Investments

Big banks have watered down rules aimed at keeping them from fobbing bad loans off on investors and ensured loopholes in transparency rules. ‘Fundamentally not that much has changed,’ an analyst says.

By Michael Hiltzik
September 13, 2013, 11:23 p.m.

There are two ways to think about how far we’ve come in protecting against a repeat of the financial meltdown five years ago that plunged the world into recession.

You can conclude that we’ve pretty much eradicated the risk of another such crisis. That’s the bankers’ viewpoint. Here’s how Morgan Stanley Chief Executive James Gorman put it in an interview with Charlie Rose earlier this month: “The probability of it happening again in our lifetime is as close to zero as I could imagine.”

Or you can conclude that we’ve done almost nothing to stave off another banking meltdown. That’s the realist’s viewpoint.

Financial historians may date the onset of the financial crisis from the collapse of Lehman Bros., which failed five years ago, on Sept. 15, 2008, though it was building for at least a year, and arguably several years, before that. Lehman’s fall may be perceived more accurately as a symptom, rather than the cause, of a disease that had already infected the financial system.

The virus hasn’t been cured, and while the patient itself — that is, the banking industry — seems to be back on its feet, it’s still a carrier.

Today’s big banks are materially larger than they were before the crash of 2008 — America’s six biggest banks have 28% more in assets than they did in 2007, according to an analysis by Bloomberg. The U.S. economy has been growing consistently, but slowly, since hitting bottom in 2009. Gross domestic product still remains 9% below where it would have been if the pre-2008 trend line had continued, and some analysts worry that the economy may have sustained “permanent damage” from the severe downturn.

Family incomes also have recovered, but the joy has been spread unevenly. As Berkeley economist Emmanuel Saez discovered in the latest of his invaluable updates on income trends in the U.S., the top 1% captured 95% of all income gains from 2009 to 2012 — the real family income among the top 1% grew by 31.4% in that period while everyone else gained only 0.4%.

Could it happen again? You bet it can, says Anat Admati, a professor of finance and economics at Stanford and co-author of “The Bankers’ New Clothes,” a book published in February that details the shortcomings of banking regulation today. That’s because big banks are still too deeply hooked on borrowing and on making deals in shadow markets that are almost impossible for regulators to track.

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