The SEC recently launched a valiant defense of its performance in the crisis, pointing out that it has charged 66 CEOs and other "senior corporate officers" in connection with the crisis. But none was at Lehman or any of the other major banks. SEC officials say they simply couldn't make the case that Lehman's failure resulted from fraud.
Is that so? Lehman's federally appointed bankruptcy examiner, Anton Valukas, said he found "actionable balance-sheet manipulation" at Lehman and significant nondisclosures of accounting tricks designed to conceal its true condition.
In the words of William K. Black, who oversaw the prosecution of bankers after the savings and loan crisis of the 1980s, the SEC's own figures "demonstrate its epic failure in preventing the current crisis (the SEC was useless) and deterring future crises (the SEC leaves the fraudulent wealthy officers immensely wealthy)."
There's more to suing or prosecuting these executives than merely satisfying the public's passion for retribution. There's also the need to discourage a return to the old ways.
That message hasn't been heard by the banking industry. Although executives say the banks have much stronger capital cushions today than they did before 2008, Admati contends they aren't nearly strong enough.
The average reported ratio of equity to assets among the big banks — equity being the safest capital one can have — is about 10% to 11%. Admati says it should be closer to 30%, so that the banks would be able to survive a market crash like the one that put Lehman, Merrill Lynch, Bear Stearns and other onetime gilt-edged names out of business.
She also points out that the lax rules about what risky investments must get reported as balance sheet assets and what can be left off undermine confidence in the banks' figures. "Their fragility is hard to see from their balance sheets."
The banks today still fight regulation by claiming that tying their hands will hobble economic growth. This is one of those balancing tests where all the weights seem to have been piled on one side. What's left off is the cost of inaction.
Earlier this summer, economists at the Federal Reserve Bank of Dallas took a crack at measuring that cost. Their conclusion was that the Great Recession cost the U.S. as much as $14 trillion in economic output, or up to $120,000 for every household in the country. That comes to a lot more than the cost of keeping a few bankers from collecting their bonuses through risky, manipulative financial deals.
The targets of regulation always squeal that trampling on their freedom of action will have economic costs. But the reality is that the cost of lax regulation is always higher than the cost of making a system safe. The U.S. understood that reality in the Thirties. What keeps us from understanding it now?