Have the banking collapse lessons really been learned?


Ten years ago this week, the world’s financial system went into meltdown. The trigger was a French bank that had put investors’ money into US subprime mortgages that had been “securitized” by the original lenders. These loans should never have been made to the borrowers who were quite incapable of keeping up regular payments. But mortgage brokers were so anxious to win commissions, and banks and other lenders were so eager to book fat upfront fees that no one bothered to consider the underlying risks.

And besides, the original lender sold on the loan to others, so no longer needed to worry if thereafter it ceased to perform. The “securitization” of virtually every form of credit, but particularly the subprime lending, created a quasi-commodity for dealers who diced and sliced then packaged together often disparate credits. And fund managers and every other sort of investor did not need to worry about the safety of these investments because the rating agencies gave them a clean bill of health and regularly gave these fundamentally unsound and highly dangerous instruments their highest rankings.

Thus when the level of defaults among subprime borrowers hit a critical level, financial managers struggled to unwind the complex securitized packages and suddenly realized they no longer knew how much was left of the billions of their own and their clients’ money that they had poured into this market. When the French bank told a group of its investors that they could no longer cash out their subprime investments, panic spread across the global financial system. Nervous banks refused to lend to each other. Liquidity dried up. Their balance sheets that had been signed off by the big accountancy firms as both accurate and prudentially managed suddenly showed red. Some big banks, most notably America’s Lehman Brothers, went bust. Other financial institutions that were deemed “too big to fail” were bailed out by governments with trillions of dollars of taxpayers’ money.

For much of the last decade, countries have pursued budgetary austerity as they have sought to pay back the hundreds of billions they had to borrow. The ordinary citizen has suffered through higher taxes or diminished services from the state, or both. It remains a matter of cold fury on both sides of the Atlantic that not a single one of the bankers who drove the financial system into the solid wall of reality has faced any criminal or civil prosecution. Perhaps just as important, but not so obviously to the man on the street, is that no one in any of the accountancy firms or rating agencies has been brought to book. These two professions had the public duty to assess risks properly. But they failed absolutely to discharge this obligation.

The creation of investment packages that even the men who sold them did not really understand was clearly insane. No less mysterious was the inability of so-called seasoned market professional to recognize the inherent danger in something with such a name as “subprime”. These securities actually described themselves as being not of the highest quality. Yet laziness, greed and a fatuous belief that unregulated markets would always steady themselves led to a worldwide financial collapse that wrecked the lives of tens of millions of Joe Public.

We are now told that banks are tightly regulated, are forced to hold much more capital and that the events of a decade ago could never happen again. We shall see.