Five years on, some of the financial crisis’ most familiar characters are chirping in on the likelihood of another meltdown.
Last week Morgan Stanley CEO James Gorman went on the Charlie Rose show and claimed that the probability of another financial crisis is “as close to zero as I could imagine.”
“The way these firms are managed, the amount of capital that they have, the amount of liquidity that they have, the changes in their business mix — it’s dramatic,” said Gorman, whose firm lived to tell the tale in part thanks to a $US10 billion federal rescue package (since repaid).
Gorman has been mocked for his “this time is different” incredulity, but he was reiterating a familiar post-crisis trope.
Here’s Goldman Sachs’ Lloyd Blankfein in May when asked by German newspaper Die Welt whether the banking system was more secure now than before the crisis: “Much more secure! For instance, the size of our balance sheet has declined by 40%, but we hold twice as much capital as before the crisis.”
Of course, that whole line of thinking is interesting when you consider the tantrum thrown by some on Wall Street when higher capital requirements were introduced. In 2011 for example, outspoken JP Morgan CEO Jamie Dimon reportedly told Canada’s head central banker Mark Carney (now running the Bank of England) that a proposed capital surcharge for the largest banks was “un-American.”
Enter John Thain, the former CEO of Merrill Lynch (sold to Bank of America amid the crisis), who told the Wall Street Journal’s Francesco Guerrera this week, “Certainly financial institutions are less levered.”
But according to Thain, “Too big to fail” — one of the lasting clichés of the financial crisis — still awaits a solution.
“I think that is the key, to have the mechanism to either merge or wind down or break into parts these financial institutions, but in a controlled way, and the mechanism to do that, I think, is not clear yet,” Thain told the Journal. “If you take one of those large firms, they are so big, they are so interconnected, they are such a part of the financial system that even today it would be hard to manage.”
The upshot of the crisis has been significant deleveraging, Thain said. The capital problems in our nation’s largest banks have been adjusted by force and circumstance. But Dodd-Frank, whether toothless or not, addresses problems endemic before 2008. And the funny thing about future financial crises, Thain suggests, is that they happen in the future.
According to Dougan, one of just a handful of top chief executives to make it all the way from crisis to present day, “Some amount of risk has gone away because some activities are not being undertaken any more. But also a fair amount of risk has been transferred to other parts of the system, areas like shadow banking, insurance companies, pension funds or retail investors.”
So there’s that to look forward to.