In September 2008, one of the world’s largest investment banks filed for Chapter 11 bankruptcy, sparked by a credit crisis, and falling real estate prices. The swift collapse ofLehman Brothers, a 158-year-old financial services firm, played a pivotal role in the global financial crisis. The bankruptcy sent shockwaves through the financial system, leading to a freeze of credit markets, a steep stock price decline, and widespread economic pain. Governments around the world acted swiftly to stabilize the financial system and prevent further turmoil.
Fifteen years on, the fall of Lehman is a powerful reminder of the risks in the financial system and the need for more effective regulation. It also continues to ignite sharp debate over“too big to fail” (TBTF) policiesthat result in massive government bailouts.
To commemorate the 15th anniversary,Better Markets, a leading independent, non-partisan nonprofit organization headquartered in the nation’s capital, held avirtual conferenceon September 13 that was open to policymakers, journalists, various stakeholders, and the general public.
The all-day event looked back at the Lehman collapse and was kicked off by Better Markets co-founder, President, and CEODennis Kelleher. Kelleher reminded the audience of the devastating impacts the financial crash had on everyday Americans, “resulting in over $20 trillion in lost GDP, widespread unemployment, and a surge in foreclosures and underwater mortgages.”
“It is so important to remember the collapse of Lehman Brothers and to remember the ongoing challenges and dangers of Too-Big-To-Fail,” he said.
“I hope this will ignite a renewed focus on the many important issues that touch the lives and livelihoods of all Americans.”
In her opening remarks,Senator Elizabeth Warren(D-MA), emphasized the 15-year effort to establish a fairer, more secure financial system following the 2008 crash. She commended Better Markets for consistently championing economic justice, notably in battles to uphold Dodd-Frank promises and support the Consumer Financial Protection Bureau (CFPB). But she said challenges persist and pointed to the concerning trend of bank consolidation that has resulted in the drastic reduction in the number of banks from over 18,000 in the 90s to less than 5,000 today. She called on regulators to fulfill their role in scrutinizing mergers and preventing those detrimental to the economy.
"We have a system in place for bank regulators to block mergers that would be bad for the economy," Warren said. "We just have to remind the regulators of their responsibilities and hold their feet to the fire when they ignore them."
Martin Wolf, the chief economics commentator for the Financial Times, delivered the keynote address and delved into the intertwined relationship between democratic capitalism, its historical underpinnings, and the challenges it currently faces. He relayed the story of his family’s connection to the devastating impacts of the Holocaust, underscoring the critical link between economic well-being and a stable democratic order.
“One must never assume the stability of a civilized democracy,” he said, “not even the most powerful, not even the United States.”
Wolf turned to the economic forces that are harming the health of democracies worldwide, including deindustrialization, rising inequality, falling productivity growth, financial instability, and slowing economic growth, especially after the Great Recession. Wolf concluded that large-scale inequality and the decline of the working and middle classes have eroded the foundations of democratic capitalism.
“It is an intriguing fact that the US and UK appear to be the most unequal of the big high-income democracies and they have also had some of the potent right-wing populist politics. Is that an accident? I doubt it.”
Wolf described two forms of authoritarian capitalism that challenge democracy. One form is Putin’s Russia and the other is the Chinese version of “bureaucratic authoritarian capitalism.”
“A communist bureaucracy operating a capitalist economy can itself appear self-disciplined, long-sighted, technocratic and rational.”
However, Wolf argued that “bureaucratic capitalism also suffers from the great vices of authoritarianism, especially the tendency towards corruption, and crony capitalism. These failings damage both the economy and political legitimacy.”
He went on to say that autocracies are inherently flawed systems for several reasons.
“They do not have a structure of accountability; they do not have open debate; they cannot ensure the peaceful transfer of power; and they tend towards unbridled cronyism and corruption. Indeed, corruption too often becomes the system
Despite the threats to democracy, he said the marriage of the market economy and democracy remains vital, though a difficult one, emphasizing the need to renew shared citizenship to preserve democratic values.
“If democracy is to work, we cannot think only as consumers, workers, business owners, savers, or investors. We must think of ourselves as citizens.”
The Better Markets conference also held a Fireside Chat with Security and Exchange Commission ChairmanGary Genslerwho provided“A Market Regulator’s View of Too-Big-To-Fail.” He acknowledged that despite efforts, financial stability remains susceptible to periodic stresses, both in traditional banks and non-bank sectors.
“How do we limit the effect on the investing public, the working public that people don't lose their jobs, lose their homes as innocent bystanders to the highways of finance?”
“Our role as a securities regulator, or any financial regulator, is to try to lower the risk of those happening.”
The conference featured panel discussions that included an all-star list of government, economic, and banking experts. The morning panel“What has Changed/Not Changed From Bear Stearns/Lehman Brothers to SVB/First Republic”provided in-depth insight into the regulatory landscape of the last 15 years and the legacy of TBTF.
Speakers included Bill Cohan, writer and former senior Wall Street M&A investment banker, Jeremy Kress, Assistant Professor of Business Law at Michigan Ross, Frank Partnoy, law professor at Berkeley Law School, and Jennifer Taub, law professor and author.
The first afternoon panel specifically focused on what happened to the Dodd-Frank Act and why it wasn’t able to prevent the string of bank failures that occurred this past Spring. Panelists included Simon Johnson, professor, global economics & management, MIT, Patricia McCoy, law professor, Boston College Law School, Saule Omarova, law professor, Cornell Law School, and Art Wilmarth, law professor at George Washington University Law School.
CASI faculty co-director Anat Admati joined a second afternoon panel of noted experts from government and academia titled,Looking to the Future: What Reforms Are Needed to End TBTF?The panel was moderated by journalist, author, and media executiveLouise Story.
In her opening remarks, Admati delved into critical issues surrounding the financial system. She began by linking the financial crisis to the political crises that followed and the perception that the initial bailout efforts were inadequate.
“We have a very reckless system and everything that's wrong with the system is due to too much debt and bad incentives and really bad regulations,” she said. Admati took issue with the Federal Reserve for reaching beyond its primary role.
“The Central Bank is there supposedly to provide equity support, it's not supposed to bail out insolvent institutions, yet it's doing it right now and it did it during COVID as well.”
She argued for a reevaluation of the tax code to incentivize equity financing over debt.
“The one thing we need to do is change the tax code which completely encourages debt over equity. It creates an addiction to debt. Why? Every highly indebted company would resist reducing leverage and would always increase it, especially when it's high – if they can get away with it.”
“And, of course, the banks are getting away with it more than anybody because they have passive creditors, depositors, and they have guarantees.”
Admati also raised concerns about how assets are measured and emphasized the importance of higher levels of equity in banking.
“It's the risk weights that are distorting,” she stated. “It's the government that always wants to give itself a low-risk weight so that the bank always holds its bonds, and then [the bank] doesn't lend to businesses who need it, where we need the banks the most. Instead, it just became this crazy game in which nobody can fail. The system itself is incredibly bloated and we just seem to accept that there's no political will to change it.”
Admati suggested a path forward, emphasizing the need for accountability across the board, from bankers to policymakers, regulators, and influential figures. She underscored the impact of a revolving door system between government positions and the private sector.
“It's not a question of where you came from. It's a question of whether you remember what you're supposed to be doing.”
We have a government and people working in it who are not paid well, who are moving on to the private sector, and we’ve got an attitude problem towards the government. We say the government is the problem. That idea goes back to Ronald Reagan. Instead, we have to own the fact that the government needs to work for us.”
Highlights from other panelists:
Reed Hundt, Co-founder, Chairman, and CEO of the Coalition for Green Capital, kicked off the panel by reflecting on the lessons learned from the 2008 crisis. He emphasized the importance of swift action, fair implementation of bailout programs, and the need for substantial stimulus measures. Hundt also advocated for macroeconomic thinking and underscored the significance of trust in the stability of the financial system.
Thomas Hoenig, former President of the Kansas City Fed and former Chair of the FDIC, pointed out that the problem of TBTF has only deepened since the Lehman collapse. He argued that despite the Dodd-Frank Act's regulatory efforts, large financial institutions have become even larger, more complex, and more powerful. Hoenig emphasized the pivotal role of equity capital and the use of leverage ratios in evaluating capital adequacy. He cautioned against relying solely on Basel capital standards, advocating for a more market-oriented approach to risk assessment.
Gerald Epstein, Professor of Economics at the University of Massachusetts, Amherst, delved into the challenges of ending TBTF. He proposed policy tools like capital and equity requirements, as well as revisiting legislation like the Glass-Steagall Act to separate investment and commercial banking. Epstein called for banks to contribute to social goals, particularly in addressing climate change, and urged for public options in the financial sector.
In her closing remarks, Admati called for greater public awareness and a greater demand for solutions to create a more stable and fair financial system.
Better Markets President and CEO Dennis Kelleher echoed Admati’s call to action.
“These issues literally impact the lives and livelihoods of all Americans. They need much more attention and involvement by those who are not in the financial industry pushing their narrow interest to the top of the agenda.
“We need engaged citizens acting as citizens. The public interest will only have a fighting chance if we fight for it.”
You can watch the full conferencehere.
