Wednesday

28th Sep 2022

Opinion

Not learning from Lehman mistakes

  • There should be no banks which are 'too big too fail' (Photo: sachab)

The 15th of September 2013 marks the fifth anniversary of the most spectacular bankruptcy of the financial crisis: the collapse of Wall Street investment bank Lehman Brothers.

Back then, European leaders, including European Commission President Jose Manuel Barroso, made bold promises to reform financial regulation in the European Union so that it could never happen again.

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But five years on, Europe is as vulnerable as it was on the eve of Lehman.

The financial crisis prompted the euro crisis and devastated European economies.

Unemployment has ballooned to a record level of nearly 26 million - a staggering 10.7 percent of the labour force. Youth unemployment is even higher.

Meanwhile, even as average people feel the pinch of austerity, multi-billion bailouts have gone to the very banks which caused it all.

Having paid such a high price, people have every right to demand that politicians take effective action.

But five years of "reform" have not fixed the problems laid bare by the crash.

Let us take four examples.

First, European banks are still lending far above safe levels.

Shortly before its bankruptcy, Lehman Brothers had borrowed the equivalent of 31 times its own capital. Experts say this was a leading cause of its demise.

But today, banks, such as Deutsche Bank and Barclays, borrow even more than Lehman did before it fell and no European rules stand in their way.

Second, requirements for how much capital banks need to hold to make them more resilient to market downturns have been raised.

But, crucially, the requirements are still lower than those used by Lehman Brothers in its time.

Some might say Lehman only reached those levels due to creative accounting practices. But little has been done to close the giant loopholes in EU and international banking regulation to prevent such creative accounting.

Third, derivatives trading continues to grow.

Derivatives are among the most widely traded and most opaque financial products.

They have a track record of driving up global food prices and making more people go to bed hungry each night. But EU proposals on how to regulate them contain gaps that enable food speculation to go on.

Finally, ratings agencies remain open to manipulation.

In the first phase of the crisis, agencies warmly recommended junk products to investors for far longer than they should have.

One reason is because "issuers" (the people who sold the junk) actually paid the agencies in order to get triple-A ratings. The “issuer pays model” remains untouched.

Looking back, it really is quite amazing to see how easily the financial lobby has kept control of policy.

Their main tactic is scaremongering: claiming that strong regulation would damage competitiveness and cost jobs.

It is painfully ironic, given how many jobs their own failures have cost.

To get their message across, financial lobbyists do not need to bang on doors.

The doors, for them, are permanently open, as they were in terms of privileged access to decision-makers on recent new rules on banking and derivatives.

A large part of the EU elite is blinded by the ideology of the single market.

The financial crisis has given us hundreds of pages of new legislation and little in terms of change.

We need to reset the debate and set course for reforms that will make a real difference.

If it wants to avoid another Lehman moment, and all that followed, we need to take much more ambitious steps.

To start with, Europe needs to break up banks which are "too big to fail" and it needs a Financial Transaction Tax. It needs to shrink speculative trading in derivatives and to clamp down on tax dodging.

In order to restore public trust and to change banking culture, Europe should also punish CEOs and corporations who act in bad faith.

Too often, it seems, there are also criminals who are "too big to catch."

Kenneth Haar is a researcher at Corporate Europe Observatory, a Brussels-based NGO. Anne van Schaik is a campaigner at Friends of the Earth Europe, also a Brussels-based NGO

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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