By SPIEGEL Staff
It has been one year since the Lehman bankruptcy, and the world is still a dangerous place. Bank balance sheets are less of a reflection of reality than ever before.
According to IMF calculations, banks have only purged about one-third of now-worthless assets from their balance sheets. In other words, the sharp rises in prices on the stock markets are based in part on fantasy numbers.
The government supports this retouching of balance sheets. Financial regulators are currently refraining from implementing existing accounting rules. In particular, the rule that requires virtually all securities to be listed on balance sheets at current market prices has been quietly suspended.
In the first few months following the Lehman collapse, the declines in market prices brought on by the crisis led to a series of balance-sheet adjustments, which in turn resulted in additional sales of securities.
This downward spiral placed more and more banks in jeopardy. Only when accounting rules were de facto suspended did a stability of sorts set in -- but it was deceptive.
At the present time, banks -- with the support of regulators -- can apply an almost unprecedented level of creativity in accounting for their risks. "The fire extinguishers actually fuelled the fire," says Martin Hellwig of the Max Planck Institute in Bonn.
The Big Get Bigger
Individual major banks have also become more -- not less -- influential during the course of the crisis. Many lenders have disappeared, while others have slipped under the protective umbrella of the industry leaders.
Before the crisis erupted, the notion that certain banks were "too big to fail" was seen as a threat to the stability of the world's financial architecture. The problem has only grown since then, with the crisis making the big players even bigger.
The trend toward concentration is continuing, encouraged by the US government, which has devised new antitrust regulations for takeovers to facilitate the acquisition of troubled banks.
After acquiring Wachovia, previously the fourth-largest bank in the US market, Wells Fargo now manages 138 percent more assets than before the crisis. By acquiring Bear Stearns and Washington Mutual, JPMorgan Chase increased its total assets by 39 percent. Bank of America doubled its total assets when it acquired Merrill Lynch and mortgage lender Countrywide. "The oligopoly has tightened," says Mark Zandi, chief economist at Moody's Economy.com.
As a result, the world's biggest financial institutions have reached a critical mass that, as in a nuclear reactor, can lead to uncontrolled chain reactions -- even more so than before the crisis. If one of these banks collapses, it will not only bring down the financial sector, but the economies of several countries as well. No nation can afford to allow such mega-banks to fail. As Fed chief Ben Bernanke says: "When the elephant falls down, all the grass gets crushed as well."
Moral Hazard
Does this mean that today's newly swollen giants will be more cautious this time around? Have they learned from the crisis?
They have learned, but they've learned the wrong lesson. In retrospect, the Lehman Brothers case no longer seems quite as horrifying to the major banks. In fact, it is almost reassuring. They know now that there will be no repeat of the Lehman debacle. The government will not allow a second major player to fail. In a worst-case scenario, a large Wall Street bank can fall back on the US Treasury -- provided it is seen as a "systemic risk."
This realization is like a life insurance policy for the big banks, but it also encourages renewed reckless behavior. Experts refer to this logic as "moral hazard," because it means that those who take high risks are suddenly behaving rationally. The banks are always the ones to profit, while the government is expected to pay for losses that could jeopardize the banks' existence. But this is precisely what leads to the risk of an even bigger disaster.
This is why Bundesbank President Axel Weber wants to force major banks to establish large capital reserves. It would put them at a disadvantage compared with smaller banks, but this seems to be the only way to curb their aspirations to continue growing.
The Weber proposal is not revolutionary, but it is prudent. Nevertheless, it has been met with massive resistance among some that would be affected by it. Indeed, Wall Street has already dispatched its lobbyists to Washington.
Oriented toward Growth
The lobbying industry itself is likely to emerge a winner from the Wall Street disaster. In 2008, US companies spent $3.3 billion on lobbying activities, or more than twice as much as they did 10 years ago. Some of the most successful lobbying firms are those with ties to the Democrats, like the firm run by Tony Podesta, the brother of John Podesta, who managed Obama's transition into the White House.
Money and politics are closely connected in the United States. Connecticut Senator Christopher Dodd, who heads the Senate Banking Committee, collected millions in campaign contributions last year, mainly from the very finance and banking sector he is now expected to rein in.
Limiting the size of a bank would be as painful for Wall Street as capping bonuses, because bank CEOs are oriented toward growth. Their ambition, their entire way of thinking and, in many cases, their compensation is based on growth.
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