The 2007-2009 Financial Crisis was avoidable. And so is the next one, but only if we learn from the past.

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We must make certain the underlying elements of the crisis – shockingly awful corporate leadership and incompetence, with a healthy dose of stunning but unjustified arrogance; steadily declining lending standards which led to unconstrained and excessive borrowing by Wall Street and the American public; absurdly inadequate financial regulations; frenzied risk-taking on all levels; federal officials who were unprepared for such a crisis and, therefore, inconsistent in their decisions; and practically zero accountability for anyone – are examined and reigned in. For good.

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After the 2007-2009 Financial Crisis, the U.S. Congress passed – and President Obama signed into law – the Dodd-Frank Wall Street Reform and Consumer Protection Act, the most sweeping financial regulation in American history. Dodd-Frank set limits on bank debt, requiring banks to keep more money in reserve; restricted how much debt banks can leverage in investments; established the Volcker Rule, which restricts banks from trading with their own funds; created stress tests for banks to better monitor systemic risk; reversed much of the Commodity Futures Modernization Act’s (CFMA) deregulation, now compelling many firms that trade derivatives use a more regulated clearinghouse; established the Financial Stability Oversight Council (FSOC) and the Consumer Financial Protection Bureau (CFPB); and bolstered the regulation of credit agencies as well as whistleblower protections.

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The legislation also expanded the Federal Deposit Insurance Corporation’s authority, making the FDIC responsible for all firms designated as “systemically important.” As such, the FDIC now has orderly liquidation authority, meaning it has the power to restructure or liquidate failing financial firms that would pose a danger to the U.S. financial system if they filed traditional bankruptcy. The FDIC, together with the Federal Reserve, also handles the “living wills” that financial institutions now periodically submit to summarize their credit exposure and outline the company’s strategy for a swift, orderly resolution in the event of its material financial distress or total failure.

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Dodd-Frank is not perfect – for example, it puts way too much regulation on smaller community banks – but it’s a solid start. Wall Street executives and Republicans can jump up and down and scream about “over-regulation” impeding economic growth – which makes little sense since the S&P 500 index of U.S. stocks has returned 11 percent a year in real terms since the legislation passed – and as an enthusiastic capitalist I agree that, in a perfect world, the markets would self-regulate. However, this section unequivocally proves that even the free-est of markets demand boundaries. Adam Smith’s invisible hand – which would ideally guide market participants to contribute in a mutually beneficial way – is not foolproof when that hand is attached to a fool.

 

​Luckily, it’s possible to strike an appropriate balance between risk-taking and recklessness. Sensible financial regulation gives the breathing room necessary for innovation, entrepreneurship and economic growth but, at the same time, prevents the catastrophic extremes that the free market can unleash.​

 

We must remain super diligent about this – especially as we embark on a second Trump administration – because Donald & Co. are already going all in on financial deregulation, even though in many ways our overall financial condition is even more fragile than in the years leading to the 2007-2009 Financial Crisis (and everyone please believe, it absolutely CAN happen again).

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When it comes to irresponsible behavior by banks, it just keeps being Groundhog Day all over again. Between March and May 2023, Silicon Valley Bank, Signature Bank, and First Republic Bank were all seized by government regulators. The collapse of these three banks constituted three of the four largest failures of a federally insured bank in U.S. history.

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When the Federal Reserve, Treasury Department, and the FDIC decided to invoke emergency authority to shore up the debt of Silicon Valley Bank and Signature Bank – of course they did – they essentially made the decision to grant U.S. government guarantees for depositor losses of an entirely new class of banks. Then, by offering discounted loans to any other bank that wanted to borrow from its facilities, the Federal Reserve, just like in 2008, made substantial emergency support available to the entire banking system.

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Meaning, the United States government bailed-out banks yet again, moral hazard be damned. Yet again, bankers bet on black with what they have come to assume – consciously or unconsciously – will be American taxpayer money, congratulating themselves with huge bonuses when they win but not stung by any significant consequence when they lose. It’s total b.s.

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Interest groups in the Finance, Insurance & Real Estate sector have been hammering Washington since Dodd-Frank passed, and boy has that finally paid off for them! They have spent over 9 BILLION DOLLARS lobbying Washington since 2008.

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President Trump now wants to re-privatize Fannie Mae and Freddie Mac, posting on social media: “I am working on TAKING THESE AMAZING COMPANIES PUBLIC. I want to be clear, the U.S. Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President.”

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Fannie Mae and Freddie Mac currently guarantee $7.7 trillion in loans and back half of the single-family mortgage market. As usual, as financial regulations have been systematically watered-down, these loans have become increasingly risky. If the Trump administration gets its way, we’ll be right back in the nonsensical universe where Fannie Mae and Freddie Mac’s profits are private, but their risks fall squarely on the American taxpayer.

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U.S. regulators have recently taken steps to weaken post-financial- crisis rules to allow the nation’s largest lenders to free up some of the capital they have been required to have to ensure they can survive in times of market stress and turmoil. This capital requirement is called the supplementary leverage ratio, and it governs how much capital big banks are required to hold against their total assets/leverage.  This rule applies the same capital to all bank assets, whatever their risk (including loans, Treasuries and derivatives).

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This new change would reduce the ratio from 5 percent of the bank’s total assets to somewhere between 3.5 percent and 4.5 percent, translating to roughly $13 billion. The capital requirements for the largest banks’ subsidiaries (as opposed to the holding company) will drop 27 percent, translating to a reduction of $210 billion in capital.

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The regulators' justification for this move is that lowering these requirements will help bolster global markets because banks will surely buy more Treasuries – which we already know they won’t do. Morgan Stanley has already said they don’t expect to “significantly increase” their Treasury holdings, and Bank of America has essentially said the same. What they all will do, as history clearly shows, is funnel more money into dividends and stock buybacks.

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< As a reminder, in a stock buyback (a.k.a. share repurchase) a company buys back its own shares from the marketplace. They do this, in part, to reduce the number of shares that are available on the open market, which ultimately increases the value of those shares (i.e., supply and demand). Buybacks can also increase equity value, make a company look more financially sound, and allow a way for money to be returned to investors. >

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… and this is just the beginning of the financial deregulation push we will see during the second Trump era. Next up will likely be even less supervision and accountability for banks; a change in how they are rated; and an easing of their stress tests, which are designed to assess a bank’s ability to withstand an economic crisis.

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This is a huge mistake at a time when banks are bigger than ever. Combined, the top 15 largest banks in the United States hold $14 trillion in assets, and they facilitate trading in almost $30 trillion worth of Treasury securities (this number was less than $6 trillion in 2008). Over-the-counter derivatives are still all the rage – to the tune of $730 trillion.

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Rolling back any of these safeguards significantly increases the risk of a big bank failure, making our financial system more unstable and less resilient.

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And remember that deadly, extremely complex security called the collateralized debt obligation (CDO)? Today we have the collateralized loan obligation (CLO), which are asset-backed securities that invest in illiquid assets. CLOs are securitized products that pool leveraged loans together, then repackage them into tranches. Sound familiar?

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Publicly traded structured credit hit record highs in 2024 and are expected to exceed that in 2025. New asset-backed securities totaled $335 billion in 2024, and CLOs climbed to $201 billion. This time around, the target de jour is the insurance industry, specifically the $1.1 trillion fixed annuities market. Fixed annuities are a retirement-savings product offered by life insurers. What could possibly go wrong?

 

...the endless repetition of history.