One Year after Lehman It's Business as Usual Again for Wall Street's Casino Capitalists

By SPIEGEL Staff

Part 3: Bonuses Are Back


In the ensuing months, bank regulators, central bankers and politicians got to work, eager to get to the root of the problem. All financial products in all countries were to be regulated. Blind spots in the financial system, such as subsidiaries of giant banks in places like the tiny Bahamas, were to be eliminated. And early warning systems -- a sort of worldwide system of market regulation -- were to be installed.

Europeans, as if anticipating a future world government, even advocated establishing a global economic council whose task would be to monitor activity in the world economic system.

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Russian Prime Minister Vladimir Putin expressed what many politicians in the West were thinking. "This is not the irresponsibility of specific individuals but the irresponsibility of the system, which claimed leadership," he said, adding that there could be "no return" to the former conditions.

The vast majority of humanity probably agrees, and yet this will not be enough to tame market capitalism. More deep-seated reforms must now be implemented, a task that becomes more and more difficult as time passes. There are many indications that although the world is poorer as a result of the financial crisis, it has not necessarily learned from the experience.

Business is back in full swing in the financial sector, now that the government is using taxpayers' money to guarantee the high risks. For this reason, there are many on Wall Street who would prefer to see nothing changed. They no longer believe in the need for reform, particularly when it affects their compensation. The new buzzword among stockbrokers is "BAB" -- "Bonuses Are Back."

The pace of strict bank regulation has been downgraded from full speed ahead to sluggish. Senior IMF officials, including Managing Director Dominique Strauss-Kahn, fear that the momentum behind radical measures is gone.

Stricter Rules

One year after the Lehman collapse, Americans and Europeans meeting in Pittsburgh for the G-20 summit want to prove to their citizens what they can do if they make a concerted effort. They want to show that they are capable of drawing conclusions, even when they are unwelcome among the powerful in the financial sector.

The Europeans, at any rate, will travel to Pittsburgh with the best intentions and with thick folders packed with proposals. For months, Europe's central bankers and finance ministers have been busy drafting stricter rules for global finance.

In mid-July, the Basel Committee on Banking Supervision, which now includes the representatives of 27 countries, approved astonishingly detailed regulations, which could find their way into national laws by the end of 2010. The Basel rules would require banks to maintain larger capital reserves, particularly for risky financial products. For instance, the securitization of mortgage loans into complex bundles -- which played a fatal role in the financial crisis -- would be made significantly more expensive, and thus far less attractive, for financial institutions.

The Basel committee includes representatives of Germany's central bank, the Bundesbank, and its banking regulator BaFin. Both organizations are proud of the progress that has already been made. Two years ago, say officials close to Bundesbank President Axel Weber, much of what is being done today would have been unthinkable.

If the proposed Basel rules become reality, lenders could be forced to establish capital reserves in good times, which they could then deplete in bad times without becoming a burden on the government.

Joining Forces against the Americans

On this issue, Deutsche Bank CEO Ackermann sees eye-to-eye with reformers. "The banking industry has too little capital and is too highly leveraged. We almost stripped ourselves bare, so that there were hardly any reserves left," he said last week at a banking conference in Frankfurt.

But will the United States play along? Experts at Berlin's Finance Ministry have not failed to notice that Washington's willingness to enact reforms is declining in proportion to the pace of economic recovery. Merkel, for her part, knows that her prospects of succeeding in Pittsburgh will be maximized if a united Europe joins forces against the Americans.

Her natural partner on such issues as limiting executive compensation, is French President Nicolas Sarkozy. In a letter the chancellor and Sarkozy drafted, and British Prime Minister Gordon Brown signed, shortly before the meeting of G-20 finance ministers two weekends ago, the three leaders advocated limiting executive bonuses for bankers.

Among the G-20 leaders, Brown had been, until now, the strongest opponent of more regulation. Nevertheless, the German, British and French leaders are in agreement in the joint letter, which is formally addressed to the Swedish president of the European Council and the Obama administration. They call for a ban on guaranteed bonus payments, which enable investment bankers to continue to cash in even after taking their banks to the brink of financial ruin with their speculative behavior. For Brown, whose economy is more dependent on the financial industry than most, and which profited handsomely from it in the good years, ideas like this are nothing short of heretical. As chancellor of the Exchequer, he celebrated London's investment bankers as modern-day heroes.

Whether he is really serious about pushing for a reform of banking compensation in Pittsburgh is debatable. Brown's chancellor of the Exchequer, Alistair Darling, has already begun to raise doubts surrounding his own prime minister's positions. A "global pay policy," he told the Independent, would not be feasible.

For the British and the Americans alike, it is not easy to reform the financial architecture of the London City or Wall Street without jeopardizing the prosperity these financial centers generated in better days. As recently as 2008, the US financial sector was responsible for about 40 percent of American corporate profits. Seventy percent of all international bonds and about half of all stocks are traded in London's City financial district. In 2006, the financial sector employed 6.5 million Britons, who in turn produced 10.1 percent of the gross domestic product. Some fear that if regulation becomes too stringent, a share of the business could migrate to Shanghai, Hong Kong or even Moscow.

Who Got Us into this Mess?

Lawrence McDonald can offer answers to anyone who hopes to understand why reforming Wall Street is so difficult. The former Lehman Brothers vice president already has a new job with an investment firm with offices on Madison Avenue.

McDonald wants to continue where he left off -- or, as he says, was forced to leave off.

When the former Lehman bankers get together socially today, they ask themselves questions like: Who got us into this mess? Why was our boss allowed to do as he pleased for so long?

McDonald speaks about the people responsible for the collapse in the third person, making himself sound like a survivor of the debacle rather than someone who might have helped to cause it. "The fact is," he says, "that eight people ruined an organization in which more than 20,000 employees were doing a good job and making money."

The 31st floor was to blame, he says, or, more specifically, the largely invisible boss of bosses, who would have his driver call ahead to make sure that the elevator would be waiting for him when his limousine arrived at Lehman headquarters.

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