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One year after near complete collapse what has changed?

http://www.dailyfinance.com/2009/09/13/one-year-after-crisis-banks-back-to-risk-taking/ EW YORK (Sept. 13) - A year after the financial system nearly collapsed, the nation's biggest banks are bigger and regaining their appetite for risk. Goldman Sachs, JPMorgan Chase and others - which have received tens of billions of dollars in federal aid - are once more betting big on bonds, commodities and exotic financial products, trading that nearly stopped during the financial crisis. That Wall Street is making money again in essentially the same ways that thrust the banking system into chaos last fall is reason for concern on several levels, financial analysts and government officials say. - There have been no significant changes to the federal rules governing their behavior. Proposals that have been made to better monitor the financial system and to police the products banks sell to consumers have been held up by lobbyists, lawmakers and turf-protecting regulators. - Through mergers and the failure of Lehman Brothers, the mammoth banks whose near-collapse prompted government rescues have gotten even bigger, increasing the risk they pose to the financial system. And they still make bets that, in the aggregate, are worth far more than the capital they have on hand to cover against potential losses. - The government's response to last year's meltdown was to spend whatever it takes to protect the financial system from collapse - a precedent that could encourage even greater risk-taking from the private sector. Lawrence Summers, director of the White House National Economic Council, says an overhaul of financial regulations is needed as soon as possible to keep the financial system safe over the long haul. "You cannot rely on the scars of past crises to ensure against practices that will lead to future crises," Summers says. No one is predicting another meltdown from risky trading in the near term. Rather, the concern is what happens over time as banks' confidence grows and the memory of the financial crisis of 2008 fades. Will they pile on bets to the point that a new asset bubble forms and - as happened with mortgage-backed securities - its undoing endangers banks and the broader economy? "We're seeing the same kind of behavior from the banks, and that could lead to some huge and scary parallels," says Simon Johnson, former chief economist with the International Monetary Fund. Some risk-taking is good. When banks are willing to invest in companies or lend to home-buyers, that nurtures economic growth by generating employment and consumer spending, feeding a cycle of expansion. The problem is when banks' quest for profits leads them to take on too much risk. In the case of the housing bubble, which burst last year, banks lent too freely to consumers with weak credit and wagered too much on complex financial instruments tied to mortgages. As real-estate prices turned south, so did the financial industry's health. Because the largest banks' trading divisions make their bets with each other, their fortunes are intertwined. The collapse of one can threaten another - and another - if it is unable to pay off its debts. This so-called counterparty risk is a major reason the Obama administration's regulatory overhaul plan calls for the creation of a "systemic risk regulator." The administration is also seeking tougher capital requirements for banks, arguing that banks' buying of exotic financial products without keeping enough cash on reserve was a key cause of the crisis. Treasury Secretary Timothy Geithner has urged the Group of 20 nations - which meets this month in Pittsburgh - to agree on new capital levels by the end of 2010 and put them in place two years later. Geithner hasn't said how much extra capital banks should be required to keep on hand. Data from the April-June quarter show that the banks are leaning heavily again on their trading desks for revenue. - During the fourth quarter of 2008, when the financial crisis made even the shrewdest bankers risk-averse, Goldman's trading of risky assets nearly stopped. But in the second quarter of 2009, trading revenue had climbed to nearly 50 percent of total revenue, closer to where it was two years ago before the recession began. JP Morgan's reliance on trading revenue has exhibited a similar pattern. - Also in the second quarter, the five biggest banks' average potential losses from a single day of trading topped $1 billion, up 76 percent from two years ago, according to regulatory filings. The government hasn't just watched banks resume their freewheeling ways and prosper. It has been an enabler in the process. The Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corp. - during both the Bush and Obama administrations - have made trillions of dollars available to the biggest banks through bailouts, low-cost loans and loss guarantees designed to stabilize the financial system. The fai The failure of Lehman Brothers - the biggest bankruptcy in U.S. history - and the panicky sales of Bear Stearns to JPMorgan and Merrill Lynch to Bank of America, also have transformed Wall Street. The surviving investment banks have fewer competitors and more market share. Five of the biggest banks - Goldman, JPMorgan, Wells Fargo, Citigroup and Bank of America - posted second-quarter profits totaling $13 billion. That's more than double what they made in the second quarter of 2008 and nearly two-thirds as much as the $20.7 billion they earned in the second quarter of 2007 - when the economy was strong. Meanwhile, Bank of America and Wells Fargo today originate 41 percent of all home loans that are backed by Fannie Mae and Freddie Mac, according to Inside Mortgage Finance. The banks made $284 billion in such loans in the first half of this year, up from $124 billion during the same period last year. "The big banks now are more powerful than before," said Johnson, now a professor at "The big banks now are more powerful than before," said Johnson, now a professor at the Massachusetts Institute of Technology's Sloan School of Management. "Their market share has grown and they have a lot of clout in Washington." Wall Street's recovery is also being aided by a stock-market rally that has driven the S&P 500 index up nearly 54 percent since March 9, when it hit a 12-year low. Despite the return to profitability, these aren't the high-octane days from before the crisis. To qualify for government backing, the biggest Wall Street firms are no longer allowed to supercharge their returns by borrowing up to 30 times the value of their assets to place bets on stocks, bonds and other investments. Businesses supported by Wall Street bankers and traders say they've also noticed changes. Namely, their customers aren't spending as much on food, drinks and entertainment as they did during the boom years. At Fraunces Tavern, a high-end bar just around the corner from the New York Stock Exchange, the Wall Street workers who used to drink $25 glasses of port are scarce these days. "Now we're doing happy hours," says Damon Testaverde, one of the owners of Fraunces Tavern. "We never did that. There's just less bodies around." But one thing fundamental to Wall Street hasn't changed: Big banks and their traders are still finding creative - some say speculative - ways to profit. They're still packaging risky mortgages into securities and selling them to investors, who can earn higher returns by purchasing the securities tied to the riskiest mortgages. That was the practice that helped inflate the real estate bubble and eventually spread financial pain around the globe. In a way, the government has emboldened banks to keep selling risky securities: Since the crisis erupted, federal emergency programs have helped keep the banks from failing.

Public Comments

1. I am mad at the promises Congress made, that rules and oversight would be implemented, but you are surprised? By the way, what was your question? Your facts are right on tho.
2. Considering that it was Congress that lifted many of the laws in place to regulate banks, until we put the safe guards back into place that stop rewarding people and businesses for having a lot of debt, nothing will change. Even the Federal government can't stop borrowing money to pay for all of the programs that it wants.
3. You're 100% correct.There was brief talk from Ron Paul about auditing the fed Owned by (Jewish Private Bankers) H.R. 1207: 111th Congress 2009-2010Federal Reserve Transparency Act of 2009.It was updated 9/11/09,but I have my doubts it will make it (be allowed) out of the house!The only thing that has changed is Obama seeks more and more power for them.Another thing is how many more Czars do we have?Over 30.Right now,the people behind the fall of America are picking it's bones buying up land,Properties etc,for Bargain prices.Obama's as big a crook as there ever was.
4. You're absolutely right. Bailouts don't create magical better oversight and stop crony capitalism. They nurture crony capitalism. This is the major thing the Obama administration has done that I disagree with.
5. Sure? Look in the real world. Decode this lyrics "You'll see " "I will survive" Look ! We found the ruler called "The Rule of 72" wedged in between the rubbles of the pyramid in time? Luke 21.30-36 Joshua 7.11 Luke 6.39-40,41-45,46-49 Luke 9.25,55-56,60 Luke 24.44-45,47-48 Luke 10.24 Luke 19.9-10 Revelation 22.13-17 Matt 22.17-21,32 Exodus 23.24,32 What do you think?
6. A complete collapse will still happen no matter what, simple mathematics will tell you that. Just like a balloon, you can only inflate the economy so much before it goes bang. Remember though, the powers that be have staged this economic recession which is really a depression but you just can't see it yet. The people will be at their mercy once it collapses which is exactly what they want. This economy could be destroyed tomorrow with little more than a rumor.