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Ruth Porat didn’t see it coming.

The Morgan Stanley banker advised the Treasury Department on its rescue of Fannie Mae and Freddie Mac in September 2008. She says she thought she understood the risks to the financial system after having just spent a weekend trying to save Lehman Brothers when she got a message: Would she come back to deal with American International Group?

“The call I got was ‘We worked on the wrong thing,’ ” said Porat last month at the New York headquarters of the bank where she’s now chief financial officer. That AIG “could vanish that quickly and the impact that could have throughout the country, and that nobody could see it coming, was just staggering.”

Porat’s own bank almost vanished when hedge funds, spooked by difficulties getting money out of bankrupt Lehman Brothers, pulled more than $128 billion in two weeks from Morgan Stanley. To stay afloat it sold a 20 percent stake, became a bank holding company and borrowed $107.3 billion from the Federal Reserve on a single day.

Five years after Lehman sank on Sept. 15, 2008, triggering the worst financial crisis since the Great Depression, Morgan Stanley is safe enough to survive a shock that devastating, Porat said. She and Chief Executive James Gorman, with prodding from regulators, led a drive to cut risk and boost capital to soften the next blow.

While the amount of capital at the six largest U.S. lenders has almost doubled since 2008, policymakers and some Wall Street veterans say that’s not enough. They see a system still too leveraged, complicated and interconnected to withstand a panic, and regulators ill-equipped to head one off — the same conditions that led to the last crisis.

“We’re safer, but we’re not safe enough,” said Stefan Walter, who led global efforts to revise capital rules as general secretary of the Basel Committee on Banking Supervision.

More than 50 bankers, regulators, economists and lawmakers interviewed disagreed about what needs to be done. Some said the six biggest U.S. banks have only gotten bigger since 2007 — a 28 percent increase in combined assets — making it harder to let them fail. Others said they weren’t troubled by bigness or a system that requires government intervention every now and then, calling it an inevitable cost of financing global business.

“The world looks pretty benign right now. But it always does until it isn’t,” said John Reed, a former Citigroup co-CEO who helped engineer the merger that created the third-largest U.S. bank.

Catastrophic consequences

Congressional inquiries and more than 300 books about the crisis have identified many villains: homeowners borrowing beyond their means, banks selling subprime mortgages, government-supported agencies backing the loans, Wall Street packaging them for investors, ratings firms giving seals of approval, regulators offering little objection and politicians encouraging it all to happen.

Three fundamental flaws stand out.

• Regulators stripped of power allowed banks to embrace too much risk and load up on toxic debt with short-term funds.

• Insufficient capital left them little margin for error when those assets plunged in value.

• A system too large, opaque and interconnected meant they couldn’t fail without catastrophic consequences for the economy.

Regulators have since pushed banks to cut the amount of borrowed funds they use, what’s known as leverage, hold more easy-to-sell assets and rely less on overnight loans. The 2010 Dodd-Frank Act established a protocol that would, in theory, enable authorities to seize even the largest lenders and dismantle them without bringing down the entire system. An interagency group has been empowered to make sure banking supervisors work together to monitor systemic risk.

That may be insufficient. The largest banks remain Byzantine, with hundreds of subsidiaries around the world, which could thwart efforts to unwind them. Six U.S. regulators with overlapping authority often clash and are besieged by an army of highly paid lobbyists. Leverage is still too high, some regulators and economists say.

“Way short”

The biggest risks could lie in the unknown: Five years after AIG was brought down by billions of dollars of credit-default swaps, there’s little transparency about banks’ trading and derivatives businesses or their counterparties.

“The basic model hasn’t changed much, and it’s still fragile,” said Anil Kashyap, an economics professor at the University of Chicago Booth School of Business. “The banks need much more capital and liquidity. They’re still way short of being safe.”

One reason is the intensity of Wall Street’s pushback. Bank executives, lobbyists and lawyers logged more than 700 meetings with regulators on a section of Dodd-Frank that seeks to curb banks’ trading for their own account. An October 2011 proposal for implementing the rule, named after former Fed Chairman Paul Volcker, generated more than 18,000 letters, many from banks complaining it was too complex and could hurt economic growth.

Regulators still haven’t finished the Volcker rule. The Securities and Exchange Commission has to conduct a cost-benefit analysis, which could lead to further delays. The current proposal has so many exemptions that even Volcker has said he isn’t sure it will do what he wanted.

“It’s just the complexity and difficulty of the rule that has made it so hard to complete,” said Mary Schapiro, chairman of the SEC from 2009 until last year. “A lot of agencies with different viewpoints have been involved.”

Softened rules

The Volcker rule isn’t the only one held up. As of Sept. 3, more than three years after Dodd-Frank was enacted, just 40 percent of 398 rule-making requirements were completed, according to law firm Davis Polk & Wardwell, which monitors progress.

Lack of coordination among regulators and their poor supervision of derivatives, money-market funds and bank capital helped tear the system apart in 2008, according to the Financial Crisis Inquiry Commission. Regulatory authority was stripped away or blocked, the congressionally appointed panel wrote, with much of what remained undermined by infighting, loopholes and influence that the financial industry bought with $2.7  billion of lobbying and $1 billion of campaign contributions in the decade before the crash.

Since the crisis, regulators more than doubled the highest quality capital the biggest banks are required to hold and subjected them to stress tests.

Even so, Wall Street has found ways to soften or delay the impact. It found allies among European policymakers, who sought to curtail the reach of proposed derivatives rules, and asset-management firms that opposed changes to the money-market funds that banks rely on for short-term funding.

Banks also stymied government efforts to rein in the largely unregulated $633 trillion derivatives business. They carved out exemptions to Dodd-Frank rules that transactions go through central clearinghouses, which would force even the biggest dealers to post collateral. The exemptions, including one for currency swaps, could cover as much as 80 percent of the market, according to data compiled by Bloomberg.

Losing leverage

For all their groaning, banks have taken steps to improve their defenses. Morgan Stanley, whose assets at the end of 2007 were 38 times its equity, is an example. It sold a preferred stake to a Japanese bank after Lehman’s bankruptcy, raised $6.9 billion in 2009 and curtailed dividends and share buybacks. Leverage fell to 14 times equity as of June.

Morgan Stanley, the sixth-largest U.S. bank, has doubled equity and customer deposits to cut reliance on short-term borrowing, which accounted for more than half of its funding in 2008, leaving it helpless when markets froze. Gorman reshaped the company’s business model, buying Smith Barney from Citigroup to build the world’s largest wealth-management firm.

The bank also rewrote contracts with hedge funds to clarify how much cash they can pull out quickly. The goal is to buy the bank more time to react if markets plunge. Morgan Stanley now has enough cash and easy-to-sell assets to survive a year of dysfunctional markets, according to Porat.

“The most important thing is addressing and eradicating the notion of a weekend event,” Porat said, referring to the short time regulators and other banks had to react to Lehman.

The ability of banks to hide risk, years after Lehman’s fall, was demonstrated by JPMorgan’s $6.2 billion loss in 2012 on wrong-way derivatives bets by a trader known as the London Whale because his positions were so vast. The trades, which had a notional value of about $150 billion, appeared much smaller on the balance sheet of the largest U.S. bank.

Potential asset risk

Whether JPMorgan’s $2.4 trillion in assets poses a risk to the system or is a buffer against failure is a matter of dispute. Daniel Neidich, a former co-head of merchant banking at Goldman Sachs, said big banks are a condition of modern life.

“It’s just a reality of the world we live in, and how global and how interrelated it is,” said Neidich, CEO of New York-based Dune Real Estate Partners. “The benefits that all of that interconnectedness has created are tremendous.”

Regulators and policymakers say they aren’t so sure. When credit markets froze after Lehman filed for bankruptcy, the U.S. rescued other large financial institutions through capital injections and loans. The rebound in bank profits and executive payouts as U.S. unemployment remained stuck above 8 percent for 43 months created a public backlash against taxpayer-financed bailouts. Preventing more of them has been a top goal of U.S. and international regulators.

While Treasury Secretary Jack Lew said in July that “as a matter of law” banks are no longer too big to fail, he acknowledged the issue hasn’t been resolved.

“If we get to the end of this year and we cannot with an honest, straight face say that we have ended too big to fail, we’re going to have to look at other options,” he said at an investor conference in New York in July.