bear in mind that Goldman Sachs is one of the biggest contributors of Obama’s various political campaigns.

Sam B.