What We’re Reading in Financial Regulatory Reform: Looking Back on the Crisis

Through the month of September 2008, a series of failures and bailouts, including Lehman Brothers, American International Group (AIG), Fannie Mae and Freddie Mac, and the Reserve Primary Fund led to a near collapse of the global financial system, requiring an unprecedented level of public support to stem a full-scale financial panic. On this five year anniversary of the financial crisis, many leaders have reflected on what happened, its impact on the real economy, and how the financial system has or has not changed since then.

BPC’s Financial Regulatory Reform Initiative regularly highlights news articles, papers, and other important work which illuminate current and new thinking within financial regulation. We circulate these articles to provide a full view of cutting edge ideas, reactions and positions. The views expressed in these articles do not necessarily represent the views of the initiative, its co-chairs, task force members, or the Bipartisan Policy Center.

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The Financial Crisis: Five Years Later
By The Executive Office of the President

“Five years ago this week, a financial crisis unlike any in generations rocked Wall Street, turning a recession that was already hammering Main Street into the worst economic crisis since the Great Depression. In the months before President Obama took office, the economy was shrinking at a rate of over 8%. Businesses were shedding 800,000 jobs a month. Banks had stopped lending to families and small businesses. The iconic American auto industry – the heartbeat of American manufacturing –was on the brink of collapse. It was a crisis that would ultimately cost millions of Americans their jobs, their homes, and their savings – and the decades-long erosion of middle-class security was laid bare for all to see and feel.” Read the full report here.

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Hank Paulson: This is What it Was Like to Face the Financial Crisis
By Bloomberg Businessweek

“Lehman intensified the crisis—it was a symptom, not the cause. I don’t subscribe to the “domino theory” when it comes to Lehman. My former colleague, Ed Lazear, had a line that’s more apt: The crisis was like a giant popcorn popper, and it had been heating these kernels for a year as the crisis went on. Lehman might have been the first to pop, but we knew that weekend that Merrill Lynch and AIG were going to pop next, and many others in the U.S. and Europe were not far behind.” See the full article here. Starting September 16, Hank: Five Years from the Brink can be found on Netflix.

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Observations on the Financial Crisis
By Keith Hennessey and Edward Lazear

“The financial shock of September 2008 occurred five years ago. The effects are still with us. In this essay we draw on our experiences in the Bush White House and our work and teaching since then to offer views on recent economic history. We attempt to correct certain popular misinterpretations of the events and policy decisions of the last year of the Bush Administration and the first few months of the Obama Administration. We also highlight certain points we think are underappreciated by many. Rather than offering still another narrative of the financial crisis, we suggest a set of observations that we believe are key to understanding this crisis. Our analysis is based on economic reasoning as well as an examination of the evidence that the passage of time permits.” See the full report here.

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The Financial Crisis Five Years Later- Response, Reform, and Progress
By United States Department of the Treasury

“As we approach the five-year anniversary of the height of the crisis, the financial system is safer, stronger, and more resilient than it was beforehand. We are still living with the broader economic consequences, and we still have more work to do to repair the damage. But without the government’s forceful response, that damage would have been far worse and the ultimate cost to repair the damage would have been far higher.” See the slides here.

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Five Years After Lehman, We’re Much Safer
By Martin Neil Baily and Douglas J. Elliott

“It is fashionable and easy to claim that the fundamental risks remain and that the efforts of regulators and politicians are simply rearranging the deckchairs on the Titanic, or perhaps even counter-productive. This ignores how markets and regulation really work and the major improvements that have been made through the Dodd-Frank Act, the Basel III global agreement on capital and liquidity, and safety improvements forced by market participants acting in their own interest.” Read the full article here.

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Why Lehman Wasn’t Rescued
By Phillip Swagel

“The reluctance of the Federal Reserve to lend to Lehman contrasts with its actions regarding Bear Stearns and A.I.G. The difference is that in the other two cases, the Fed saw itself as lending against reasonable collateral…In the case of the Fed’s loans that facilitated the acquisition of Bear Stearns by JPMorgan Chase, $29 billion of Fed money was at risk against a collection of Bear Stearns assets thought to be worth $30 billion…In the case of A.I.G., the Fed’s loans were collateralized by the entire assets of the firm, based on the observation that A.I.G. had potentially huge losses at its unit that sold credit default swaps but the rest of the firm was a successful insurer…Such a successful outcome was simply less imaginable with Lehman than with either Bear Stearns or A.I.G. To all eyes, the problem at Lehman was one of solvency while the issue in the other two cases was liquidity. The Fed’s actions on Bear and A.I.G. were thus appropriate in its role as a lender of last resort and the same with its caution at Lehman.” Read the full article here.

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Five Years After the Financial Crisis
By American Enterprise Institute

“In September 2008, Americans were focused on an extraordinary series of events in the financial markets and government responses to them. Although the problems in the financial sector had begun earlier, the collapse of Lehman Brothers, the bailout of AIG, Fannie Mae and Freddie Mac in receivership, and a possible stock market meltdown concentrated their attention. Polls from the fall of 2008 showed that Americans were frightened about the health of our financial system. The Reuters/University of Michigan October preliminary report on consumer sentiment registered “its largest monthly decline in the [50-plus-year] history of the surveys.” Other surveys showed that many Americans feared an economic collapse. How have attitudes changed since then? Over the past five years, pollsters have asked Americans hundreds of questions about the crisis and the events that followed that help us answer that question.” Read the full report here.

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Five Years Later, Financial Lessons Not Learned
By Princeton University Professor of Economics and Public Affairs Alan Blinder

“Next Sunday marks the fifth anniversary of the fateful day that investment bank Lehman Brothers filed for bankruptcy, signaling the start of a frightening financial meltdown. It’s a good time to ponder how the U.S. economy was nearly brought to ruin. But will we? Or are we already forgetting?” Read the full article here.

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Lehman Brothers Bankruptcy and the Financial Crisis: Lessons Learned
By The Heritage Foundation’s Norbert J. Michel, Ph.D

“September 15 marks the fifth anniversary of the Lehman Brothers bankruptcy, the supposed spark that set off the financial crisis of 2008. Conventional wisdom holds that it was the federal government’s decision against bailing out this investment bank that froze credit markets and sent the economy into the “great recession.” In reality, though, while the Lehman bankruptcy sent a clear signal to investors of trouble in the marketplace, it was far from the cause of the crisis. The key policy failure was likely regulators’ decision the preceding March in favor of bailing out Bear Stearns, a (smaller) competing investment bank, rather than the decision not to save Lehman. The Bear Stearns bailout set the expectation that Lehman would also be bailed out, setting up investors and creditors for a fall. At the very least, those with a stake in Lehman surely expected the government to minimize their losses. Thus, the inconsistent treatment of the two investment banks—not simply the act of letting Lehman file bankruptcy—was the main problem.” Read the full issue brief here.