Wall Street, One Year After Lehman Brothers
This is TALK OF THE NATION. I'm Neal Conan in Washington.
A year ago, Lehman Brothers, once one of the country's largest and most venerable financial services firms collapsed. After talks with Barclays and Bank of America fell through, the only choice was bankruptcy, one of the key events that touched off the financial crisis which then triggered unprecedented government intervention, including controversially, bailouts of other big banks. President Obama marked that anniversary earlier today in Lower Manhattan. The president called on Congress to get moving on laws to overhaul financial regulation. He urged Americans not to forget the magnitude of what happened a year ago and he told Wall Street that they should remember, too.
President BARACK OBAMA: The fact is, many of the firms that are now returning to prosperity owe a debt to the American people. They were not the cause of this crisis and yet American taxpayers, through their government, had to take extraordinary actions to stabilize the financial industry. They shouldered the burden of the bailout. And they're still bearing the burden of the fallout, in lost jobs, and lost homes and lost opportunities. It is neither right nor responsible, after you've recovered, with the help of your government, to shirk your obligation to the goal of wider recovery, a more stable system, and a more broadly shared prosperity.
CONAN: This hour: what's happened a year after the collapse of Lehman Brothers? We'll hear arguments for and against more regulations and we want to hear from you. How is your bank working for you: 800-989-8255. Email: firstname.lastname@example.org. You can also join the conversation on our Web site at npr.org, click on TALK OF THE NATION. Later on the program, eight Afghan girls and their dream to play soccer, however tall the mountain. But first, Adam Davidson joins us from our bureau in New York. He covers international business and economics for NPR as part of our Planet Money team. Adam, always nice to have you on the program with us.
ADAM DAVIDSON: Great to be here, Neal. I love being here.
CONAN: And it's interesting the president talked about the banks that are returning to prosperity. Well, a year after the collapse of Lehman Brothers, those banks left on Wall Street seem to be doing very well.
DAVIDSON: Yeah. And part of it is - is the key point. Those left - I mean, when - you know, there was only five, they call them…
(Soundbite of laughter)
DAVIDSON: …forget the phrase they used, actually. But there's only five major-size investments banks and several of them collapsed: Lehman and Bear Stearns. And so, when you eliminate two of five major competitors, the three that are left are doing pretty well. But he is exactly right, the president, that is, in saying that - that they owe a huge debt of gratitude to the U.S. government. I think pretty much everyone knows that the three major investment banks and all of the major commercial banks, the regular banks, would have collapsed without prompt U.S. government action.
And when you see, you know, Goldman Sachs and others reporting record profits, that is largely a result of the U.S. government action over the last year. It's been relatively easy to make a lot of money as an investment banker with the U.S. government providing super-cheap financing for pretty much anything you want to do and extraordinary programs that have really brought billions of dollars to Wall Street.
CONAN: And the president promised, look, we need to find ways to make you understand. Next time around, the American taxpayer's not going to be there to back you up in this crisis. But he also, getting back to the distinction between the kinds of banks we're talking about, Lehman Brothers, and well, the kinds of banks most of us have daily business with - whether that's on main street or where you live in Manhattan, Adam. But nevertheless, these are very different kinds of institutions.
DAVIDSON: They are, although they are becoming less distinct as a result of this crisis. You know, a little over a year ago, it was easy to say there are investment banks - and those would be Goldman Sachs, Lehman Brothers - that provide investment services to large - you know, professional investors to large corporations, et cetera, and have no retail business, or virtually no retail business with, you know, folks like you and me. That distinction began to crumble in the '90s when Citibank, JPMorgan Chase became unified commercial banks and investment banks, providing the whole range of services - from just your checking account all the way up to super complicated derivatives that are sold only to huge corporations, that kind of thing.
Now, there are no very large stand-alone investment banks. They all became commercial banks because that was the only way to get cheap money from the Federal Reserve. So, in that sense Wall Street changed dramatically a year ago and - and there's no sign of it going backwards in any way.
CONAN: And as of June 30th, and I'm reading here from a story on the Associated Press - as of June 30th, three banks - JPMorgan, Wells Fargo and the Bank of America hold 2.3 trillion in domestic deposits or three dollars out of every 10 dollars in deposit in the United States. Three years ago, those three institutions held about 20 percent of the industry total. So, those big commercial banks are also doing pretty well, it seems.
DAVIDSON: Exactly, I mean, you just said, the president said that we will not bail these banks out again. But it's hard to make that - that threat credible when you've such a top heavy banking system. It - it really astounds me when I look at the numbers. You know, there's - there's more than 8000 banks in the U.S., which is a huge amount. We have a very unique system, globally, where we've lots and lots of small banks or small - or regional medium-sized banks.
But 90 percent of our banking system is just the top 18 or 20 banks - represent 90 percent of our system. Which means 8000 and something get to share around 10 percent of our system. So, if you have two or three banks that represent 40 or 50 percent - it is hard to imagine that if one of those banks got into serious trouble, or even worse, if all three of them or four of them got into serious trouble, that the government would just standby. So - so that's a big question that - that people really want to see not just words, you know, we're not going to bail you out again, but fundamental reforms that will make it clear the government is not going to bail them out again. But, it's hard to know how to promise. You know, next time you're going to really be in trouble.
CONAN: Yeah, next time, next time.
CONAN: If you make me come back there one more time.
DAVIDSON: And Neal, can I explain why this is so important.
DAVIDSON: Because capitalism does not work if - if - if actors in the capitalist system do not have to pay the cost for bad decisions. And if we do have a system where a handful of large banks know on some level that they can take huge risks, keep the profits, but the taxpayer has to pay for the losses if they get bad enough, that really breaks the rules of capitalism. It would mean that those - that that handful of banks plays fundamentally by a different set of rules.
And - and so, more capital will flow to them because they're less risky. But at the same time, they'll be taking larger risks. They're less risky because the U.S. taxpayer always has their back, but they take higher risks because they individually don't have, you know, the management and the top earners don't have to pay the cost of their own risk taking. And so, it creates a - a fundamental imbalance that makes the system as a whole far rockier. And that's what, you know, economists and analysts are really worried.
And, you know, they see some things in the reform agenda of the Obama administration that could counteract this. But they're really worried that we actually start this, you know, year number two after the acute stage of the crisis with a less safe, more top heavy, more risky system. That's the real fear.
CONAN: And we're going to get to the pros and cons of reform a little bit later in the program but we also want to know from you - how is your bank working for you? 800-989-8255. Email, email@example.com. And we'll go first to Dianna(ph). Dianna with us from Denver.
DIANNA: I called because I was extremely unhappy with one of the credit-card banks, Chase specifically, that has increased the minimum payment on a balance that I have from two percent to five percent and will not allow me to close the account and revert to the previous terms.
The reason they're doing this is because I have a large balance on this account and because I have the fixed low interest rates of four and five percent on this balance, because I did these balance-transfer offers for the life of the loan.
DIANA: Well, they're tell me that I have to pay five percent or start paying a higher interest rate to go back to two percent.
CONAN: And I think, Adam Davidson, and Diana, we thank you for your call, because she is hardly alone. I mean, the details of her individual case, of course, everybody's got different experiences, but it drove people crazy when the United States taxpayer was bailing out these big banks, and they were jacking up rates on credit cards and closing credit-card accounts and making it much more difficult to borrow money on a retail level, conveniently and cheaply.
Mr. DAVIDSON: Yes. The crisis of the last year, one way economists refer to it is de-leveraging, that basically we had a bubble of credit for the previous, say, five years or so where there was just way too much credit, and we now, looking back, see that it was built on a misunderstanding of real market forces, and so there was just way too much credit out there. Not just for individuals, but for corporations and for entire nations. And what happens when you de-lever is first of all the banks lend less money, and then the banks also borrow a lot of money to lend. So it has an exponential factor.
So all of that is to say there's going to be less credit out there, which means, you know, the supply of credit goes down. Our demand is going down, as well, but presumably this puts the banks in a better position to offer us less attractive terms.
In a credit bubble, where just about anyone can get credit from just about everyone, the banks are just falling all over themselves to convince you, well, go with me. I'll give you an even better deal. Now, in a credit-constrained environment, the banks are not so desperate for our credit, and so they can - you know, they can be tougher with us.
It's possible that we will have a fundamentally different consumer credit environment next year if some of the Obama proposals are passed - the Consumer Finance Protection Agency, etcetera. We don't know the details yet. We don't know how tough it's going to be on the banks.
It is possible that things like what the caller described won't happen in the future, but I wouldn't count on it. I mean, I think, you know, banks will follow their own self-interest, and when it's in their interest to get us to be customer, they'll offer really nice terms, and when it's not, they'll offer pretty lousy terms.
CONAN: A year after Lehman Brothers collapsed, what's changed? We're talking with Adam Davidson, NPR international business and economics correspondent, part of our Planet Money team.
Up next, arguments for and against more regulation. More of your calls, too, 800-989-8255. How is your bank, a year after Lehman, working for you? You can also send us an email. The address is firstname.lastname@example.org. Stay with us. I'm Neal Conan. It's the TALK OF THE NATION from NPR News.
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CONAN: This is TALK OF THE NATION. I'm Neal Conan in Washington. Wall Street marks one year since the collapse of Lehman Brothers, President Obama calls for more regulation and more responsibility on Wall Street.
We're talking today about what's changed in the past year and what hasn't. We want to hear from you. How is your bank working for you? 800-989-8255. Email email@example.com. You can also join the conversation at our Web site. Go to npr.org. Click on TALK OF THE NATION. If you go to npr.org, you can also find Planet Money, and our guest Adam Davidson covers international business and economics for NPR and is part of our Planet Money team.
Let's get another caller on the line. Hugh(ph) is on the line with us from Oakland, California.
HUGH (Caller): Hi. My large banks aren't changing a thing. So I'm looking at changing them. For my small business, I'm looking at local community banks, which are actually loaning to small businesses, which is a big problem with the big banks. So in my area, it's Community Bank of the Bay and One California Bank.
And then on the investment fund side, I'm looking at socially responsible funds which have a similar or better return, up until recently, and do something good with my money, and they don't give a lot of the profits away in bonuses to the big executives.
CONAN: And Adam, the small kinds of banks that he's talking about, well, they are making loans, as he suggests, to community businesses and community projects, and again, a year ago, it looked like nobody was making loans to anybody.
Mr. DAVIDSON: Yeah, and you know, you talk to community bankers. That is an angry group of people these days, in my experience, because what they'll generally say is the majority of us, 96, 98 percent of us, have been responsible, sober. We did not indulge in the risk-taking of Wall Street. In fact, some of us were snookered into buying some of these toxic assets and hurt ourselves, but most of us just did responsible borrowing and lending in our community, and actually, it's the big guys on Wall Street who are reaping a lot of the benefits of government action.
And I think, you know, I think it's a fair point. The issue is, as I mentioned, I think anyone would agree that a broader, more diverse financial system in which there is not three or four or five super-huge banks that contain the vast majority of funds would be safer. It's safer to have the risk spread among a lot of parties, but when you have 8,000 banks that only represent 10 percent of our banking system, and if you get to really small community banks, you know, I don't know the exact numbers, but I'm guessing by the time you get to 6,000 or 7,000 smaller ones, that might be two or three percent of the system.
So they don't have the capacity to handle all of the lending in America. They don't have the capital. Perhaps, over the course of years and decades, they could develop it, but it would take a very long time. So the government is stuck with the banking system it has, and that's a very top-heavy system.
HUGH: Well, I went to a conference recently, looking at this, which was SoCap, Social Capital Markets in San Francisco, and one of the community banks that I mentioned actually has money to lend, but people still aren't necessarily looking at them as the alternative like they should be. So actually looking to change is a way that people can influence in the capitalist market.
The other thing is that with the pension funds in on the investment side, socially responsible investing has been growing. The Rockefeller funds and other major funds are involved in it so that they're not unproven areas. But the pension funds and some others still aren't investing, and I don't understand, with the same returns or better, why they aren't getting more attention from the pension funds, who are one of the biggest sources of capital.
CONAN: Adam, if we could get a quick answer on that.
Mr. DAVIDSON: Yeah, I mean, the same returns or better. I mean, it depends what the time frame is, and you can get into endless arguments over this. But I think, you know, as a general rule, if you're investing for socially responsible causes, you know, you might be able to say oh, over three years or over this particular period of time, they beat other, more traditional funds, but I don't think over the long haul, too many serious investors think that's a money-smart decision. It might be a morally smart decision, although some people argue with that, too, but I don't imagine a dramatic shift in that.
And on the community banks, I mean, let's just say everyone listening took his advice and said yes, let's all go to community banks. I think it's a wonderful idea, sure. If they doubled, that would be 20 percent of the banking system. If they tripled, which you can imagine how hard it would be to triple the size of your bank in a very short period of time, that would still only be 30 percent of the banking system for all community banks in the country.
So I think in the short, near term, I don't know that it is possible for us to become a non-top-heavy banking system.
CONAN: In his speech earlier today, President Obama called on Congress to pass more financial regulations. Andrew Jakabovics is an associate director for housing and economics at the Center for American Progress and joins us now from a studio at that think-tank's headquarters here in Washington, D.C. Nice to have you with us on the program today.
Mr. ANDREW JAKABOVICS (Associate Director for Housing and Economics, Center for American Progress): Thanks for having me, Neal.
CONAN: And past time, I think you would argue.
(Soundbite of laughter)
Mr. JAKABOVICS: Well, in terms of the need for sort of better regulation, I mean, I think there are two aspects to it. One, of course, is the failure of the existing regulators to follow through on their existing oversight duties, but the other part is that there are plenty of opportunities at the moment for regulator shopping.
Let's focus on the banks here. If you don't like your current regulator, there are three or four others that you might be able to choose from who might give you better terms, and so one of the things that they're seeking to do is to eliminate the opportunity of banks to basically game the system, which I think provides a level playing field for all comers, which I think is really a hallmark of a well-functioning market.
CONAN: A lot of people said that the problems that we were in a year ago developed from the securitization of high-risk mortgages, and well, hasn't the system learned its lesson? That's not going to happen again anytime soon, is it?
Mr. JAKABOVICS: I'm somewhat more skeptical about Wall Street's memory. I think that they view an opportunity to make money, again particularly in the short term and to offload some of their risk, that they'll chase that. I mean, that's what Wall Street does. It seeks short-term profits, for the most part, and part of the problem is there is nobody who is tasked at the moment with ensuring the stability of the system as a whole, which is one of things that they're looking to address in the regulatory reforms.
CONAN: Wouldn't more regulations at this point stifle, as they say, innovation, stifle the growth of those banks and those businesses and reduce the number of loans available to grow the economy? We're all in trouble here.
Mr. JAKABOVICS: Well, they've already sort of tightened their credit offerings, and it's much more difficult to get credit today than it was certainly a year and a half ago. A year ago, it was basically impossible for anybody to get credit, which is one of the reasons why they stepped in in the manner in which they did. But I think that in the broader picture is that not all of those innovations were for the good of the system or for the individuals participating, for that matter, and a lot of people got hurt because they didn't understand what they were getting involved in.
So if you offer some degree of protection, particularly from the consumer perspective, through a consumer financial protection agency, then it doesn't necessarily stifle innovation, but it ensures that the innovation is fair and available on good terms to all participants. And I think that's a really important component, not only for the consumers who are participating, but also for investors so that they're sure that they're not on the short end of a stick of someone who's trying to dump some stuff.
CONAN: So time for more regulations.
Mr. JAKABOVICS: Time for smarter regulations and for regulations that are fair for all participants.
CONAN: Well, joining us now by phone is Russ Roberts, a professor of economics at George Mason University, a fellow at the Hoover Institutions. He's at his office in Fairfax, Virginia. Nice to have you back on the program, Russ.
Mr. RUSS ROBERTS (Professor of Economics, George Mason University; Fellow, Hoover Institution): Good to be back.
CONAN: And is it time for more regulation?
Mr. ROBERTS: Could be. I think there's time for doing some things that are smarter than we've done in the past. Whether you call that more regulation or not is an open question. I was very disappointed that the president's speech today had no - not just no details, it's simply the idea that we need to do more regulating, and I think that's the wrong way to go both in terms of leadership and as a strategy. I don't think - that's not a strategy. That's just, it's a hope and a prayer, and he's got some of the best economists in the world. I'd like to hear what they think and what he thinks the nature of that regulation should be, if it is to be increased.
But to say to Congress please make our financial system more stable or make our financial system more fair is not their strong suit. It's no guarantee. In fact, I'd be skeptical that they would improve things, but if it were - sorry?
CONAN: I was going to say, one of the things that we have heard about is that new regulations would require banks to keep larger cash reserves on hand so that when risky bets - and bets are, by their nature, risky - when they go bad, they're available to pay them off and not suddenly facing bankruptcy.
Now, the percentage of those cash reserves is yet to be made clear, but nevertheless, is that a wise idea?
Mr. ROBERTS: Well, I think it's a very wise idea that banks be less leveraged, that is, have more capital than they've had in the past. But I think unless we understand why they did what they did, why financial institutions did what they did, we're prone to make the same mistakes we've made before, which is to assume that by changing the thing that we think was responsible, we've fixed it. But if we don't understand the underlying cause, we're not going to make a lot of progress.
Here's an example of one of the things that hasn't changed in the last year that I think should have changed in the regulatory area, which is Fannie and Freddie's role in the housing market. Fannie and Freddie had an implicit - and it turned out to be actual - guarantee of U.S. government support. That encouraged them to be highly leveraged. They were much more leveraged than the Wall Street firms, and as you point out, when you are highly leveraged, when you've borrowed a lot of money, you take on more risk, and you are prone to insolvency and bankruptcy when there is a small change in your underlying assets.
Unfortunately, Fannie and Freddie are still going strong. They're just under the conservatorship, as it's called, of the U.S. government. But the underlying policy, which is: it's good for the government to artificially make home-owning more attractive than it otherwise would be, was a policy that put you and I, taxpayers, on the hook for Freddie and Fannie's mistakes. And it broke the natural feedback loops of responsibility that would have caused them to be less leveraged.
So I think we need to do that with Fannie and Freddie, we need to do it with the remaining Wall Street firms. We have bailed all of them out except for Lehman, but everybody else who made bets with other people's money, including -which ended up being your money and mine - those people were compensated for their mistakes. That was a terrible mistake. We're going to continue to make that.
Until we fix that, changing this - tweaking this regulation or that regulation is going to encourage Wall Street to take bets with our money. That is not good for capitalism. It's not good for democracy.
CONAN: Let's get another caller in. This is Bruce(ph), and Bruce with us from Scottsdale.
BRUCE (Caller): Hi, thanks for taking my call.
CONAN: Go ahead.
BRUCE: What is this boogeyman called we can't let these big guys fail? Why can't we let the big banks fail and take their lumps? And I know it's a complicated issue, but if my local Wal-Mart went out of business, there'll be plenty of people willing to snap up those assets and hire those people.
CONAN: All right. I think that's the point that Russ Roberts was also just making, that we ought to be willing to let those big guys fail. And he'll correct me if I'm wrong. But, Andrew Jakabovics, what's the argument? Why can't we let them fail?
Mr. JAKABOVICS: Well, the concern was that the institution such as Lehman was sort of - which was the first domino to fall - is that the other guys were basically two interconnected to fail. And that was sort of a function of their size.
And so, there was nobody and there was not enough excess capacity in the system to pick up all of the myriads of pieces that would have been left all over the place. And many of these transactions like credit default swaps and the like, these very complex derivatives were basically sort of these dominoes written against insurance policies, written against other insurance policies. And it wasn't clear that there was enough money in the system to actually resolve these institutions in an orderly fashion. And so, that's basically what brought the system to a standstill.
And so, unfortunately, if we allow these institutions to, in fact, become too big to fail, the risk of moral hazard that these guys will continue to make bad bets potentially on a taxpayer dime is a real concern.
CONAN: Bruce, I think you've asked one of the key questions of the discussion. Thanks very much for the phone call.
CONAN: We're talking about the proposed reforms on Wall Street a year after the collapse of Lehman Brothers. Our guests, Adam Davidson of Planet Money here at NPR; Andrew Jakabovics of the Center for American Progress; and Russ Roberts, a professor of Economics at George Mason University. You're listening to TALK OF THE NATION from NPR News.
And let's go next to Paul(ph). Paul is with us from Chico, in California.
PAUL (Caller): Oh, yeah. Thanks for taking my call. I was wondering, why can't they break the bank stuff like we did with Ma Bell?
CONAN: And that's - if they're getting too big to fail, I guess, Adam Davidson, why don't we make them smaller?
DAVIDSON: And there are people - Simon Johnson of baselinescenario.com, he's arguing for that. And other people are as well. I think there's a few issues. One issue was, you know, AT&T was a government-enforced monopoly, and so they were simply removing the government enforcement of that monopoly. We don't have a government-enforced monopoly, although many would argue that our regulatory system does encourage bigness in a way that's problematic.
I think there's a bunch of issues. I mean, one is just pragmatic. There's just not the votes. You know, Democrats are not - this is not like some issue where all the Democrats are on one side and all the Republicans are on the other. Many very powerful Democrats have close ties to banks. Banks are one of, if not the most, powerful lobbying group in Washington. So there's just no way that's going to happen.
There's a big question about whether it's a good idea. I mean, the previous caller talked about Wal-Mart. You think of GM or Procter & Gamble, these huge companies probably need large banks. The other big issue is it's a big world out there. I think London would love it if we broke up our banks because then anyone who wants to be a big bank would just instantly become a British bank. The same could be said for, I don't know, Singapore, Dubai, other places around the world.
So I think whether or not it's a good idea, it's an absolute nonstarter. If it were a good idea, though, you'd want to ask, well, who gets to decide what the right size is? How do you determine that? What incentives would that create in the banks, you know, to evade that kind of law? I think it's a very problematic area, although it certainly would end some of our problems.
CONAN: Russ Roberts, I wonder what you thought about that.
Mr. ROBERTS: Well, I think the enforcement and the actual implementation, as Adam points, is the real issue. I would much rather see what bank score as big as they'd like as long as they don't do it with my money without my choice. And again, I think the issue here is one of incentives. There is a legitimate question about complexity and interaction, et cetera, that I think justifies too big to fail. But, of course, the institutions who are getting bailed out are always going to tell us that. They're always going to make the case…
Mr. ROBERTS: …that, well, we're too interlinked, we're too big. Let's try. And you say, well, we did try it. We tried it with Lehman. The problem with Lehman is we'd already tried it for 25 years or so before with every other institution, including Bear Sterns the March before we let Lehman fail. And the Lehman failure isn't necessarily evidence that it's horrible to let banks fail. It could be evidence that the change in policy is what alarm people, not the actual failure of Lehman.
Lehman's gone through bankruptcy. It seems to be okay. Not it, but the process seems to be working. I wish we tried it before. And unless we change that, I think this whole idea that we could somehow limit the problem by keeping banks, you know, breaking them up or keeping them, some kind of ceiling on them, it's just a bit of a - it's a fantasy.
CONAN: Paul, thanks very much for the phone call. Finally, this email from Claire(ph) in California. I hope this simple question isn't silly. Do the banks have to repay the bailout money the government gave them? Adam Davidson?
DAVIDSON: Well, I'm sorry. I did not…
CONAN: Do they have to repay the bailout money?
DAVIDSON: Well, we're being told we're actually making money, that we're getting a good return on investment from the money so far. I think it's, you know, some of the money was direct loans, but far more within the form of Federal Reserve monetary policy, which works in a slightly different way.
The president said today, we were counting on losing $250 billion that the banks wouldn't be able to pay back, but now we think that we will get that money back. So, you know, there will be an accounting at the end of the day. Although whether they'll be one accounting, they'll probably be…
DAVIDSON: …many different ones, yeah.
CONAN: So, in theory at least, yes.
DAVIDSON: In theory, yes.
CONAN: All right. Adam Davidson of Planet Money, thank you very much. I'm afraid - I hear you're trying to get in Russ Roberts, I'm afraid we're out of time, but I thank you for that.
Adam Davidson, with us from New York; Russ Roberts, from his office in Fairfax, Virginia, where he's a professor of economics at George Mason. We thank him for his time today. And Andrew Jakabovics, who's an associate director for Housing and Economics at the Center for American Progress, appreciate your time today as well.
Up next, eight Afghan girls with a dream, courage and a soccer ball, "However Tall the Mountain."
Stay with us. I'm Neal Conan. It's the TALK OF THE NATION from NPR News.