Did You Ever Could Happen Again

• Government%27s emergency deportment in crisis showed bipartisan cooperation
• Too-large-to-fail banks are still a concern
• %27Jury however out%27 on whether post-crisis changes in oversight volition work

Fear gripped the U.s. five years ago. Equally Americans awoke on Monday, Sept. 15, 2008, they learned that Lehman Bros. had collapsed in bankruptcy, inflicting billions of new losses on a financial arrangement already rocked by a cratering housing market and a tightening credit crunch.

Upending Wall Street's weekend hopes that the nation'due south fourth-largest investment bank would be saved, the punch landed amid a barrage. Merrill Lynch, one of the earth's largest brokerages, had been forced into a shotgun spousal relationship with Bank of America. Insurance giant AIG was teetering. The U.South. motorcar industry was imploding. And investors were starting an electronic run on their retirement accounts.

Aftershocks of the worst fiscal crisis since the Great Depression nevertheless reflect in today'southward frail recovery. The national psyche remains uneasy, worrying: Could it happen again?

"The side by side crunch is going to involve not only Europe and the United States, but Bharat and Brazil and Red china," said former senator Chris Dodd, speaking mostly about serious threats that can leap from anywhere in an increasingly global financial organisation. "What happens in ane corner of the world, particularly in meaning economies, affects everybody."

Dennis Kelleher, president of fiscal manufacture watchdog group Ameliorate Markets, offered an even darker forecast equally he complained that giant banks at the vortex of the 2008 crisis have mounted Washington lobbying campaigns "to fight financial reform that would forbid them from doing it all again."

Effectually-THE-CLOCK TRIAGE

In that location was no time for fiscal and authorities leaders to call up five years ahead during the dark days of 2008. Often they were forced to boxing on multiple fronts — the threatened failure of Wachovia, the fourth-largest U.S. bank, the meltdown of Washington Common, the biggest failure in U.Due south. banking history — that in ordinary times would require weeks or months of full-time rescue intervention.

It was the fiscal version of around-the-clock triage, with trillions of dollars at chance, and the time to come of the national and global financial system in the remainder, said sometime Treasury secretary Henry Paulson. The old Goldman Sachs principal helped quarterback the U.South. rescue effort, leading Bush assistants teams every bit he brainstormed and executed bailout plans with Federal Reserve Chairman Ben Bernanke, Timothy Geithner, then caput of the Federal Reserve Bank of New York, federal regulators and Congress.

The quickening drumbeat of failures shook even some rescue leaders.

"What if the system collapses?" Paulson asked his wife, Wendy, in a call as efforts to salve Lehman failed. "Everybody is looking to me, and I don't have the answer. I am actually scared."

"None of u.s. knew how bad it would be, simply we knew information technology would be very bad," Paulson added in a USA TODAY interview, recalling how, subsequently months of non-finish containment efforts "there just was a moment there when I was seized with fear."

Among the many emergency measures used past rescue leaders, Paulson said three proved most crucial in quelling the about-panic and restoring fiscal stability:

• Executing a federal takeover of Fannie Mae and Freddie Mac, the regime-sponsored housing finance giants that collectively owned or guaranteed more than than $5 trillion in residential mortgages and mortgage-backed securities. The action kept the housing market alive in 2008 past calming fears that the undercapitalized entities could default on their bonds.

• Guaranteeing money marketplace mutual funds, the then-$3.v trillion manufacture many Americans rely on for retirement and businesses apply for curt-term funding. Halting the investor run took an unprecedented federal guarantee of the manufacture. It came later the Reserve Primary Fund, ane of the nation's largest funds, couldn't meet a stampede of requests from worried investors who raced to withdraw their money considering the fund held hundreds of millions of dollars in Lehman debt that became worthless when the investment banking concern collapsed.

• Establishing the Troubled Asset Relief Program, which enabled Treasury to move quickly in restoring conviction in the nation'southward banks by purchasing equity securities in hundreds of banks and recapitalizing the financial arrangement. Originally approaching at $700 billion, the lifeline usually known as TARP was afterwards extended to insurance and automobile companies. About $421 billion was spent, and $357 billion has been repaid.

Noting that the government'due south takeovers of Fannie and Freddie and TARP were controversial and required congressional approval, Paulson said, "Nothing could be worse than going up there and maxim, 'Hey, we need it, we're powerless without information technology,' and so not getting it."

Bernanke stunned Capitol Hill leaders when he warned in a pivotal September 2008 coming together that a meltdown of the global financial system loomed unless they acted speedily on TARP funding potency. "The oxygen left the room," recalled Dodd, a Connecticut Democrat who and so chaired the Senate banking commission.

Ultimately, the approvals emerged from ii weeks of loftier-stress Capitol Loma negotiations every bit financial weather condition continued deteriorating. "As I look back on it now, and look at all the dysfunction in Washington ... rather than say, boy, was this a terrible 2 weeks, I look at information technology and say, 'Isn't information technology astonishing that in two weeks, Democrats and Republicans came together to give united states of america these extraordinary authorities?' " Paulson said.

LONG-TERM Fiscal CURE?

In the view of David Hirschmann, president and CEO of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, the business industry would requite rescue leaders "high marks for the speed and effectiveness with which they made very difficult decisions that were not popular to step in and make sure our financial markets continued to work while the patient was bleeding on the tabular array."

But in the five years since, as President George West. Bush was succeeded by President Obama and the new White House administration and Congress enacted the sweeping but still-unfinalized Dodd-Frank fiscal reform parcel, questions and criticism surroundings efforts to ensure a long-term cure and prepare for new financial threats.

While predicting that a crisis as major as the 2008 implosion was "far less likely, Hirschmann warned, "That doesn't mean in that location won't be failures."

"The question is, have we created a better organisation to discover bug early, to look at the risks in the broader arrangement? I recollect the jury'due south still out on that," he said.

Paulson, besides, has pointed to potential threats, including the as-all the same-unchanged structures of Fannie and Freddie. He said placing them under regime control was a temporary "timeout" that provided animate space to replace the current system in which the two housing-finance giants boss the dwelling mortgage market place and leave taxpayers shouldering the cost of failures and shareholders reaping the benefits of success.

Permanent modify is crucial, said Paulson, because "today the regime basically is backstopping, ane way or the other, about ninety% of all new mortgages. I await at it and say we're sowing the seeds of another major problem" considering authorities subsidies to Fannie and Freddie are setting the terms of dwelling house loans, rather than "the private marketplace and the discipline that it brings."

President Obama last month outlined a proposed overhaul of the decades-quondam U.S. housing finance-system that would essentially stage out Fannie and Freddie. In his Phoenix announcement, Obama endorsed the ideas behind a proposal adult by a bipartisan Senate grouping.

Paulson also urged broad reform of the money market place industry. The Securities and Substitution Committee moved toward that process with a June proposal that would permit the internet nugget value of some funds "bladder" instead of beingness fixed at $1 per share. Having the funds act more than like bonds would make investors aware that the investments are non insured like bank accounts, and that they could lose their money.

Sheila Bair, chairwoman of the FDIC during the 2008 financial crisis, warned that the U.S. stock and bond markets accept grown overvalued in response to depression interest rates and the Federal Reserve Board's policy of quantitative easing — buying Treasury bonds and other government securities from financial markets in a bid to promote more lending and liquidity. The Fed has signaled it could beginning tapering the programme as early every bit this calendar month.

"In that location are a lot of uncertainties. Nosotros've never tried this before," said Bair, who now chairs the Systemic Risk Council, a non-partisan grouping urging strict Wall Street oversight. "Though I'one thousand very eager for the Fed to cease this ... they need to get very slowly, because the longer yous're in, the harder it is to become out, and we don't know what all the ramifications will be."

Bair and Paulson besides warned of connected reliance on short-term funding such as repurchase agreements, a system in which banks sell securities to buyers for cash and agree to repurchase them later at the same price, plus involvement. The majority of those funds are lent overnight and can be pulled on short notice — as happened during the financial crisis — potentially endangering banks' balance sheets.

REGULATORY GAPS?

While calling the Dodd-Frank Wall Street Reform and Consumer Act "a huge stride forward," Paulson urged an overhaul of federal financial regulatory agencies and their sometimes overlapping responsibilities. The existing structure leads to some dysfunctional competition and lack of clarity for businesses, he said.

"We demand a financial system that extends credit, that makes sure that there's confidence, that pocket-sized businesses can get loans ... that people can become mortgages," Hirschmann said. "The problem with having this alphabet soup of regulators is nobody'due south in charge of looking at all the pieces and making sure they work together."

Echoing concerns raised past Paulson, Dodd and others, Hirschmann likewise cited a relative absence of coordination with efforts to improve financial regulation in other countries. "Some of the solutions require a global approach. And that's proving much harder" to achieve, he said.

Raising the prospect of international fiscal threats, Bair said some emerging markets accept grown quickly because they had college interest rates that drew U.S. investment. Now that domestic interest rates are more favorable, "the money comes dorsum," she said, raising potential challenges both abroad and at dwelling house.

"We don't really know where the tentacles of this have gone," Bair said.

Additionally, some financial experts fence regulators have become too lenient as memories of the fiscal crisis fade and efforts to spur business and job growth increase in response to what Mohamed El-Erian, CEO of global investment house PIMCO, chosen the "wearied and outdated growth engines" of the U.Southward. and other Western nations. Their mature economies are growing slower than those of emerging nations such equally Mainland china.

Bair criticized an August conclusion in which federal regulators proposed easing a Dodd-Frank provision that would require lenders to maintain a financial stake in mortgages they securitize. The provision was aimed at blocking some subprime and other risky mortgage loans that worsened the fiscal crunch.

"The intellectual pendulum or the regulatory pendulum has swung way over toward promoting growth," said James Kwak, an associate professor at the University of Connecticut's law school and a co-founder of The Baseline Scenario, an influential economics blog. "But I think the matter people are forgetting nosotros got into this economic mess in the first place because of decades of policies that prioritized the housing market over prudent adventure management in the fiscal sector."

The largest U.Southward. banks more than by and large accept been the focus of renewed calls for reform from government watchdogs and others who say the institutions are so complex and interconnected they pose a continuing financial system risk.

Dodd-Frank hasn't changed that also-large-to-fail situation, said Richard Fisher, president of the Federal Reserve Bank of Dallas. He has urged Congress to limit the federal safety net to the giants' traditional commercial banking part. The proposal would besides require creditors and trading partners to sign acknowledgements that activities of non-bank affiliates and belongings companies aren't insured. The plan would require restructuring then each of a given bank'due south internal affiliates is subject area "to a speedy defalcation process."

Anat Admati, a finance and economics professor at Stanford Academy's concern school, warned that Americans are no safer from destabilizing bank gamble today than in 2008 because "flawed regulations and ineffective enforcement" permit securely interconnected fiscal institutions to continue making risky financial investments with likewise much borrowed money.

"Why are we allowing these institutions to be and then indebted?" asked Admati, co-author of The Bankers' New Clothes. "Why, if we could put speed limits, wouldn't nosotros put speed limits? Why don't we prevent the distress and the default?"

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Source: https://www.usatoday.com/story/money/business/2013/09/08/legacy-2008-financial-crisis-lehman/2723733/

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