A Year After the Lehman Collapse

A year ago, the financial system was on the verge of imploding. The Lehman collapse set off a trying few weeks where many other financial companies such as AIG, Fannie Mae, Freddie Mac, Goldman Sachs, and Morgan Stanley were also on the verge of imploding. The Federal Reserve and the Treasury department flooded the financial system with liquidity and shored up the banking system with loans resulting in improved protection from failure. Today the banking system appears to be healing and the economy has stabilized but many risks still exist.

We have been writing about excessive leverage and our concerns with its likely drag on the economy. This morning Nouriel Roubini spoke on CNBC about his concerns with consumer leverage, corporate leverage, real estate leverage, and finally, the excessive amount of debt created by the U.S. government. His thoughts are very much in line with our concerns for the future. Economic activity can not be robust until debt levels decline precipitously and this can only happen with time.

Another topic we have focused on is banks too big to fail are too big to exist. The Bank of International Settlement has concluded, as discussed in the WSJ, that "big banks' risks to the system increase more than proportionately with their size". We agree and have suggested that capital requirements should rise with the size of a bank. This method will allow banks to self judge wether they can garner sufficient returns on capital as their size grows. The BIS seems to have come to a similar conclusion as they suggest bigger banks pay higher taxes. If such tax is in the form of higher capital requirements then sytematic risk won't be avoided but managed more prudently.