Five years ago today, the nation plummeted into financial panic as Lehman Brothers filed for bankruptcy and other major financial institutions teetered on the edge of collapse. September 14th and September 15th of 2008 presaged a sweeping and massive bailout of Wall Street and a downward spiral that would leave our country economically wounded for years to come.
Following up on my posts of earlier this week, here is the third post in a series about five critical must do's to prevent another crisis and to remake our financial system and economy to serve all Americans, not just powerful financial interests. Also, below you will find another short summary of daily events leading up to the financial meltdown of 2008, drawn from the timeline on the website of the Financial Crisis Inquiry Commission.
Must Do # 3 - Tougher, Simpler Capital Requirements for Banks
Federal Reserve Chairman Ben Bernanke told the Financial Crisis Inquiry Commission that, in September and October of 2008, 12 of the nation's 13 most important financial institutions were at risk of failure within a week or two. The imminent collapse of the nation's biggest financial firms was in no small part due to an explosive mix of highly risky investments and razor thin capital cushions. By 2007, the five major investment banks -- Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley -- were operating with leverage ratios as high as 40 to 1, meaning for every $40 in assets, there was only $1 in capital. Less than a 3 percent drop in asset values would wipe out a firm. And the investment banks were not alone. By 2007, Bank of America was leveraged 27 to 1 and Citigroup's leverage stood at 48 to 1 when off balance sheet assets were factored into the equation. When calamity came, it was the nation's taxpayers that stood in the breach.
Five years later, with the nation's biggest banks holding an even greater share of the country's banking assets than before the financial crisis, we remain at grave risk in the event of the failure of systemically important financial institutions. Yet, capital standards remain dangerously low. Indeed, one wonders how many banks would lend to a normal company that was as highly leveraged as our nation's biggest financial houses.
Federal regulators are now proposing to increase capital requirements for the biggest financial institutions and to make the leverage rules less subject to gaming. The new rules aren't all they need to be, but they are a start and they are badly overdue. Wall Street has signaled its opposition to these new standards -- no surprise from an industry that has waged a fierce, rear guard action against every meaningful reform.
For the safety and security of our financial system and economy, these new rules need to get adopted without weakening and without delay. And, then made even stronger.
Must Do #4 - To Reform Compensation, Shareholders Unite! (posted 9/12/13)
Must Do #5 - A Federal Reserve Chair Who Will Protect the Public Interest, Not Wall Street (posted 9/9/13)
5 Years Ago Today in the Financial Crisis
On Sunday, September 14, 2008:
- Bank of America CEO Ken Lewis contacts Merrill Lynch CEO John Thain in the afternoon and says that his company would acquire Merrill for29 per share, or50 billion. Thain convenes a board meeting that evening during which the Merrill board approves the transaction.
- Federal officials tell Lehman to file for bankruptcy.
- The Federal Reserve expands the Primary Dealer Credit Facility (PDCF) to cover additional illiquid assets. On hearing about the expanded PDCF, Richard Fuld and other Lehman executives believe that it could prevent Lehman from filing for bankruptcy. President Bart McDade, CFO Ian Lowitt, counsel Harvey Miller, and other Lehman executives return to the Federal Reserve Bank of New York (FRBNY) to meet with FRBNY General Counsel Tom Baxter and his staff, but Baxter tells them that only Lehman's broker-dealer can access the expanded window and that Lehman's holding company, but not the broker-dealer, should file for bankruptcy.
- At 1:45 a.m., Lehman Brothers Holdings Inc. files for bankruptcy, listing more than600 billion of assets and liabilities with more than 100,000 creditors: it is the largest bankruptcy in U.S. history. The Fed gives LBI, the broker-dealer, access to the Primary Dealer Credit Facility, which Lehman uses three more times (28 billion on September 15,19.7 billion on September 16, and20.4 billion on September 17) until Barclays steps in to provide financing to LBI.
- Standard & Poor's (S&P) cuts AIG's credit rating.
- Bank of America and Merrill Lynch announce that the bank will purchase Merrill in an all-stock transaction. The deal, together with the Countrywide acquisition, makes Bank of America the nation's biggest retail brokerage and banker to consumers
On Monday, September 15, 2008:
- The Dow Jones fell by 504 points (4.42%) and the S&P dropped by 59 points (4.71%).