Five Years Later, Banks Learned No Lessons

Moshe WanderOctober 3, 2013 If you believe the reassurances coming out of Washington D.C., the financial crisis that hit America after the collapse of Lehman Brothers Holdings Inc. five years ago is not likely to be repeated.They say the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in mid-2010,  will “make sure that a crisis like this never happens again,” according to the White House official website. That’s quite a big promise, but there is growing evidence that a crisis like the panic of 2008 could very well happen again. Although memories of the crisis are still fresh in the minds of laid-off workers and families that lost their homes, it seems to be a distant memory to bankers and their captured regulators.The threats of concentration in the financial industry and the explosion of student debt have made another banking collapse a serious possibility.Recently, Robert H. Benmosche, the chief executive officer of American International Group, Inc. (a massive insurance conglomerate and recipient of billions in bailout money), told The Wall Street Journal that “too big to fail has been solved.”Benmosche might like to think so, but the facts show otherwise.Since the financial crisis, assets of the six biggest banks in the U.S. are up 37 percent and now control an even greater share of wealth than they did at the time of the crisis. Last week, Fortune Magazine declared, “By every measure, the big banks are bigger.” Last year, Politico reported banks deemed too big to fail were “bigger than ever.”The acquisition of Bear Stearns and Washington Mutual by JPMorgan Chase, Merrill Lynch by Bank of America and Wachovia by Wells Fargo have all contributed to this problem.It would be nice to imagine that the banking system is safer than it was prior to the financial crisis, but the banks are engaging in the same practices that created the crisis, and on a larger scale.As if buying up competitors isn’t enough, the big banks have jumped right back into the “shadow derivatives market”— where transactions occur outside the overview of traditional banks — that was culpable in the financial crisis. Banking reformer and attorney Ellen Brown highlighted how the value of the entire derivatives market, at $1.2 quadrillion, is 20 times the size of the world economy.Since 2005, these transactions have been backed by the government, creating more perverse incentives for big banks to load up on risk. But it’s not just derivatives and conglomeration. Student loans may be the nail in the coffin for the next financial crisis.The parallels between the housing sector and the student loan bubble are deep. In both cases, the federal government’s low interest rates and subsidized loans have incentivized banks to lend out money that they wouldn’t otherwise lend.And both cases share the good intentions of the federal government wanting to make something (homeownership and college education, respectively) affordable for people who are living on a tight budget.Writing in Rolling Stone magazine, financial reporter Matt Taibbi compared the explosion in student debt (accounting for over 67 percent of last quarter’s rise in non-real estate household debt) to the growth of mortgage debt prior to the collapse of the housing market, which triggered the financial crisis in 2008.Since student loan debt recently topped $1 trillion and outpaced credit card debt for the first time ever, the next crisis could be even worse than the last one.Although making college affordable is a worthy goal, the government’s subsidized loans may have the adverse effect of destabilizing the already fragile financial system.Five years after a devastating recession, unemployment and underemployment remain high. And although Americans are tired of this terrible economy, the biggest banks are reprising the same acts that led to the crisis in 2008, and there’s no reason to expect this won’t happen again.Moshe Wander is an undeclared freshman.