Five years after the financial crisis

Many business news outlets have been running series this week about the state of the financial system five years after the crisis. It’s been interesting to see what topics are being covered, indicating where the financial system may still have problems.

The Wall Street Journal series, running under the headline “Crisis Plus 5 Years,” included stories about the surge in the debt markets, Fannie Mae and Freddie Mac, lessons from the crisis, and a story about how hard it’s been for regulators to write rules restricting banks’ ability to invest their own money.

Excerpts from the Volcker rule story are below:

The Volcker rule, a centerpiece of the sweeping overhaul of financial regulation known as Dodd-Frank, is an attempt to protect the financial system from risk. It is simple in concept. Banks are prohibited from making investment bets with their own money.

But it has proved fiendishly difficult to apply. Five years after cratering financial firms ignited a global crisis, and three years after Dodd-Frank outlined the Volcker rule as a central part of the government response, the rule languishes unfinished and unenforced, mired in policy tangles and infighting among five separate agencies whose job is to produce the fine print.

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The rule’s long gestation, described in interviews with dozens of current and former officials, is emblematic of the struggles that federal agencies face as they attempt to make fixed language of regulation fit a financial world that is ever evolving.

Just 40% of Dodd-Frank’s nearly 400 provisions have been fleshed out with regulatory language and made final, the law firm Davis Polk & Wardwell LLP has estimated.

Some provisions have run into courtroom trouble, with judges faulting regulators for misinterpreting the law, as with a rule to cap debit-card fees and one that would limit speculative positions in futures contracts. Other provisions have been bogged down by the sheer breadth of change they would cause and concern it could ripple unpredictably through markets.

The result is that despite the profound shock the crisis dealt to the nation, revealing its vulnerabilities, significant parts of the U.S. financial infrastructure remain potentially at risk. Assets at the 10 largest U.S. banks have grown nearly 40%, to $11 trillion, raising questions of whether the government has solved the problem of certain financial institutions being “too big to fail.”

Bloomberg’s story said that five years after the collapse of Lehman Brothers, banks were still at risk:

While the amount of capital at the six largest U.S. lenders has almost doubled since 2008, policy makers and some Wall Street veterans say that’s not enough. They see a system still too leveraged, complicated and interconnected to withstand a panic, and regulators ill-equipped to head one off — the same conditions that led to the last crisis.

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More than 50 bankers, regulators, economists and lawmakers interviewed by Bloomberg News disagreed about what needs to be done. Some said the six biggest U.S. banks have only gotten bigger since 2007 — a 28 percent increase in combined assets, according to data compiled by Bloomberg — making it harder to let them fail. Others said they weren’t troubled by bigness or a system that requires government intervention every now and then, calling it an inevitable cost of financing global business.

Congressional inquiries and more than 300 books about the crisis have identified many villains: homeowners borrowing beyond their means, banks selling subprime mortgages, government-supported agencies backing the loans, Wall Street packaging them for investors, ratings firms giving seals of approval, regulators offering little objection and politicians encouraging it all to happen.

Three fundamental flaws stand out. Regulators stripped of power allowed banks to embrace too much risk and load up on toxic debt with short-term funds. Insufficient capital left them little margin for error when those assets plunged in value. A system too large, opaque and interconnected meant they couldn’t fail without catastrophic consequences for the economy.

A USA Today story said the economy was only marginally better five years after the crisis, making it hard for businesses to expand and consumers to spend:

The economy is growing but at a listless 2% annual pace.

Employers are adding jobs, but many are part time and low-paying.

Mortgages are easier to get, but not for first-time home buyers.

Five years after Lehman Bros. collapsed and the ensuing financial crisis set off the Great Recession, the aftershocks of the historic upheaval are still being felt in nearly every corner of the economy. The recovery, which began in June 2009, and the job market undoubtedly have made significant strides. After growing at the slowest pace since World War II, the economy, many analysts project, is finally expected to expand a healthy 3% next year.

A week ago, the International Monetary Fund said the U.S. is expected to fuel global growth in the near term.

But the vestiges of the financial crisis and recession continue to restrain growth, leaving lenders more tight-fisted, businesses more hesitant to hire and invest, and consumers less inclined to splurge.

Five years later and regulators are still struggling to write rules and figure out how to keep banks from taking on too much risk. The economy is growing, which is positive, but just not that much. It’s hard to see that there’s been any improvement to the financial system when you look at some of these stories. Here’s hoping that all those lessons and the painful aftermath don’t go to waste.  It has been five years.