Ten years ago, I was serving as Pennsylvania State Treasurer, supervising the investment of the state’s money, when the venerable Wall Street investment bank Lehman Brothers declared bankruptcy on September 15, 2008. Amid a series of financial disasters in 2008, the date of September 15 became the bellwether for the Great Recession that followed.
Our financial and regulatory systems failed in 2008, and trillions of dollars of value in the markets evaporated. What followed was an unforgettable period of history, with the stock market peaking above 14,000 in October 2007 and closing a year and a half later below 6,500. Subsequent years of economic stagnation and slow recovery followed.
There were numerous signs foreshadowing this debacle: consistent press coverage of the “housing bubble,” the troubles of the federal housing guarantors, Freddie Mac and Fannie Mae, and the forced sales of Bear Stearns and Countrywide Financial. A toxic financial maelstrom was emerging, but few people saw these seemingly unrelated events as part of a systemic challenge to our economy.
Commentators and experts have pointed to countless causes of the Great Recession; however, simply put, America overleveraged, and over extended. We had taken too much of the wrong kinds of risks with our own and other people’s money.
Congress was jolted into action, passing the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to address many of these risks, providing regulators with enhanced tools to work with the financial sector to prevent another economic catastrophe.
Ten years later, we have emerged from the Great Recession, but not quickly and not without enormous damage to the lives of millions of Americans. As a close observer of the financial markets and a financial regulator, I am concerned that many leaders in the business, financial, and political communities have forgotten some of the lessons we learned about risk and leverage and are again treating our financial markets like a roulette wheel.
A wave of de-regulatory fervor has crested in our nation’s capital, formed by short-term memories, the desire to roll back consumer protections, and a new “irrational exuberance” about our nation’s economy. We are witnessing not a piecemeal “chipping” away of the protections Dodd-Frank provides to both consumers and institutions, but rather a wholesale “stripping” away of those protections in several opening acts.
First, the federal regulator that oversees many of our nation’s largest banks -- the Office of the Comptroller of the Currency (OCC) – has announced a new type of special purpose national bank charter that may enable companies to sidestep well-established protections designed for our citizens and the stability of the nation’s economy. Because federal law preempts state law, companies currently licensed by state regulators could obtain this new banking charter and effectively no longer be required to abide by state laws that protect our citizens.
Second, we are also witnessing a rollback of enforcement activities at the federal Consumer Financial Protection Agency (CFPB). The CFPB has sharply decreased its enforcement activity, with its Acting Director stating earlier this year that he was “looking to the state regulators and state attorneys general for a lot more leadership when it comes to enforcement.” The only federal financial regulator dedicated to consumer financial protection has effectively become largely a provider of brochures on financial topics.
Third, federal financial regulators are also reviewing the Community Reinvestment Act (CRA), which was passed by Congress in 1977 to combat one of the most pernicious financial activities of the past century: the “redlining” of communities and neighborhoods that resulted in “haves” and “have nots” split along racial lines. Given the current political atmosphere in our nation’s capital, I am concerned about the ability of an amended CRA to continue to protect underserved populations.
Fourth, proposals to reduce capital at the nation’s largest banks pose systemic risks to the financial system. Capital is the “cushion” that banks and other financial institutions rely on precisely when it’s needed most. Adequate capital requirements, both in quality and quantity, ensure the financial institutions have enough “skin in the game” to help limit the activities which ultimately contributed to the last crisis.
This deregulatory fervor is further complicated by the belief that efficient financial markets should be explicitly trusted to regulate themselves. Efficient markets depend upon coordination of effective and smart state and federal government regulation to ensure their safety and soundness. I can testify from my own personal experience as a former Wall Street investment banker that markets are not as efficient as we would like to believe. Risk requires constant management and oversight.
Ten years after the collapse of Lehman Brothers – and our economy – not everyone has forgotten the lessons learned about risk and regulation. Many, including Federal Reserve officials and community bankers, have expressed concern about loosening capital requirements on the nation’s largest banks.
I can assure Pennsylvanians that Governor Wolf and I have learned and will not forget the hard lessons taught by the Great Recession of 2008. We are fully committed to representing Pennsylvania’s interests with our federal counterparts and working to ensure Pennsylvania consumers are protected in the financial services marketplace.
Robin L. Wiessmann has served as Pennsylvania Secretary of Banking and Securities since 2015. She served as Pennsylvania State Treasurer from 2007-2009. Previously, she served as Vice President of Public Finance at Goldman Sachs and was a founder and President of Artemis Capital Group, the first women-owned investment banking firm on Wall Street.
Originally published [here] in the Harrisburg Patriot-News on September 14, 2018.