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The guest commentary below was written by Christopher Whalen. It was originally posted on The Institutional Risk Analyst

Nothing Has Changed Since Lehman - zemp

People keep asking what we think of the 10-year anniversary of the collapse of Lehman Brothers.  Our answer is that not much has changed.  Lehman once had the best performing bank in the US and then it was gone.  Why?  Fraud on loans and securities. 

Fraud in different forms still prevails in the world of investing, but has migrated from banks to non-banks like funds and BDCs, and of course structured securities. Derivatives are the enablers of fraud.   

Saying banal, irrelevant things about the anniversary of the Lehman failure certainly helps to fill an otherwise empty media void.   But we never, ever talk about the true cause of the crisis, namely securities fraud by some of the biggest firms on Wall Street.  These bankers and firms were not punished, thus we remain at risk.  

Not only has nothing changed since 2008, but as in 2006, we have convinced ourselves that everything is just fine.  Residential and commercial real estate valuations have gone crazy since 2010, but everything is fine.  Just remember that the financial crisis of 2008 really began in 2005 when Countrywide and Washington Mutual began their slow motion collapse, like a small rock slide at the top of a mountain.  

Nothing Has Changed Since Lehman - zello

By 2006 the mortgage market was slowing -- as it is today -- and smaller non-bank firms were collapsing under the double whammy of falling volumes and rising costs.  When New Century Financial and Long Beach collapsed in 2007, regulators were approached about the coming contagion, but nobody at the Fed or other agencies believed it. By 2008 came the avalanche.  

We identified the cause of the subprime crisis a decade ago in a paper published by Indiana State University entitled: "The Subprime Crisis: Cause, Effect and Consequences."  We argued that three basic issues were at the root of the problem -- issues that remain unresolved today.     

First was an odious public policy partnership, spawned in Washington and comprising hundreds of companies, associations and government agencies, to enhance the availability of affordable housing via the use of creative financing techniques.

Second, federal regulators have actively encouraged the rapid growth of over-the-counter (OTC) derivatives and securities by all types of financial institutions. 

And third, also bearing blame for the subprime crisis is the related embrace by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board of fair value accounting. 

Again, nothing has changed in a decade. Most of the "sales" of securities done on Wall Street are not true sales at all.  For example, how does a lender transfer the ability-to-repay (ATR) risk in a prime, non-QM mortgage to an end investor?  Ben Bernanke, Hank Paulson and Tim Geithner are heroes and the regulators will save us next time.  Click here to read the paper on SSRN.


Christopher Whalen is Chairman of Whalen Global Advisors LLC. He has worked in politics, at the Federal Reserve Bank of New York and as an investment banker for more than 30 years. He is the author of three books Inflated (2010)Financial Stability (2014) and Ford Men (2017).

In 2017, he resumed publication of The Institutional Risk Analyst and contributes to many other publications and media outlets. He recently launched the first volume of The IRA Bank Book, a review of the operating and credit performance of the US banking industry written for institutional investors. 

Nothing Has Changed Since Lehman - hedgeye risk manager