A decade ago this week, Bear Stearns got sold for $2 per share to JP Morgan Chase and six months later Lehman Brothers folded and went out of business. Regulators promised to prevent a repeat and began a process of instituting controls – more reserves, restrictions on risk taking and higher capital requirements to avoid another crisis.
But these regulations have begun to unravel. Earlier this week, the Senate at the behest of the President dialed back regulations relaxing a wave of restrictions placed on the banking industry a decade ago following the financial crisis. Of significance, is the roll back of Dodd-Frank financial law which now goes back to allowing all banks with less than $250 billion in assets to no longer abide by the stricter rules.
All told, it is expected that 75% of the banks will receive relief from the easing of regulations. The prevailing notion in the current administration is that failure of financial institutions is no longer a concern and as such, it is time to relax restrictions on the banking industry. But, what if this line of thinking is wrong?
Future Wealth’s View
Crisis situations occur due to complacency and myopia. In 1982, no one expected countries like Mexico to default. In 1997, Asia’s exchange rates were not expected to break. In 2008, no one ventured to guess that US would slip into the worst crisis since the great Depression. In 2011, Euro nations were not expected to default. In 2016, Venezuela was not expected slip into 800% inflation. The list goes on.
Library shelves groan under the weight of the number of books written on the pitfalls of short term thinking. And yet, companies and countries alike seem to be embracing this ill-advised path and choose to “kick the can down the road”, when it is clear that managing for the short term comes at the expense of firms’ and countries’ long-term value. What if there is no “down the road” in this “kick the can” game?
With a litany of dysfunctions so prevalent in current administration, one wonders what else is in store. Hardly a week goes by before a key official is fired or replaced. And all the while, everyone else is blissfully ignorant of the harsh reality of another crisis. Only time will tell.