A year after Lehman

The ever so eloquent Barack Obama, delivered a speech in New York on September 14th to mark the anniversary of Lehman Brothers’ failure. This was more about applying a bit of presidential pressure but spoken more like propaganda seminar.

By sketching out the rationale behind his legislative proposals for a systemic-risk regulator, a new consumer-protection agency, the need for strong capital and better resolution regimes, he reminded Congress that health care is not his only priority. If anyone needed reminding, Obama chided bonus-hungry bankers for failing to learn the lessons of Lehman while emphasizing the inadequacies of the financial regulatory system.

It is the responsibility of homeowners for taking risks they could not afford. But Obama urged banks to bring financial services to those currently outside the financial system and put the consumer-protection agency first on his list of reforms. In so doing, the cost of future failures would fall on shareholders and creditors. But it is far from clear that he will force money-market funds, a major source of bank funding, to give up their promise to return their capital to investors intact.

It is also a political stunt to pledge that in the event taxpayers ever had to step in again to rescue the system, they would get every cent back. In reality, even if taxpayers have earned a 17% return on their “investment” in banks that have since bought the government out, such figures ignore the money shelled out on too-big-to-fail institutions such as AIG, Fannie Mae and Freddie Mac. And they fail to adjust the returns for risk, the very sin that banks committed leading to the whole unregulated financial mess.

I suspect, many will be charmed by Obama’s ability to package and deliver the message, leading them to believe that the crisis occurred because there were no regulations, that big banks will be responsible and be allowed to fail in the future, and that the proposed constraints of finance will create a new age of prosperity.

There is no denying that reform is badly needed. But baring unrealistic risk-to-reward proportions especially for bankers and investors, people will still be greedy. This is an underlying flaw in the free market system which will lead to the same crisis all over again. Banks and big credit agencies will still fail and still need saving. Then as the gap between the rich-gets-richer and the poor-gets-poorer widens, social, political and financial reform will be eminent. The cycle continues.