Lehman Head Bryan Marsal has warned that Wall Street had not learned its lesson in the credit crisis and that another megabank bankruptcy is likely. Marsal made the remarks while in Berlin for a bankruptcy conference in an interview with German business daily Handelsblatt, which I have translated below. A link to the full German text is provided at the bottom of this post. His comments serve as a reminder that the megabanks are still too large and complex, and, therefore pose a risk to the entire global banking system.
Text of the interview
Handelsblatt: you are handling the largest bankruptcy in human history. Can anything like this happen again?
Bryan Marsal: It is even likely that a case like Lehman’s will repeat itself – in any event, as long as nothing fundamental changes in financial regulation and in financial institutions. Wall Street has not really learned a lot from the situation. There is still too much leverage in the market, and credit default swaps remain completely unregulated. Even with regulators and in the companies little has been done after the global catastrophe.
HB: But financial regulators around the world are now pulling in the reins …
Marsal: Oh, really? That’s just for show. The regulators are overworked and underpaid. Someone who earns $80,000 a year cannot seriously compete with someone who gets $400,000 for finding ways to get around the system. And so far no one from the regulators at the SEC, at the FDIC or our government has asked how the Lehman collapse could have been avoided and what countermeasures could be taken to prevent a recurrence.
HB: So David loses to Goliath?
Marsal: I wouldn’t put it that way. In Canada, for example, you have to put up at least 25 percent equity to finance your own home. The banks finance no more than three quarters of the money. If we had such a rule in the U.S., there would never have been the massive mortgage-speculation in the years from 2005 to 2007.
HB: What should have been done?
Marsal: You see, Lehman was not too big to go bust, rather too complex. An orderly bankruptcy with the assistance of the U.S. government would have saved investors losses in the order of 75 to 100 billion U.S. dollars. A similar global meltdown could be prevented only if there were global regulations for companies that are also as complex and global as Lehman was. Lehman saw itself as an American institution, but worked in 40 states and had more than 900 subsidiaries. Consequently, we have to deal with 80 different types of insolvency proceedings in 20 different jurisdictions. There is simply a lack of an overarching coordination of the regulatory bodies in the international financial markets. Banks are growing globally, but die locally, that’s the problem.
HB: And no one anticipated this?
Marsal: The Treasury Department miscalculated. Nobody there had counted on the global consequences of the Lehman collapse, and therefore no one had taken a well-prepared liquidation of the company into consideration.
HB: What do you mean?
Marsal: Banks in trouble cannot be saved in the sense of a ongoing concern (?) forecast. We thus need some kind of global emergency parachute. If banks want to grow beyond national borders, regulators need to agree in advance on a single procedure in the event of bankruptcy. In the absence of such agreement between individual states, banks should not receive any authorization for cross-border expansion.
So, here is the man overseeing the largest bankruptcy in history telling us that, more than one year on, US regulators haven’t even asked for his professional opinion as to what went wrong and how we can stop a repeat. That’s pretty damning. It certainly speaks to the inability of regulation alone to prevent another crisis.
You must break up the banks and setup a resolution mechanism for their likely failure, because Lehman’s CEO feels one of these banks will fail in the future. Moreover, there is absolutely no international agreement on what needs to be done to regulate these cross-border megabanks. Marsal’s worry of another crisis seems apt in this environment.
Marsal is winding Lehman down much as Drexel was liquidated nearly 20 years ago after its catastrophic failure. So, he is simply administering the disposal of assets. The article mentions that the German banks are loaded with Lehman debt, $80 billion worth of claims. That tells me that German banks are probably also very exposed in Greece and Spain as well – one reason the Germans should look to a non-Lehman-like end to the European sovereign debt crisis.
Lehman-Chef warnt vor weiteren großen Bankpleiten – Handelsblatt
Update 1225 EDT: While the focus of this story was regulation of too-big-to-fail institutions, a Canadian reader pointed out that some of Mr Marsal’s statements were inaccurate regarding mortgage lending in Canada. Yes, 20% down is required for a conventional mortgage. However, in practice, most people put much less down. For example at Toronto-Dominion’s website it reads:
The size of a down payment can vary. Depending on the type of mortgage, down payments generally range from 5% to 20% of the purchase price.
To obtain a conventional mortgage, home buyers are required to put down at least 20% of the purchase price or appraised value (whichever is less) as a down payment. If you don’t have the necessary time or resources to save a full 20% down payment, you can choose a high-ratio mortgage and buy a home with as little as a 5% down payment. This option is called a high-ratio mortgage and it requires you to purchase default insurance.
Whether you choose a conventional or a high-ratio mortgage, one thing is almost always certain: the larger your down payment, the more you save in the long run. A larger down payment —
- Reduces the amount of your monthly principal and interest payment
- Reduces the total amount of interest you pay over the life of your mortgage
Your TD Canada Trust mortgage specialist can show you how much you could save, and show you many more money-saving strategies.
Moreover, I know that TD also offers up to 5% cash back (see here). So, effectively, you can get 100% of your mortgage in Canada financed by the bank – and many do.