BY MARTIN HUTCHINSON

If history is any guide to the future, Citigroup will be in the middle of whatever financial crisis Wall Street manages to cook up next. Or so say James Freeman and Vern McKinley in “Borrowed Time: Two Centuries of Booms, Busts, and Bailouts at Citi,” a new book examining the $180 billion bank’s troubled past. The institution bailed out in 2008 has suffered repeated failures of over-aggression and lack of foresight, while Uncle Sam’s open wallet has blocked meaningful reform.

In its early days, Citi was a politically connected bank with poor lending practices controlled by a management team with alcohol problems. The bank came close to failure in the Panic of 1837, but was bailed out by John Jacob Astor, the beaver-pelt mogul who installed a capable top executive. For the next 72 years, Citi was capably run and grew to be the nation’s largest bank, albeit with only one branch, taking on deposits in “panics” because of its perceived solidity.

Readers of “Borrowed Time” can play an amusing parlor game identifying the most misguided of those who led Citi in its problematic second century. Frank Vanderlip, the originator of many of Citi’s long-term problems, tops the list. Like several of his successors, Vanderlip was not professionally a banker – he was a journalist and U.S. Treasury official. He focused his tenure by doing much to create the half-baked Federal Reserve system rather than a single central bank, which would have decimated Citi’s correspondent-banking business.

Vanderlip then decided that a period of catastrophic world war was ideal for a single-branch bank, with no internationally experienced staff, to embark on building a global network of over 100 branches, half of them in Cuba. That combined with a push into domestic brokerage to cause Citi to require a $144 million bailout from the New York Fed in 1920 and to continue recording its Cuban sugar loans and holdings as current throughout the 1920s.

President Roosevelt partly blamed Vanderlip’s successor, “Good time Charlie” Mitchell, for the Great Depression. This was only a little harsh; he was just a high-powered salesman who got carried away. In building loan volume, Mitchell didn’t bother to ensure that the credits were economically useful. Brokers’ loans, used for stock speculation, comprised 65 percent of the bank’s total loans in March 1929. The result was the collapse of Citi’s brokerage affiliate, Mitchell’s ouster and a government bailout with $50 million of preferred stock.

Having suffered two near-death experiences in a decade, Citi was at least conservative for a generation. The next bailout came courtesy of Walter “countries don’t go bust” Wriston in 1982, when Citi, heavily over-leveraged, lost well over 100 percent of its capital in loans to Mexico, Brazil and Argentina. This time, the regulators’ response was to provide liquidity and pretend the loans were solid, which worked until the end of the decade, when the Latin American bad loans were joined by dud real-estate loans (including a heavy exposure to developer Donald Trump). Citi was described as “technically insolvent” by the House Commerce Committee chairman in 1991 but was privately rescued by an injection of preferred stock from Saudi Prince Alwaleed bin Talal.

The authors describe in detail Citi’s successful attempt to re-integrate commercial and investment banking with its Salomon Brothers merger in 1998, followed 10 years later by the collapse of its balance sheet once again, this time with problems appearing in domestic mortgages, investment-banking products and international banking. Citi was bailed out again, with the total exposure from various government loan funds reaching an astounding $517 billion in January 2009.

Freeman and McKinley strongly suggest Citi should not have been bailed out, but do not address how another bank failure in 2008 even larger than that of Lehman Brothers would have bolstered global investor confidence. However, a third alternative to Lehman-style bankruptcy existed: the nationalization of the bank, with shareholders being wiped out, followed by rapid liquidation and asset sales, while paying creditors in full. That rough justice might have restored more confidence in the U.S. financial system than a government bailout.

It surely would have wiped out a bank culture that had repeatedly brought losses and bankruptcy, and would have forced its perpetrators to find new employment. Eliminating a bank with Citi’s long track record of failure would also arguably have removed moral hazard from the banking system. “Borrowed Time” argues that Citi – having been left mostly intact after 2008 – will be at the heart of whatever future financial crisis awaits. History makes that a good bet.

First published Aug. 24, 2018

Image: REUTERS/Brendan McDermid

BY ROB COX

The wedding-industrial complex tries to convince couples to celebrate their nuptials every year with a traditional gift. The quality of each present increases with longevity. In year one it’s just paper for the spouse. After 50 it’s glittering gold, and so on. The same could be said for commemorating financial crises: The further away from the anniversary, the more valuable the lesson to be learned.

In that sense, recalling Long-Term Capital Management’s implosion in 1998 may be more worthwhile than dwelling on next month’s anniversary of the collapse of Lehman Brothers. The financial and economic fallout that followed the Wall Street firm’s bankruptcy in 2008 was certainly larger and more severe than the one that preceded it by a decade. But as the world discovered to its dismay 10 years after LTCM, some of the glaring deficiencies that led to that crisis were repeated – and at scale.

The key takeaway is simple, if somewhat meta: There are always blind spots. Whatever regulators, bankers, policymakers and investors think they learned during the last crisis may not be correct at all – or may simply be forgotten. That may not be comforting. But greater humility is always preferable to excessive confidence.

A more specific lesson, though, is the recognition that without sharp regulation, leverage tends to increase in the system until it becomes so interconnected that emergency measures become the only feasible way to contain the damage. Secondly, though reforms are often rolled out in the heat of panic, they historically do little to radically change the structure of the financial industry. Banks may have more capital today, but they still marry riskier activities with the potential to upset their more normal ones – lending and transactions management – in ways that pose a danger to the economy.

Take a journey back to the summer of 1998. As “The Boy Is Mine” by Monica and Brandy topped the Billboard Hot 100 charts, Russia’s economy was melting down. On Aug. 17, Moscow devalued the ruble and, in a surprise move, defaulted on its domestic debt. Investors dumped risky assets, like developing-country securities, which are often thinly traded. And they piled into safer ones, like U.S. Treasury bonds, which can be bought and sold with relative ease.

The reaction to Russia’s default upset the trading strategy of a hedge fund in Greenwich, Connecticut founded by John Meriwether. As a jacked-up version of the arbitrage desk of his former employer Salomon Brothers, LTCM made its name exploiting inefficiencies in the prices of assets that, over time, should naturally converge. Sometimes these discrepancies, say in a bond coming due in 30 years compared to another maturing in 29-1/2 years, were minuscule.

To magnify the difference, LTCM had to pile on debt. As Roger Lowenstein wrote in “When Genius Failed,” his chronicle of LTCM’s rise and fall, one of Meriwether’s first trades was to borrow 25 times the firm’s capital to structure a trade that took advantage of the difference between two nearly identical U.S. government bonds with slightly different maturity dates. And as the boss of a big, prestigious fee-payer to Wall Street banks, he could tap into their greed, and their fear of missing out, to play them off against each other – usually keeping them in the dark about their rivals’ involvement as well as the full scope of LTCM’s trades.

Markets, though, are not always as efficient as LTCM’s smarty-pants partners believed. Especially when fear runs riot, as was the case following the Russian meltdown 20 years ago this Friday. By the start of September 1998, the market turmoil had caused a $2.5 billion loss, or half of LTCM’s capital, as investors piled into liquid securities and dumped riskier ones. Over the ensuing weeks, LTCM was forced to dump assets at fire-sale prices to meet collateral requirements, incurring greater losses still.

Within a month of Russia’s default, Meriwether and his traders – including Nobel Prize-winning economists Myron Scholes and Robert Merton – were facing insolvency. After a series of private investors baulked, the New York Federal Reserve pulled together a consortium of investment and commercial banks who rightly feared what might happen if LTCM was forced to liquidate its $125 billion portfolio, not including the derivative positions it held off its balance sheet.

Fourteen banks pooled their money, injecting just over $3.6 billion of fresh capital into LTCM and parachuting in a team to oversee the fund’s liquidation.

Here is where a critical lesson should have been imparted to the financial industry. Instead, many of those banks who saw firsthand how leverage kills spent the next decade effectively transforming their own balance sheets to mimic the one that crushed LTCM. The Securities and Exchange Commission aided and abetted by relaxing capital requirements for investment banks early in the new millennium.

Maybe the fact that the banks ultimately got their money back convinced them of the merits of LTCM’s model – along with the false surety that, though their employees lacked Nobels in economics, they were savvier traders. Perhaps it was the comforting spectacle of seeing the Fed spring into action, coordinating the operation and swiftly cutting interest rates days after the bailout that led them to believe that whatever happened with their own trades, there would always be a lender of last resort.

Funnily, two of those called upon by the Fed to lend a hand, Lehman Brothers and Bear Stearns, kicked up a fuss over participating. That has fueled speculation ever since they both went under that their rivals – or even the Fed – had it in for them.

Whatever the case, it took another decade, and the Lehman catastrophe, for the broader banking industry, its watchdogs and policymakers to get the bigger message on the danger of leverage. Banks are now loaded up with capital. But the need for that was crystal clear in 1998, too. Which raises a question: What lesson should have been obvious from 2008, but has not yet been imparted or ignored? Maybe there isn’t a very satisfying answer, apart from simply recognizing what 20 years of hindsight teaches: We don’t yet know.

First published Aug. 15, 2018

(Image: REUTERS/Kevin Coombs/Files)

BY ANTONY CURRIE

August can arouse fear in the most seasoned Wall Street hands. If a crisis is going to hit, there’s a good chance it’ll come at the height of the northern hemisphere’s summer – usually after a couple of weeks of market torpor. That’s what happened with the Russia default and LTCM crash 20 years ago. And sudden crises in the past few years, like China’s 2015 devaluation, have forced financiers to scramble back from their holidays. But there’s one notable exception: August 2008.

Granted, it was a stressful time. Lehman Brothers executives were desperately trying to find new capital. The UK’s Northern Rock Building Society needed another taxpayer bailout. And plenty of investors and bank bosses were still trying to work out how much exposure they had to mortgage bonds and the cratering U.S. housing market. Yet those 31 days were surprisingly uneventful.

The respite gave the Federal Reserve space to work out whether its $900 billion balance sheet could handle more bailouts and how to reduce systemic risk. But the board of governors was almost as worried about rising inflation; one, Richard Fisher, even wanted to raise interest rates, as the European Central Bank had done the previous month.

Elsewhere, many lapsed into complacency. General Motors boss Rick Wagoner claimed the automaker was over the worst of its job cuts and pension and healthcare pressures.

Citigroup’s then-Chief Administrative Officer Don Callahan proclaimed that it was “among the best capitalized banks in the world,” in a letter responding to a Breakingviews article arguing it was too big to succeed, or fail. Barclays argued it needed a Tier 1 capital ratio of only 5.25 percent; it now sports more than double that.

Some boom-time spirit was still palpable, too. Buyout shops KKR and Apollo were ramping up plans to take their companies public. Merrill Lynch handed over a $40 million guaranteed five-month pay deal to lure ex-Goldmanite Tom Montag.

Such hubris was quashed the following month when Lehman went under and Merrill was rescued by Bank of America. By November Citi had been bailed out twice and the ECB had to cut rates; four months after that Wagoner was ditched with GM on the verge of bankruptcy. Bumper bonus guarantees are now all but extinct – though Montag remains at BofA, as chief operating officer. He’s the rare survivor of 2008’s far from august August.

First published Aug. 10, 2018

(Image: REUTERS/Nacho Doce)

BY GINA CHON

The increasing role of non-banks in the U.S. mortgage market sparks memories of the 2008 financial crisis. As the likes of Citigroup, Bank of America and JPMorgan have cut home lending and servicing, specialists have stepped in, but they lack bank-like capital cushions. Government-owned Ginnie Mae, guarantor of $2 trillion in mortgage-backed securities, is particularly exposed, as are the mainly lower-income Americans it is supposed to help.

Ginnie Mae outsourced oversight to regulators like the Federal Reserve when banks were its main securities issuers and servicers. But a post-crisis crackdown caused them to shrink those businesses. In 2017, four of the top five issuers of Ginnie Mae-backed single-family MBS instruments were non-banks, with PennyMac Loan Services and Lakeview Loan Servicing in the two top spots.

Meanwhile, Ginnie Mae’s guarantee book has ballooned to almost five times its size in 2007, putting it in the same ballpark as government-sponsored Freddie Mac. But Ginnie Mae has only about 140 direct employees, compared to more than 6,100 workers at Freddie Mac.

That’s partly because Freddie Mac buys and owns mortgages as well as guaranteeing them, but the huge disparity in resources means Ginnie Mae, which supports mortgages for veterans, lower-income individuals and minority groups, can’t adequately police the non-banks whose borrowers’ performance it essentially guarantees. A September audit supported that finding.

Non-bank lenders and mortgage servicers often rely on the kind of short-term funding that proved so vulnerable during the crisis. Furthermore, non-banks are largely regulated by state watchdogs, which have varying standards.

U.S. Housing Secretary Ben Carson, who oversees Ginnie Mae, is positioned to sound the alarm but he is one of the less visible members of President Donald Trump’s cabinet and has little experience in mortgage finance. Lawmakers have not managed to comprehensively reform Fannie Mae and Freddie Mac, but at least they are currently on a tight leash. Ginnie Mae is essentially untouched, and its size and non-bank ecosystem rarely come up as concerns.

Michael Bright, Trump’s nominee to lead Ginnie Mae, told lawmakers at his confirmation hearing on Tuesday that rising interest rates made financial stress among non-bank mortgage lenders and servicers his biggest worry. He offers a rare and lonely warning that swaths of the home-loan market escaped post-2008 reform.

First published July 25, 2018

(Image: REUTERS/Mike Blake)

BY PETER THAL LARSEN

In September it will be a decade since Lehman Brothers collapsed. While many recall the Wall Street firm’s dramatic failure – and the global crisis it unleashed – few know how it began. A dazzling new production of “The Lehman Trilogy” examines that story through the eyes of its founding siblings and the dynasty they created. It’s America’s economic history distilled into a family drama.

The chronicle of a collapse foretold begins in September 1844 when Henry, the oldest Lehman, arrives in the United States from Bavaria. He settles in Montgomery, Alabama and opens a store selling clothing and farming tools, where he is joined by his two brothers. The immigrant ethos of self-reliance and hard work is strong. Financial innovation begins early. The brothers buy cotton from local farmers and sell it to factories in the north. “We’re middle men,” the youngest, Mayer, explains to his sceptical future father-in-law.

As the family’s wealth grows, traditions fade. When Henry dies, his brothers close the shop for a week to mourn. By the time Robert “Bobbie” Lehman, the last family member to run the firm, passes away more than a century later, his colleagues barely pause. Markets no longer have time for sentiment.

With assimilation comes financial abstraction. The brothers move to New York and trade commodities such as coffee, coal and iron but no longer handle the actual goods. Investigating an opportunity to finance a railroad, Emanuel Lehman is shocked that the business consists of nothing more than a line drawn on a map. His son Philip sees the potential profit: he’s interested in numbers with lots of “zeroes, zeroes, zeroes”.

The detachment from reality is complete when the firm embraces computerised trading. The giant panoramic screen behind the stage – which first displays Alabaman cotton fields and then the New York skyline – becomes a digital blur. The play does not attempt to explain how subprime mortgages were repackaged into the supposedly safe bonds that helped trigger Lehman’s demise in 2008. There’s no need: the scope for self-delusion is clear.

The history – adapted by Ben Power from Stefano Massini’s play – is punctuated by crises, most of which Lehman turns into opportunities. After a massive cotton fire, the brothers finance new crops. Following America’s destructive civil war, the firm secures state funding to start a bank. During the Wall Street crash of 1929, Lehman survives by bringing in partners from outside the family.

The story is told by three actors who are on stage for the play’s three hours. As well as portraying the brothers, they switch into a range of other characters – children, girlfriends, wives, business partners, rabbis – all the while dressed in the original black garb of the founders. This is funny but also serves as a constant reminder of the firm’s origins.

The action takes place in a large, rotating glass-and-steel box that is part corporate boardroom, part executive office. It’s filled with stacks of cardboard boxes like the ones Lehman’s employees used to carry their belongings after the bank collapsed. As the action unfolds in a single-room Alabama store, or the racecourse where Bobbie Lehman watches his horses, this backdrop is an intimation of the firm’s ultimate fate.

The play pays little attention to the firm’s modern history. It summarises the battle for control between banker Pete Peterson and trader Lewis Glucksman, both sons of immigrants, and suggests the latter’s victory over the former helped determine the bank’s course. Lehman’s sale to American Express and subsequent spinoff in 1994 barely warrants a mention. Dick Fuld, the firm’s final chief executive, only makes a brief appearance.

Director Sam Mendes achieves something more important, though, by forcing his audience to re-examine a familiar story through fresh eyes. “The Lehman Trilogy” reduces the complexities of finance to their human essence: ambition, inspiration, trust, greed, and hubris. The story will resonate when memories of Lehman’s failure are as faded as the pictures of the brothers who founded it.

First published July 20, 2018

(Image: REUTERS/Kevin Lamarque)

BY ANTONY CURRIE

The collapse of a Pasadena mortgage lender with 33 branches sounds like an odd choice for one of the seminal moments of 2008. Plenty of far bigger, more complex and consequential institutions hit the wall during that tumultuous year – from Lehman Brothers to AIG to Fannie Mae and Freddie Mac. IndyMac, which failed 10 years ago on Wednesday, wasn’t even the largest thrift or retail-bank downfall. And another 460 went under by the end of 2012. Yet its fate resonates in Donald Trump’s deregulatory era.

The most obvious reason is Treasury Secretary Steven Mnuchin. He gathered together the group of private-equity firms which six months later bought the bank’s assets out of conservatorship at the Federal Deposit Insurance Corp for around $1.3 billion. He also served as chairman and, initially, chief executive. Five years later, the investors sold it for $3.4 billion. That made the buyer, CIT, the first bank to cross the $50 billion asset threshold regulators had set to denote systemically important institutions. Mnuchin bagged over $100 million. That’s around a third of his current net worth, according to Forbes.

The other is Joseph Otting, who Mnuchin hired as chief executive of OneWest, IndyMac’s new name. He’s now a top U.S. bank regulator, serving as the comptroller of the currency. The 2009 deal with the FDIC became the template for other such sales. Current Commerce Secretary Wilbur Ross, for example, was one of the buyers of BankUnited, another lender that went bust a few months later.

IndyMac, though, offers a textbook case of why it’s not just the big banks which need alert regulators. It quickly grew to $32 billion in assets by selling risky mortgages and relied heavily on loans from the Federal Home Loan Banks and brokered deposits, both expensive. Throw in the worst watchdog of the lot – the now-shuttered Office of Thrift Supervision – and it couldn’t get much more chaotic.

Banks around this size, and even a bit bigger, are getting most of the regulatory relief from the White House and Congress. That’s understandable, to a degree: many of the post-crash rules targeted the mega-banks but snared their smaller cousins in bureaucracy.

But even the minnows can cause trouble. By the end of 2012, the failure of lenders that followed IndyMac into receivership had cost the FDIC more than $90 billion. That’s roughly what Washington spent on preferred stock to bail out Bank of America and Citigroup. Ensuring both types of calamities are avoided requires vigilant oversight across the entire banking industry.

First published July 11, 2018

(Image: REUTERS/Danny Moloshok)

BY ANTONY CURRIE

Ten years after it effectively failed, Bear Stearns is a useful lesson in healthy conflict. The Wall Street firm’s demise, like that of Lehman Brothers six months later, was a group effort by executives and watchdogs. So it is a cause for concern that post-crisis rules are being softened and regulators talk of forging a “partnership” with the banks they police.

The U.S. financial system has far more safeguards than it did as, under bridge-playing boss Jimmy Cayne, Bear crept toward its own undoing. Banks have to hold more liquidity and capital and have all but exited subprime lending, prop trading and constructing large swaths of overly complex securities. Pay can be clawed back, and big institutions face a comprehensive, and in their eyes overly opaque and pessimistic, annual stress test administered by the Federal Reserve.

That has fostered a degree of mutual suspicion between the two sides. So it should. Regulators are supposed to hunt for the bad news banks may be trying to hide. A decade ago, the relationship was getting too cozy. Christopher Cox, then chair of the Securities and Exchange Commission, told Congress a couple of weeks after Bear’s collapse that it had been well capitalized and “apparently fully liquid.” Yet later investigations by his agency and others revealed Bear’s executives had been worried about funding for months.

Where there was friction, it was sometimes in the wrong places. Officials from the SEC and the Fed covering Lehman seemed to spend more time battling each other than digging into the firm’s troubles, according to a bankruptcy court investigation. Worse, the Office of Thrift Supervision, which regulated Washington Mutual and IndyMac – both of which went bust – called its charges “customers.”

Some of that mentality is starting to return. Comptroller of the Currency Joseph Otting said last month that “there is more of a partnership with banks, as opposed to a dictatorship.” He came to the OCC after running OneWest, the successor to IndyMac. Meanwhile, Congress looks set to pass a bill rolling back some of the admittedly onerous restrictions on smaller banks in the 2010 Dodd-Frank Act.

The crisis is still fresh enough that the most obvious mistakes in letting banks run amok are unlikely to be repeated. But hubris is a real danger, and when banks and their regulators see eye to eye, it’s time to worry.

First published March 14, 2018

(Image: REUTERS/Kristina Cooke)

BY ROB COX

Just five minutes before Monday’s solar eclipse, hundreds of beachgoers along the Cape Cod National Seashore were donning special glasses and positioning empty cereal boxes with pinholes in them, tittering with anticipation to see the moon begin to blot out much of the sun. As a result, they missed something far more exciting some 10 yards offshore.

A hungry great white shark was attacking a harbor seal. It snatched the poor creature in its jaws and hurled it toward the shore, in between body-surfing and boogie-boarding youngsters. Those, like my son, who had been watching the water, saw the seal breach out of a foaming commotion of water and blood and yelled “Shark!”

But the majority of folks on Nauset Beach, including the lifeguards focused on the safety of swimmers, missed the great white itself. They only saw the dying seal with its blubbery entrails visible as it swam in hobbled fashion along the surf, leaving a thick trail of blood in the water. That was the end of the beach day as the authorities, now in great abundance, prohibited further swimming.

As yet another heralded 10-year anniversary of the great financial crisis approaches, the true-life tale of the shark in the eclipse presents an apt metaphor for what happened back in 2007. People on the beach straining their necks to peer thousands of miles into space missed the more important event just a few feet away.

In retrospect, of course, I should have been more attentive to the water than the sky. Anyone entering Nauset Beach will, aside from the advertisements for Liam’s clam shack, see the ominous signs warning about the preponderance of great whites, and flags hoisted high bearing the likeness of a shark. Nonetheless, the parking lot fills up on most summer days.

So it was with the global banking crisis. There were indications everywhere of a system going awry. A decade on, these are the things financial experts and pundits are returning to in a perverse form of celebration. Everyone, it seems, has their view about which of these events from early 2007 and into the first half of the following year foretold the calamities to come. But the truth is more complicated.

Though intellectually stimulating to revisit with hindsight, in isolation none really explained the whole picture in ways sufficient to avoid the inevitable attack. Those who experienced the crisis in the trenches of finance, journalism and public policy will continue a healthy debate for as long as they can remember what happened.

It’s worth recalling some of them since we are now in the 10-year anniversary cycle – but with the simple purpose of recognizing that only the sum total of events can provide a real lesson for future avoidance. And even that will be imperfect.

It’s widely accepted that the canary in the coal mine came in early February, 2007, when HSBC announced it was taking an extra $1.8 billion in provisions for mortgage loans provided to subprime U.S. borrowers. Mauro Guillén, director of the Lauder Institute at the University of Pennsylvania’s Wharton School, kicks off his timeline of the crisis with this event, which inspired a savvy Breakingviews piece questioning whether subprime would be “the first shoe to drop.”

Perhaps because HSBC had a few years earlier, and unusually, acquired a lender focused on less creditworthy customers, many saw it as an isolated case. They didn’t need to look much further for other warnings that the shark, to stretch the analogy, would soon devour the seal. New Century Financial, a subprime lender, was bleeding out for much of first quarter of the year, culminating in its April bankruptcy. Months later, two Bear Stearns hedge funds investing in ropey mortgage assets went bust.

By August that year it had started to become apparent that the problems were no longer isolated to a few buccaneering market participants. CNBC commentator Jim Cramer’s on-air rant that “the Fed is asleep” was followed by a notice to investors from BNP Paribas that it couldn’t value a bunch of mortgage-related assets in its portfolio due to a “complete evaporation of liquidity.” Within weeks, central banks were injecting money into the financial system.

At the annual Federal Reserve symposium in Jackson Hole, Wyoming that year – the decennial anniversary comes this weekend – central bankers appeared confident no systemic crisis was imminent. In a speech entitled “Housing, Housing Finance, and Monetary Policy,” then-Chairman Ben Bernanke said, “It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”

Despite these jitters, investors remained calm, even complacent. From the week before HSBC burped to October of that year – when UBS, Merrill Lynch and Citigroup warned of some $20 billion of subprime losses – the S&P 500 Index rallied some 10 percent.

The complacency rolled on until troubled Bear Stearns was swallowed by JPMorgan in March of 2008. That’s an anniversary that will no doubt merit barrels of ink next year, as will the mother of all crisis celebrations with the 10-year mark of the September demise of Lehman Brothers and the bailout of both AIG and mortgage agencies Fannie Mae and Freddie Mac.

Each anniversary marks an opportunity not simply to remember what happened, but to recognize that no single event can really be said to have predicted, kicked off or ended the crisis. Like all collective delusions and manias of crowds, the failure of most investors, regulators, politicians, bankers and, yes, we journalists to identify the danger lurking just below the surface in 2007 only becomes evident by examining the full arc of what occurred.

And there is a further lesson, one that both the history of market bubbles and financial panics – as well as mid-eclipse shark attacks – will confirm: we will almost certainly be looking in the wrong direction when the next attack comes round.

First published Aug. 24, 2017

(Image:  REUTERS/David Gray)

BY ANTONY CURRIE

The 10th anniversary of the financial crisis could not come at a better time. Tuesday marks a decade to the day since HSBC fessed up to its subprime-mortgage problems, which were growing so rapidly it needed to set aside an extra $1.8 billion to cover losses. A day later New Century, one of the country’s biggest stand-alone home-loan providers at the time, admitted it would need to restate its 2006 results. Thus started a credit crunch-turned-global recession that cost the U.S. economy alone as much as $30 trillion.

That figure, an upper estimate from the Dallas Federal Reserve in 2013, should serve as a sanity check as the Trump administration, the Republican Party and banks crow about the chances of regulatory rollback. It’s a timely reminder that exuberance and loose standards can cause painful damage.

Doubtless some of the regulatory zeal in the aftermath of the worst financial crisis in generations needs toning down. Smaller banks, for example, have been hit unduly hard by new rules. The pre-2007 excesses, though, needed to be dealt with – from overly lax lending to conflicted credit ratings to skewed compensation incentives.

Those took root in the system after bankers chafing at the bit about older regulatory restraints like Glass-Steagall persuaded Congress and watchdogs to overturn them. Bankers then downplayed the risks and overemphasized the upside. So Wall Street executives in 2007 asserted subprime mortgages would wreak no havoc as they represented just a couple of percentage points of revenue. Within weeks, they were forced to admit they paid no attention to how great the losses could become.

A similar blinkered approach is starting to return as bankers, as well as investors in all sectors, concentrate on the benefits of Trump administration promises on tax cuts and regulatory reform. Meanwhile, they’re ignoring the potential impact of the president’s trade protectionism and broader America First policies.

The impact of the last decade’s financial crisis is long-lasting. It caused GDP losses that compounded each year from 2008 to 2015 and decreased business fixed investment by a fifth, according to a new analysis by Wells Fargo economists. The likes of Citi and BofA are still trying to offload unwanted pre-crash assets even though the Fed’s exceptionally accommodative monetary policy has boosted asset prices.

The U.S. economy may be growing slower than current pushers of deregulation would like. But it hasn’t lurched into its usual pattern of a recession every six or seven years. That should count as a victory worth remembering.

First published Feb. 7, 2017

(Image: REUTERS/Bobby Yip)