Wednesday, February 11, 2015

The Revolving Door Between Wall Street & The Regulators

Lehman Brothers collapsed over six years ago bringing the financial system to the brink and taking down the global economy. For the first few years after the collapse individual citizens wanted to know how it happened and what was going to be done to make sure it did not occur again. 

Today those thoughts are all but gone. People are once again focused on the out sized returns of their 401k and the monthly rise in their home's value on Zillow. Who cares what those banks are doing now because life is good again, right?

Some of us are still paying attention and what is taking place is now is essentially more of the same only on a larger scale. The big banks have consolidated, grown in size, and become more "Too Big To Fail." While many U.S. banks have deleveraged significantly since 2008 (definitely a good thing), their derivatives portfolios (off balance sheet bets made in the dark) have mushroomed in size. While they may not hold trillions of dollars worth of mortgage risk on their balance sheet, their new structure with Fannie Mae and Freddie Mac involves the "sharing" of losses during the next crisis. 

How about the regulators that have been put in charge to watch the banks? People found out after the crisis that a revolving doors existed between the banks and regulators to incentivize them to look the other way in order to help their own job prospects in the future. Since the crisis this revolving door has only grown more common:

When confidence evaporates from the debt markets again you will see the emperor still wears no clothes. A larger problem or question to ask would be; what if the confidence evaporated behind the government debt markets which are the backstop standing behind the Too Big To Fails?

A bubble and the ensuing crisis usually never expand and implode in the same place it did the last time (Gold in 1980, Japanese stocks in 1990, Internet stocks in 2000, Mortgage bonds in 2007, Government bonds in 201X?). 

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