Five Years On: Lessons Learned from the Collapse?

September 15, 2013 at 12:00 AM EDT
On the fifth anniversary of the collapse of Lehman Brothers, Heidi Moore, The Guardian's US finance and economics editor, speaks with Hari Sreenivasan about what the United States has (or hasn't) done to prevent another financial collapse and how regulations on Wall Street can be improved.

HARI SREENIVASAN:  This is the fifth Anniversary of the collapse of Lehman Brothers, the biggest bankruptcy in American history that convenient helped trigger the greatest economic crisis in the United States since The Great Depression. Have we taken adequate steps to prevent a recurrence? For more about that we are joined in our studio by Heidi Moore, a finance and economics editor for The Guardian newspaper based in New York.

What have we done so far to prevent another banking collapse like we saw?

HEIDI MOORE:  We flailed a bit. We have done things supposed to prevent another banking collapse like passing the Dodd-Frank Act, an omnibus regulation bill supposed to prevent Wall Street from becoming too big to fail. And that really has been kind of the major effort that has happened.

There, were of course, the bailouts at the time, TARP bailout and there was the quantitative easing stimulus by the Fed which is also a result of the crisis at that time.

HARI SREENIVASAN:  Are there things we said he would do to prevent this we haven’t done yet.

HEIDI MOORE: Yes, a lot. You can look at today at Dodd-Frank very specifically, hundreds of rules. One Dodd-Frank left undone, passed in a hurry in 2009 in a very emotional time and it was essentially a very long to-d o list, 900 page to-do list, almost all left undone. Good things we have done create the Consumer Financial Protection Bureau and also create the council of 14 regulators that meet about once a month. Only supposed to meet once a quarter and talk about what’s going on in regulation and issues you are facing. There are two things that came out of it. It is called the Volcker Rule, supposed to be one of the lynch pins of how we were going to change the financial system. That is nowhere. It is mired in bureaucracy.

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HARI SREENIVASAN:   Because – why are the regulations not effective?

HEIDI MOORE: They are not effective largely because there is no one pushing them forward. Wall Street has gotten its claws into it. We know Wall Street as a money-making enterprise but also a lobbying enterprise and those lobbyists are the ones who know the financial sector best and they advise Congress on how to write rules.

One rule concerning derivatives, 85 lines in it 75 were written by Citigroup lobbyists. Part of the issue is that Wall Street has a lot of influence over the rule writing process and they are invested and making it weaker, the other side of it is that we have too little enforcement.

The Securities and Exchange Commission and other regulators are perpetually underfunded and also facing pressure from Wall Street to weaken their efforts and their prosecutions are very rarely successful.

HARI SREENIVASAN:  Is it accurate for some of these critics to say perhaps we need to do a better job of enforcing the laws on the books as opposed to writing entirely new ones.

HEIDI MOORE:  We do need better laws and new laws only because the financial system is becoming  more and more complex, and writing laws allows us to explore how they’ve become complex and to reign in that complexity or at least regulate it. But it’s true that we also don’t enforce very well what we already have. A lot of regulators just aren’t incentivized to find wrongdoing. We have a whistle-blower rule, that’s part of Dodd-Frank that still hasn’t been finalized.

You have the structural issue that a lot of regulators are paid $50,000, $80,000, maybe $100,000 a year but the bankers that they are regulating are being paid millions of dollars a year. So there is a class system, quite literally a class hierarchy in Wall Street regulation.

HARI SREENIVASAN:   How big a threat to do we face?

HEIDI MOORE:  A pretty big threat. As with last time, we don’t know what it s last time, we were blind-sided by the mortgage crisis you even though there were a few oracles who said the predicted it, no one could have predicted that the economy could be so bad that income inequality would bed a bad as it is. Economic recovery stumbled along, almost the stagnation no one predicted that. We won’t see that coming next time either but it’s worth it for regulators to  take a look at assets that are priced way too high, relative to what they are a worth.

HARI SREENIVASAN:  Heidi Moore. Thanks so much.

HEIDI MOORE:  Thank you.

HARI SREENIVASAN:  The conversation about the 2008 financial crisis continues tomorrow on the NewsHour interview with the man who headed up the Treasury Department back then, Henry Paulson.