Five years ago tomorrow, the investment bank Lehman Brothers filed for bankruptcy, officially kicking off the financial crisis that led to what we now call the Great Recession. Lehman's bankruptcy was followed by the bailout of insurance giant AIG, the $700 billion bank bailout known as TARP and an alphabet soup of Federal Reserve programs launched in an attempt to stem the damage being done to the economy.
But even with those emergency measures, the final toll of the crisis was staggering: 8.7 million jobs were lost, $16 trillion in household wealth was wiped out and 12 million homeowners were left underwater, owing more on their mortgages than their homes were worth. According to the Federal Reserve Bank of Dallas, the cumulative effects of the crisis – wealth lost during the recession plus the effect that lower earnings and wealth will have on future earnings and output – could add up to more than $28 trillion.
The crisis began with a housing bubble fueled by subprime mortgage lenders, who were encouraged to make loan after loan by Wall Street banks that wanted mortgage securities to slice, dice and sell around the world. But it was exacerbated by the fact that the biggest Wall Street banks were so interconnected that the failure of one meant all the others were brought to the brink of collapse. The banks – engorged on debt and engaging in risky trading for only their own benefit – put the whole economy at risk.
Since then, quite a lot of time, effort and ink have been spent trying to fix what went wrong. So how did that attempt go?
The main legislative response to the crisis – the Dodd-Frank financial reform law – undeniably contains some things that will make the next crisis, whatever its form, easier to manage (or even prevent). There's now a regulator explicitly tasked with policing consumer financial products, the Consumer Financial Protection Bureau. There's a new process that, at least in theory, will allow the government to dismantle a failing mega-bank without resorting to ad-hoc bailouts, a legal process that was sorely missing during the 2008 crisis.
There's a new regulatory regime for derivatives – the risky financial instruments that helped bring down AIG – that should make their market much more transparent. And banks are now required to hold more capital on hand to protect against a sudden downturn.
In other areas, though, not much has changed. For instance, the biggest banks are bigger than ever. In fact, the six largest banks in the U.S. now hold $9.6 trillion in assets, a 37 percent increase from five years ago. That total is equal to 58 percent of the entire economy. As Fortune's Stephen Gandel noted, "The biggest bank in the nation, JPMorgan, has $2.4 trillion in assets alone -- the size of England's economy."
And while those banks have gotten bigger, rules meant to rein in their risky trading have gone precisely nowhere. A key part of Dodd-Frank known as the Volcker Rule – which was supposed to prevent banks from making risky trades with taxpayer-backed dollars, such as consumer deposits – was watered down by Congress even before it passed, and is now stuck in a bureaucratic and lobbying morass. (Overall, just 40 percent of the rules in Dodd-Frank are actually finished.) More ambitious reforms, like capping the size of banks, garnered just one unsuccessful vote in the Senate.
Homeowners, meanwhile, continue to struggle. Not only are 7.1 million still underwater, but banks are engaging in shady practices to push homeowners into foreclosure who should have been able to stay in their homes. A much ballyhooed settlement stemming from rampant "foreclosure fraud," as it's called, doesn't seem to have actually stopped these pernicious practices.
So while some things have certainly changed for the better – and having a consumer regulator will hopefully shortcircuit a lot of problems before they start – the biggest banks are still just one catastrophe away from pulling the country back to the edge of a cliff. And if the new process for unwinding a failed mega-bank doesn't work, there won't be many options available other than the odious bailouts used in 2008. In the meantime, homeowners who have suffered at the hands of the financial industry still find themselves with few avenues for receiving any justice.
Is there any momentum for new reform? Well, Sen. Elizabeth Warren, D-Mass., has been beating the drum for breaking up the biggest banks, and introduced a bill – along with Sens. John McCain, R-Ariz., Maria Cantwell, D-Wash., and Angus King, I-Maine – that would bring back a Depression-era regulation keeping investment and commercial banking separate. Former Citigroup CEO John Reed, who presided over the nation's first true banking behemoth, told the Financial Times recently that breaking up banks can and should be done, making him one of a handful of Wall Street titans to take such a position.
But the financial industry is as strong as ever, so the prospects of real reform happening absent another crisis or a real populist reawakening are still pretty slim. If another crash comes along, we're going to have to hope that the tinkering and tweaking that's already occurred is enough to save us.