For the chroniclers of capitalism, the collapse of Lehman Brothers a decade ago this week stands as the major tipping point in modern financial history. The talk in the City will be of the days before Lehman and those after.
A new economic era dawned for Britain and much of the wealthy world when the American investment bank became the biggest company to file for bankruptcy on 15 September 2008 with more than $600bn (£464bn) in assets – about $2,000 for every man woman and child in the US at the time.
It triggered the largest economic shock since the Great Depression and is known now as the Great Recession. UK real GDP fell sharply in 2009 and did not return to its pre-crisis level until 2013. Business investment experienced a sharp downturn in 2009 and took until 2015 to recover its 2007-peak.
A decade on, productivity growth has stalled and household debt has hit dangerous levels amid government austerity we were told was necessary to atone for the recklessness of the City.
When Lehman went bust, the idea that governments should rescue failing companies was still anathema to George Bush. Yet politicians around the world quickly realised the domino effect from its collapse could not be ignored.
The banking system and its biggest titans were too big to fail. Their losses had to be socialised to prevent havoc to living standards, despite decades of vast profits flowing into private hands. Consumers would lose access to their banks accounts and businesses wouldn’t be able to borrow if action wasn’t taken.
In the aftermath, the politicians and bankers, like guilty children seeking penance, promised this would never happen again – the time for “ending too big to fail” had come. That is the big story of the past decade in finance.
Much progress has been made. Mark Carney, the Bank of England governor, argues capital requirements for banks have increased 10-fold in a decade, while trumpeting their ability to pass stress tests simulating a financial apocalypse worse than 2008. Even the harshest of Brexit wouldn’t prevent them operating, he says.
The poster child of the crisis in Britain, RBS, has increased the proportion of its funding kept aside to protect against potential losses from 2% before its taxpayer-funded bailout, to around 16% today. The industry has been forced to ringfence riskier investment banking away from day-to-day retail banking and draw up so-called living wills plotting how they would fail safely.
Yet the costs of failure will always remain too great. Like Sisyphus condemned to push an immense rock up a hill for eternity, the job can never be finished.
Warren Buffett, perhaps the world’s most famous investor, knows no major bank would ever be allowed to fail. The bankscarry an implicit government guarantee, making them among the safest investments around.
Despite a decade trying to remove taxpayers from the hook, the power of the industry remains more concentrated than ever with four major players. Share sales have begun, but RBS is still majority owned by the state.
The former CEO Fred Goodwin was due about £350,000 a year from his RBS pension when he rode off into the sunset leaving a charred wreck behind him. That’s around £3m since 2009, from a bank still essentially a ward of state. Not a single bank chief or chairman went to prison here or in the US. The moral hazard of reward for failure remains.
The gleaming towers of Canary Wharf or the City might be potent symbols of free-market capitalism, but they are state sponsored. The financial system is a perversely socialist endeavour. It is the ultimate welfare recipient.
Support for the banks during the 2008 crash hit a peak of almost a trillion pounds to save the banks from collapse. And the money is still flowing a decade after Lehman.
George Osborne’s help-to-buy scheme helps prop-up the mortgage industry, with around £9bn of equity loans helping support a wider market worth about £1.4tn. With the Tories in power, selling mortgages can only be a winning bet.
The term funding scheme gave £127bn in cheap borrowing to the banks with the proviso they kept lending following the Brexit vote two years ago.
The financial services compensation scheme guarantees the deposits of every individual customer of a UK bank up to £85,000. Meanwhile banks have become more reliant on our cash since the crash, with about 87% of funds drawn from depositors.
The New Economics Foundation reckons the industry receives about £23bn from its ability to create loans and receive income, in another hidden subsidy.
For all of this arm’s-length support we have relatively little say in how the banks are run and how our money should be used.
There are plenty of options. Competition could be improved to reduce the impact one bank would have on the economy from going bust. The big four could be forcibly split or more support provided to challengers. Labour proposes turning RBS into a network of local banks and the idea has merit.
Alongside setting interest rates and overseeing bank stability, Threadneedle Street could issue credit guidance rules, steering bank lending towards greater levels of productive investment in the economy.
Politicians could have greater say over when bank branches are closed down, or on the cost of credit for the neediest customers, who are routinely ripped-off by high-cost providers.
A national investment bank might be useful, as proposed by the IPPR commission on economic justice. While public institutions can fail in the same way as the private sector, there is more accountability and evidence from around the world that they can also succeed.
Christine Lagarde warned last week the banking industry was “safer, but not safe enough” 10 years after Lehman, as the industry pushes back against the rules introduced since the crisis.
Brexiters want fewer rules for the City, while Donald Trump has pledged to unpick some of the key post-crisis reforms in America.
That must never be allowed. Greater action from the state is required, not less. Otherwise, the world could be reaching a tipping point once more in the post-Lehman age.