A YEAR AFTER LEHMAN

The more things change, the more they remain the same. A year after Lehman Brothers collapsed, what’s surprising on Wall Street is not how much has changed, but how little has.

To be fair with the Ben Bernankes and Henry Paulsons of the world, they did the right thing by bailing out the financial industry. If not, we would’ve not been referring to the events of the past year as just a recession. It would’ve simply been the Great Depression Act 2 Scene 1.

But having said that, what Bernanke & Co didn’t do was reform the system. They just rescued it, that’s all. The fundamental flaw of big banks cutting nine figure paychecks for executives who take irrational risks for short-term profits still exists. Banks are still rewarding bad actors. Only worse, these are the same guys who were bailed out by taxpayer largesse.

Now I don’t belong to the Investment Bankers hate club. I think it’s an honourable profession just like anything else. But my problem with this business is there are too many incentives for irrational risk-taking and too few punishments, if those risks don’t pay off.

And those incentives still exist. At the time of writing this post, Goldman Sachs was preparing to pay its 30,000 employees an average of $700,000. That’s pretty much what it was before the crash. So if I am a taxpayer who’s hard-earned money has bailed out these fattened chicken, then what am I to believe?

The impression that’s going around is that no matter what happens at these big banks, the government will always bail them out. So what’s happening is that investors are once again beginning to lend money to these banks and other financial majors on easy terms. That in turn will prompt the banks to take on risky loans. (After all, it’s somebody else’s money). When the going’s good, the banks keep the profits. When it turns sour, taxpayers will swallow the losses anyway. Heads I win, tails I still win.

A small case in point. Even today, even after the cataclysm of the global financial bust, in Goldman Sachs $1 in actual capital supports $14 in loans and investments. This is the same bloody over-leveraging which led to the financial bloodbath of last fall.

There’s simply no question that there has to be more regulation. That’s daft. The question is: is there the political will to do the same. Obama is a transformational politician. Can he also be a transformational President? History will judge his Presidency by what he did to correct the flaws which led to the catastrophe of September 2008. Or what he could have but didn’t do.