Thursday, 27 August 2009

The Financial Crisis, One Year Later: 4 Questions

Almost a year ago -- Sept. 15, 2008 -- Lehman Brothers filed for bankruptcy. While it's hard to peg a "start date" to a financial crisis (and personally, I think the "Lehman effect" has been overblown and has spurred bad policy decisions because of the "no more Lehmans" vein of thinking, which is the intellectual heir of "Bailout Nation" -- think about it), the day of Lehman's collapse would qualify as well as any other. The Lehman implosion revealed some truly ugly stuff: (1) there was a lot of dangerous interconnectedness in the financial system that made it prone to "seizing up" (2) there were a lot of rotten-egg-bad assets out there, and who was holding them, and the larger impact they might have, was anyone's guess (3) the banking partner you were doing business with yesterday could be revealed to be deeply and massively insolvent today (remember the Lehman bankruptcy settlement, and how shockingly little the investment bank turned out to be worth? Its debt fetched less than 9 cents on the dollar!)

So anyway, the financial crisis -- actually arguably not a "crisis" anymore; there has to be a temporal statute of limitations on the word, after all -- is approaching its one-year anniversary, by my reckoning. Think about that. 12 months. A full year. Early on, there was scrambling, and Bush team members huddling to figure out what to do if there was widespread looting and a civil breakdown, and Paulson trying to seize unprecedented powers to buy up toxic assets ... then we got a new U.S. president ... the crisis hit a mature period ... and here we are.

We're no longer in the flashing-red-lights, slap-the-panic-button phase of the financial mess. We're in a more rational place. So let's imagine the U.S. financial system bigshots -- the Geithners, Bernankes and such -- were sitting down for a Congressional hearing today, their minions scurrying about in the background, ferrying notes forward and back. And let's say I were a Congressman.

Here are four questions I would ask.

1. Rarely has the United States seen a crisis of this magnitude without some sort of criminal and actionable wrongdoing, somewhere in the heart of the system. While I realize that many problems during this crisis simply arose from bad decisions that led to huge losses, it seems probable that there were instances of wrongdoing. It may have been accounting shenanigans, or knowing misrepresentations of financial soundness, or something else entirely. Further, it seems that prosecuting a few wrongdoers might help deter such activity in the future.

And so my question: Who, among high-level executives, is currently being investigated or prosecuted related to this financial crisis? What about in AIG's Financial Products group? If no one, why is that? What investigations are ongoing? If you can't reveal specifics, at least which government bodies are conducting investigations? When did they start? What are they looking at, broadly?

2. Last year, early in this crisis, Hank Paulson was convinced that we had to rid banks of toxic assets to repair the U.S. financial system. Tim Geithner apparently believed the same because early this year he outlined a plan for public-private investing partnerships to buy up these assets. After all, Japan's "Lost Decade" in the 90's was partly attributed to its failure to clean up the toxic assets in its banking system quickly enough. Now the Geithner plan has been quietly allowed to all but die, and little is now being said about the bad assets that banks currently hold.

Does this suggest these toxic assets are no longer a problem? If they are not, what has changed so dramatically? If you say the banks have become more profitable, please help us understand that profitability: how much is due to massive, and temporary, government support of the financial markets, and how much can the banks themselves take credit for? Is there a possibility that a number of the largest U.S. banks are insolvent, figuring in these toxic assets? If this is the case, what is our strategy right now? Is it one of "regulatory forbearance," to allow them to work themselves out of the financial hole they are in? If so, does that have consequences for the rest of the economy that you are not openly admitting, such as that the banks will make up for expected losses on bad assets by hitting consumers with extra fees?

3. Hardly anyone would dispute that "too big to fail" has become a term of all-too-common derision during this financial mess. Part of the problem during the financial meltdown, the political left and right can agree, was that institutions that made bad bets and that should have failed couldn't fail without threatening to bring down the rest of the financial system. Ben Bernanke realized that saving AIG was a necessary evil, for example, and expressed an almost visceral disgust at having to do so.

Since we all agree that "too big to fail" is bad, what concrete measures are now being taken to break up large financial companies? I am aware that there have been vague statements made that something needs to be done, but this is one year later, and it's time for the rubber to hit the road, especially since large financial companies will fight, tooth and nail, any regulations to downsize them. So how do you now define "too big to fail," in terms of assets or any other measurement? How are you currently preventing companies from becoming too big to fail? Which companies are too big to fail right now that need to be dissolved, and when will that occur? Again, I'm sorry, but I don't want to hear rhetoric about how you're concerned about this -- it's been one year, after all -- I want concrete answers.

4. One other matter almost all observers happen to agree upon: the financial system needs much greater transparency. We need to be able to regulate the banking system well, including the "shadow banking" system. We need to know what's going on with a forty-something trillion-dollar credit default swap market that has the potential to suck liquidity out of the credit markets just when this liquidity is most needed. We need to get a better sense of which financial companies are solid and who's in trouble.

In light of all this, what concrete steps have been taken to improve transparency in the financial system? Again, I'm not interested in rhetoric -- what have you actually done, or at least what bills are pending in Congress, or what concrete proposals are awaiting review? Also, if transparency is a good thing, why won't the Federal Reserve reveal to Bloomberg News (and other media of course) the collateral it has been accepting, and from which banks, as part of its backstop programs? While an argument could be made initially, during the extreme volatility of the early crisis, that this information shouldn't be revealed, what is the argument that you would make now, one year later? And if you can continue to conceal this information a year later, at what time do you think it would be appropriate to reveal it? Ever? And if you don't think it should ever be revealed, who is the person ultimately responsible for making good on this collateral, if it turns out to be bad and the Fed loses money? If it is the taxpayer, then how can you justify your secrecy in a political system purportedly dedicated to democracy and openness?