Liquidity and growth in markets outside of the United States have led to rapid global consolidation. Of course, in some cases, the consolidation was forced. After all, if someone had told me three years ago that in 2008 Lehman Brothers would declare bankruptcy, I would have thought that extraordinary enough. And yet to think about the number of failed or crippled firms that were either acquired, taken over by the government, bankrupt, or severely squeezed is extraordinary and a reminder of just how challenging this moment truly was. In no particular order: Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, AIG, Washington Mutual, Merrill Lynch, Countrywide Financial, Citigroup, GM, Chrysler, GMAC, and Northern Rock, among many others. One of the things that made this crisis so deep was the fact that Lehman’s failure came after the failure of Bear Stearns and Fannie Mae and Freddie Mac. And of course just days before the government takeover of AIG. It was the cumulative collapse of all of these institutions, many of which were overleveraged, that was so damaging.
These were among the most extraordinary and difficult years for the country and its financial system. As Jamie Dimon wrote in JPMorgan’s annual letter to shareholders in 2010, “We have endured a once-in-a-generation economic, political, and social storm, the impact of which will continue to be felt for years or even decades to come.” This moment in time was so dramatic, filmmakers have tried to bring the story to life in many movies. I have even played myself in three of them!
Three years later we are still feeling the impact of this epic period. More than 8 million jobs were lost in the 2008 recession. Today the unemployment rate remains at stubbornly high levels and wages have not moved much. The Federal Reserve was still at work stimulating the economy and financial markets in 2011. It grew its balance sheet to a record size, first during the crisis then after, as the central bank bought bonds as part of its $600 billion second quantitative easing program, dubbed QE2, with the goal of stimulating investments and economic activity. The Fed’s balance sheet—a broad gauge of Fed lending to the financial system—expanded to $2.670 trillion in April 2011. The Fed’s holding of U.S. government securities grew to $1.402 trillion. The Fed’s bond-buying program helped confidence and the markets trade higher, even in the face of a slow economy, although many critics have complained so much easy money will lead to a new set of problems, including inflation.
The most persistent and toughest part of the recovery has been housing. Because of the mistakes in writing mortgages, the pipeline of foreclosures is steep. This part of the business remains weak throughout the economy. The banks will be fighting lawsuits for many years, from individuals, municipalities, and anyone else impacted by the bankruptcies and failed mortgages. Certainly one huge—and controversial—change is the regulatory environment. It has gotten tighter, and there is a parade of new enforcers on the scene, like Elizabeth Warren, who heads the new consumer protection agency. And at the Securities & Exchange Commission, chairman Mary Schapiro is putting more teeth into a regulator tarnished by scandals like the Bernie Madoff affair. The Dodd-Frank legislation created several additional regulators and set forth more than four hundred rules and regulations that need to be implemented by various regulatory bodies. Additional rules are coming from European regulators on liquidity and capital requirements emanating from Basel 3. Not that more rules and overseers are necessarily effective, as we have learned from the hundreds of overseers of AIG during the boom years. But even as Dodd-Frank is the freshly minted law of the land, many of the regulations are still being written and argued. We have not yet seen the effects of the new consumer protection agency nor has the “resolution authority,” which essentially provides a bankruptcy process for big banks and is intended to isolate troubled institutions from impacting the rest of the economy, been tested. Many would say that today, we still face the myth of “too big to fail” after massive consolidations of financial giants. Among the consolidations: JPMorgan acquired Bear Stearns and Washington Mutual; Bank of America owns Merrill Lynch and Countrywide; Wells Fargo owns Wachovia; Morgan Stanley is a third owned by Asian companies; Morgan Stanley and Smith Barney combined their brokerage force; Citigroup has sold assets and is looking at emerging markets to grow.
The banks are still debating parts of Dodd-Frank, such as the Durbin Amendment capping debit card fees, derivatives legislation, and the international capital requirements. The resolution of some of these items will dictate how much consumers pay for general banking. Banks say the Durbin Amendment will cut $14 billion in revenue. Jamie Dimon told me once again in January 2011 that such reforms might actually end up being more expensive for customers as
