I recently read a summary of an interview of James Gorman, CEO of Morgan Stanley. When Gorman was asked about the chances of another financial crisis like the one we had 5 years ago occurring, he replied that “the probability of it happening again in our lifetime is as close to zero as I could imagine”. To this statement, my reply is quite simply “bull----!”
Here are the reasons why another financial crisis can happen in the next few years.
1. Government and personal debt remain at unsustainable levels.
2. The US budget is still not balanced.
3. Due to 1 & 2, interest rates must go up.
4. No bankers were ever punished for their role in the last collapse so there is no deterrent to keep them from doing it all over again.
5. Banks have refused to own up to the mistakes they made in making loans to borrowers who were not credit worthy.
6. Congress has refused to own up to the fact that it pressured the banks to make loans to borrowers who were not credit worthy.
7. The new rules and regulations so quickly adopted by Congress to obscure its role in the collapse have been watered down so much by bank lobbyists that the new set of checks and balances allegedly created has holes large enough to drive to drive a truck through.
8. In order to clear the inventory of SF REO, pending foreclosures, and defaulted loans on their books, banks have not been actively lending to home builders, thus creating an artificial imbalance in supply and demand which has pushed home prices in many markets back up to 2008 levels. This is how bubbles are created.
9. Fannie Mae and Freddie Mac are still toothless tigers and need to be dismantled. What board of directors of a public company pays its officers millions of dollars to lose billions of dollars? Fannie Mae and Freddie Mac.
10. The typical response from a bank facing a loss from a bad SF loan is to sue everyone who touched the loan even though the primary reason for the loss is the bank’s own poor underwriting decision in making the loan in the first place.
In other words, it doesn’t look like banks and Congress really learned anything from the recent collapse and until then it can happen all over again.
Gorman also said, “There’s a difference between incompetence or mismanagement or poor judgment or excessive risk taking from actually breaking the law. There’s nothing I’ve seen that would suggest that any of the major participants in the financial crisis should be in jail for their actions”. His argument is essentially that all of the bankers pulling down millions in compensation prior to, during, and after the crisis were just idiots and not real crooks. If that is true, my money is definitely on another financial crisis in Gorman’s lifetime.