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After the Fall: One Year Later, Still No Regulations

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President Obama gave a speech on Wall Street today that sent a strong message: We must learn from last year’s financial collapse and improve our national regulatory system to fix its underlying weaknesses.

“Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them,” Mr. Obama said in a speech at Federal Hall in Lower Manhattan.

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“They do so not just at their own peril, but at our nation’s … I want everybody here to hear my words. We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.

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Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.”

These are the strongest statements I have heard from the president on how better risk management — internally at banks, systematically from the regulators and philosophically from those working on Wall Street — must be embraced. With Obama using so much of his political capital and “mandate for change” on health care (albeit with little progress), it remains to be seen if he will be able to spur Congress to enact any progress on reforming the financial industry. The White House certainly hasn’t been able to get Capitol Hill to do much thus far.

From the Wall Street Journal:

Mr. Obama’s planned overhaul would dramatically rewrite the rules of the road for the U.S. financial sector, with new protections for consumers and safeguards against the potential collapse of more big banks. But it is unclear if Congress can unite behind a revamp on Mr. Obama’s timetable, given the time-consuming debate over health care and disagreements between lawmakers on the major components of the overhaul.

The Atlantic ran its piece today to mark the anniversary of the collapse, looking at “5 Reasons to Worry.” In their first reason, they warn against the fact that “in the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” according to Joseph Stiglitz, a Nobel-winning economist and the former chief economist at the World Bank. Among the other four reasons to worry are: continued federal subsidies, unchecked greed and unregulated derivatives.

Those in the risk management industry are unfortunately accustomed to having their advice ignored. Twelve months after the largest collective failure of financial risk management to occur in my lifetime, however, it remains shocking that so little has been done to fix the problem.
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Outrage Against AIG on Capitol Hill

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Chairman Paul Kanjorski presided over the congressional hearing involving state representatives, the NAIC, the Treasury Department, the Office of Thrift Supervision and Standard & Poor’s.

“We meet today to scrutinize American International Group,” Kanjorski began. He continued, explaining that the reason for the current and future meetings was to discern several things – namely how AIG got to where it is now, how they are using (or misusing) taxpayer bailout funds and how and when the company will pay back its bailout money, plus interest.

Time was then given to the always-outspoken Representative Barney Frank from Massachusetts, who undoubtedly received nods of satisfaction from the viewing audience.

“Something is seriously out of whack and AIG needs to fix it now,” Frank stated. “Many Americans have made personal sacrifices to make it in this difficult time – AIG should do the same.”

Frank then read from the AIG contracts in question, stating the specifics of the bonuses, which said if the company has a net loss for the year, the employees still receive their bonuses.

“This is a problem with compensation structure,” Frank lambasted. “They give themselves contracts that effectively insulate them from losses. We should exercise our rights as owners of this company and bring about lawsuits.” Referring to the breaking of the contracts in question, he made vocal what most Americans are thinking right now: “the magnitude of the losses is so great that we are justified in rescinding the bonuses.”

Representative Spencer Bachus from Alabama blamed Washington, the regulators, and Congress for failing to do their jobs.

“However, the blame game needs to be secondary,” he stated. “Recouping the taxpayer’s money is first and foremost. But will AIG ever return to profitability and will they ever be able to return the money.”

A valid question indeed.

Chairman Kanjorski then turned the questioning to the panel of three individuals representing the NAIC, Standard and Poor’s, the OTS and the Treasury Department. From the insurance regulator perspective- the head of the NAIC claimed that AIG has become the poster child for systemic risk. He then revealed the obvious – that there are “threats on horizon in terms of reputational risk in regards to the insurance division of AIG.”

After two hours of questions and statements, the meeting broke with heckling from some in attendance who held signs reading “honest taxpayer fund.”

You can watch the full video of the hearing here. Another hearing is set for March 24, when Congress will hear from Treasury Secretary Tim Geithner, among others.