Two Years After Lehman, Is the Financial System Safe -- or Just Safer?

Police van on Wall StreetSince Lehman Brothers went bankrupt in September 2008, financial regulators around the world have begun erecting a scaffolding of new rules and regulations designed to place limits on excessive risk-taking. The big question is: Are they enough to prevent another financial crisis from taking place?

The central plank of the new financial order in the U.S. is the Dodd-Frank financial overhaul bill signed into law by President Obama last July. The massive bill, spanning more than 2,000 pages, covers panoply of topics, from what constitutes a safe mortgage to the identification of large financial institutions as systemically important so that they can be taken over and dismantled in the event of another crisis.

The latest piece of the new regulatory framework emerged over the weekend of Sept. 11, when an international committee of central bankers meeting in Basel, Switzerland, approved new rules for bank capital requirements. Called Basel III, the rules aim to increase the amount of money banks have to set aside for an emergency from the present 2% of assets to around 7%, by 2019.

"Significantly Less Damaging"

Neither Dodd-Frank nor Basel III will come into effect immediately -- or possibly not even for years. In the case of Dodd-Frank, more than 60 regulations have to be written to describe exactly how the law will be implemented. Basel III must be approved by national governments around the world (and its major rules will be phased in over 10 years). Despite the momentum now built up for Basel III, its predecessor agreement, Basel II, was never approved by a rejectionist U.S. Congress.

"Nothing will keep us from having future financial crises, because we have systems that are run by humans," says Douglas Elliott, a former investment banker who is now a fellow at the Brookings Institution in Washington, D.C.

"What we can do is make them significantly less frequent and significantly less damaging," Elliott says. "Basel III will be a big help in that regard because one of the great things about capital is that it provides you with a general level of protection without having to guess in advance what the next problem is going to be."

While some critics have bemoaned the fact that the 7% capital requirement agreed was less than what the U.S. had wanted, Elliott pointed out that the regulators have also recalculated the risk weighting of assets, so the eventual cushion may end being 8% or 9%. "This is a big step forward," he says.

A Framework for Mitigating Damage

Delores Atallo-Hazelgreen, a leader in the governance, risk and regulatory financial services practice at New York-based consultancy Deloitte & Touche says one of Dodd-Frank's major achievements is that it wasn't written exclusively for banks. It also includes "nonbanks" among the institutions that are considered systemically important and thus within the Federal Reserve's regulatory reach.

After all, it was the collapse of an insurance company, AIG, that nearly brought down the financial system and had to be bailed out with the injection of $180 billion in taxpayer funds. AIG wasn't on the radar screens of financial regulators at the time of the collapse, so the new law seeks to bring companies like AIG under scrutiny.

"When you look at what the crisis was about, it was asset quality, it was about liquidity, it was about capital," Atallo-Hazelgreen says. "In Dodd-Frank, there's mindfulness about asset quality and specific oversight around capital cushions. Some good governance is also in the regulation. We're creating a framework where we're mitigating the things that got to us last time."

More Consumer Protections

Already Dodd-Frank has had an impact on Wall Street. Firms such as Goldman Sachs (GS) and Citigroup (C) have begun selling off their proprietary trading desks, where the firm bets its own money, something prohibited by Dodd-Frank's "Volcker Rule" (named after former Fed Chairman Paul Volcker, who was concerned about banks taking excessive risks). Morgan Stanley (MS) has also sold off its hedge fund.

Dodd-Frank also contains extensive protections for consumers on such things as mortgages and loans, thanks to a relatively independent Consumer Protection Board that will be housed within the Fed. There were reports Tuesday that Obama has chosen Elizabeth Warren, a Harvard law professor, to head the agency, despite opposition from Republicans in Congress who think she's too liberal.

Atallo-Hazelgreen says another important part of Dodd-Frank is the requirement for "living wills," a document each institution will have to draw up to specify how it would unwind a failing part of its business or completely dissolve the firm. The idea is to have this done in an orderly manner, not the chaos the reigned when Lehman Brothers announced its bankruptcy filing on Sept. 14, 2008, leaving counterparties to transactions worldwide not knowing how much exposure they had to the firm.

A Step Backward?

Not everyone is totally sanguine about Dodd-Frank's ability to stave off the next crisis. Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University, says the bill has some major flaws.

For example, Hurley says, the Fed can no longer bail out an individual institution under the law but only can help a community of troubled banks at the same time.

"The Fed can't do a rifle shot," Hurley says "I think they removed the safety net. For two centuries, the essential function of a central bank has been to calm a panic. Now they can only calm a panic if it already has metastasized into more than one institution."

Asked if he felt that the body of new rules made the financial system safer than it was in 2008, Hurley replies: "No."

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ITs noe safe when youre talking about Sales Tax Hotel Tax School Tax Liquor Tax Luxury Tax Excise Taxes Property Tax Cigarette Tax Medicare Tax Inventory Tax Car Rental Tax Real Estate Tax Well Permit Tax Fuel Permit Tax Inheritance Tax Road Usage Tax CDL license Tax Dog License Tax State Income Tax Food License Tax Vehicle Sales Tax Gross Receipts Tax Social Security Tax Service Charge Tax Fishing License Tax Federal Income Tax Building Permit Tax IRS Interest Charges Hunting License Tax Marriage License Tax Corporate Income Tax Personal Property Tax Accounts Receivable Tax Recreational Vehicle Tax Workers Compensation Tax Watercraft Registration Tax Telephone Usage Charge Tax Telephone Federal Excise Tax Telephone State and Local Tax IRS Penalties (tax on top of tax) State Unemployment Tax (SUTA) Federal Unemployment Tax (FUTA) Telephone Minimum Usage Surcharge Tax Telephone Federal Universal Service FeeTax Gasoline Tax (currently 44.75 cents per gallon) Utility Taxes Vehicle License Registration Tax Telephone Recurring and Nonrecurring Charges Tax Not one of these taxes existed 100 years ago, & our nation was the most prosperous in the world. We had absolutely no national debt, had the largest middle class in the world, and Mom stayed home to raise the kids. We also were A Common Law Country! I have set up a place that the poor and middle class in the country can start to get some of this tax money back. It is our turn to have a piece of the action. Here is my way to get your loot back. Just google EASY STOCK CASH and click the first link. Once you get there, go right to the PENNY STOCK page to see what the rich don't want you to know.

September 15 2010 at 9:31 PM Report abuse rate up rate down Reply

I is funny to watch these Beckheads and FOXbots rail about the unsound economic policies of Obama when our current problems are the result of polices supported by every republican administration since Reagan. The assumption that others are as clueless as they must surely be a the root of their ignorance of recent economic history.

September 15 2010 at 5:45 PM Report abuse +1 rate up rate down Reply

bank capital requirements are essentially no different than the average joe having a rainy day fund. ya know, for the new tranny in car, or roof or dead hvac system. pretend the year has 50 weeks for a moment. 2 weeks worth of earnings as a rainy day fund is not enough for joe average much less a bank.

September 15 2010 at 4:01 PM Report abuse +2 rate up rate down Reply

and forgot, moody's and s&p should be run out of town on a rail. everyone just quit doing their jobs.

September 15 2010 at 3:55 PM Report abuse +1 rate up rate down Reply

everything is just swell. not. we are paying the price for 10 years of loose enforcement, wall street and consumer greed. what went on was untenable long term. the people are equally to blame as wall street. what did wall street have to do with someone unqualified buying a house they could not afford, then milking it all the equity out of it as it rose in value? there never has been and never will be a free lunch.

September 15 2010 at 3:53 PM Report abuse +1 rate up rate down Reply

Obama wants to make sure everyone....makes money in the market. Nobody will lose...everyone will win. Soon.....Obama will take over professional sports...and make it mandatory for there to be no losers.....just...winner #1.....and winner #2. You can't say Merry Christmas in the schools because it might offend someone. won't even be able to speak English...without offending someone. Illegals get free baby They're arrested multiple times for crimes...but never deported. Free healthcare......soon free mansions. Uh.....Obama? There are a crapload of bills in the mailbox.....what do you want me to do with them? Put them under the rug....with the others?

September 15 2010 at 2:53 PM Report abuse -2 rate up rate down Reply
1 reply to travelandlaughs's comment

Make Obama stick to running the country again. The rock star know it all gets a little old.

September 15 2010 at 3:53 PM Report abuse -2 rate up rate down Reply

O'Babble sez, "Buy gold!"

September 15 2010 at 2:37 PM Report abuse +2 rate up rate down Reply

It is still run by the same people who were allowed to ass rape the American people and the government stood by and did nothing

September 15 2010 at 2:02 PM Report abuse +2 rate up rate down Reply

"If you read this weekend's New York Times' hit job on would-be Speaker John Boehner and his 'lobbyist friends,' you might think, as the reporter clearly thinks, that John Boehner is cozier with lobbyists than most powerful politicians are. But did you know: · Nancy Pelosi has raised almost twice as much money from lobbyists this election as Boehner has? · At least 18 House Democrats have raised more lobbyist cash this election than Boehner has. · Chuck Schumer and Harry Reid have pocketed more lobbyist cash in the past 18 months than Boehner has raised in the past 6 elections, combined?" --columnist Timothy Carney

September 15 2010 at 1:57 PM Report abuse rate up rate down Reply

Devastatingly Weaker..In the US..fee based business cut card revisions...FDIC requirements requirements changed...Financial Regulation passed...while the Government hides Fannie Mae & Freddie Basel 2% to 7% adds trillions for the comfort of Central Governments and the devastation of free markets and the consumer/business.AMEN

September 15 2010 at 1:53 PM Report abuse +1 rate up rate down Reply