Since the Wall Street caused financial collapse was triggered more than four years ago, Wall Street and its boosters have been underestimating its costs and overestimating the costs of regulation and financial reform.
Wall Street does this because it wants to kill financial reform and regulation.
It does this because financial reform and regulation would limit or eliminate Wall Street’s most reckless forms of trading and investment activities – which happen to be the most profitable to them and riskiest to investors.
But on the fourth anniversary of the collapse of Lehman Brothers, here comes a public interest group – Better Markets – headed by a former partner at Skadden Arps – Dennis Kelleher – to say flat out – Wall Street caused the Great Recession, and the Great Recession cost America a lot of money.
And Better Markets puts a number on how much it cost America – $12.8 trillion.
That number includes – lost gross domestic product, destroyed household wealth, unemployment and underemployment, foreclosures, government bailouts, emergency spending measures, and other government actions that prevented a second Great Depression.
In addition to putting a number on the cost of the Great Recession, the 72-page report – titled matter-of-factly – The Cost of the Wall Street-Caused Financial Collapse and Ongoing Economic Crisis is More Than $12.8 Trillion – summarizes the amazing events that followed the collapse of Lehman Brothers.
In case you forgot, let us recap.
Four years ago – September 15, 2012 – Lehman Brothers, filed for bankruptcy.
Treasury Secretary Hank Paulson had just bailed out the fifth largest investment bank – Bear Stearns. But he allowed the fourth largest investment bank – Lehman Brothers – to fail.
Lehman’s failure “ignited a financial contagion that quickly caused the global financial system to grind to a halt and brought the world to the precipice of a second Great Depression or worse,” the authors recount.
The week before, the federal govenment had nationalized Fannie Mae and Freddie Mac.
They effectively nationalized AIG and Citigroup with billions in bailout money.
Goldman Sachs and Morgan Stanley, the two largest investment banks, were allowed to convert into bank holding companies, “thereby receiving access to the full panoply of federal banking support programs, the so-called federal safety net.”
Merrill Lynch, the third largest investment bank, was acquired by Bank of America.
Wachovia, the fourth largest bank holding company, was acquired in an FDIC-forced sale by Wells Fargo.
The nation’s largest savings and loan, Washington Mutual, failed, was seized by federal regulators and then sold at bargain basement prices to JP Morgan Chase.
“All this happened at an alarming and dizzying speed, with the public and policy-makers struggling to keep up with developments,” according to the report.
In response, the federal government created a number of bailout programs in an effort to stem the tide.
They created the $700 billion Troubled Assets Relief Program (TARP) and many others.
Yet despite all of its efforts, as late as February 2009, more than five months after the collapse of Lehman Brothers, the financial systems of the United States and many countries around the world continued to decline rapidly – with no bottom in sight.
On February 23, 2009, the federal government announced that the full faith and credit of the United States would stand behind the entire financial system, “which was thus effectively nationalized,” according to the report.
“That historic step was followed by others and – ultimately – trillions of additional government dollars were spent, lent, pledged, guaranteed or otherwise used in an all-out effort to prevent a second Great Depression,” the authors write.
“We now know that those actions somehow worked, that the financial system did not entirely collapse, and that a second Great Depression was avoided. Having lost 54 percent of its value since its October 29, 2007 high, we also now know – with the benefit of hindsight – that the stock market hit its lowest point on March 9, 2009 and that the rapid and uncontrolled decline of the financial markets and the economy stopped sometime in the March-April 2009 period.”
The Better Markets report says that Wall Street and its many allies and sympathizers “are denying and understating the costs of the crisis, primarily to kill, weaken, or avoid financial reform and re-regulation.”
“Wall Street and its allies are doing everything possible, including spending inordinate amounts of money on lawyers, lobbyists, PR-spinners, campaign contributions, advertising, ‘studies,’ trade groups and many other things to stop, kill, weaken, or avoid financial reform.”
But the report’s authors warn that “absent an understanding of the true costs of the financial and economic crises, a sense of complacency can arise and a lack of urgency to take action to prevent such from happening again, especially as the memory of these events and their impact fades.”
“We must never forget how close the country came to a complete collapse of the financial system and a second Great Depression, or how really terrible the Great Recession has been and continues to be for so many American families.”
The report puts the cause of the collapse squarely on Wall Street – which it defines as the too-big-to-fail banks and activities primarily but not exclusively located or based on or around Wall Street.
“It is not an overstatement to say that without Wall Street’s creation, demand for, packaging, sale and distribution of worthless securities, largely based on mortgages and related derivatives, there would have been no financial or economic crisis,” the report finds.
“Tellingly, Wall Street benefited the most by far from these activities, reaping more than $200 billion in bonuses since 2003,” the report concludes. “Reaping the most money from an action or activity is historically highly reliable evidence of responsibility for that action, especially when it arises from wrongdoing, if not criminality. Other than claims by Wall Street and those directly or indirectly paid by it, there really is little genuine dispute that Wall Street caused the worst financial crisis since the Stock Market Crash of 1929 and the worst economy the country has suffered from since the Great Depression of the 1930s.”