It’s been 10 years since the financial collapse of investment bank Bear Stearns was resolved by means of a Federal Reserve-sponsored bailout engineered by the healthier giant bank, J.P. Morgan Chase. Morgan also absorbed the troubled thrift bank Washington Mutual, which was teetering on the edge of failure as well.
Just recall the fevered bailouts of troubled banks and the generous role of Uncle Sam in making sure the 2008 crisis did not roll over into another Great Depression. We came very close to Armageddon in those days of tribulation. The failing investment bank Merrill Lynch, which once introduced Wall Street to Main Street America, had to be absorbed by Bank of America, which itself needed emergency financing from the Treasury. Bank of America did double duty by also taking over the troubled mortgage banking firm Countrywide Credit, whose real estate portfolio was in deep trouble.
Further necessary concentration on Wall Street involved Wells Fargo having to bail out the nearly insolvent Wachovia Bank and Morgan Stanley acquiring Smith Barney from the dangerously insolvent Citigroup, whose shares declined in the market by 95%.
This run of deterioration on finance was brought about by the reckless expansion of debt and leverage on and off the balance sheets of most giant financial concerns that had wildly expanded their involvement in the deteriorating real estate market. As former Secretary of the Treasury Timothy Geithner described it, regulators could not understand “what exposures they (the banks) had, what counterparties might be in trouble…. We couldn’t persuade enough of them to reduce their leverage or manage their risks more carefully, because they didn’t think that was in their interest. That was the real danger to the system.”
In fact, we came very close to Armageddon that mid-September day of 2008 just after Merrill Lynch was saved by Bank of America and insurance giant AIG was saved from insolvency by a federal bailout loan of $185 billion. There was still General Electric, then very much in the troubled financial business that warned the government it might not be able to roll over or refinance its mighty pile of short-term debt the next morning. Fears abounded of a run on the banking system if the short-term securities called commercial paper froze. The only emergency respite was to that evening plaster a government guarantee of the $600 billion commercial paper market that kept industry oiled and operating. That’s how close to a possibly chaotic condition we came.
It’s been years now since the phrase “too big to fail” was bandied about in describing the giant institutions of Wall Street like Goldman Sachs, Morgan Stanley, Citigroup or Bank of America Over the years these firms largely drew down their leverage, and set aside huge reservoirs of cash to tide them over another crisis period if should raise its ugly head. These bank shares increased in price but largely continued to sell at or near their book value per share. General Electric largely divested itself of its financial operations.
Substantial fines were paid by some of the banks like J.P. Morgan and Goldman Sachs for some of their ill-considered operations during the runaway times. Most of the banks have developed extensive possible plans, deemed to be “living wills,” to deal with any repeat excesses in the future. Meanwhile the Dodd-Frank legislation to form tighter regulation of Wall Street is being watered down by the Trump administration.
What’s more the banks have been extraordinary beneficiaries of the Trump tax legislation which reduced the tax on profits from 35% to 21%. As well, bank shares in some cases like J.P. Morgan Chase have risen to new peak levels in anticipation of higher interest rates from the Federal Reserve that will create a higher margin of profit on making loans. None of this would have happened had not the Treasury, the Federal Reserve and the White House made up their minds to spend whatever was necessary to save Wall Street back in 2008.
