The Center for Law, Economics and Finance at the George Washington University Law School held a half-day program on Sept. 12 titled "Five Years On, Learning Lehman's Lessons from the Panic of 2008: Are We Better Prepared for the Next Financial Crisis?" co-sponsored by the liberal advocacy group Better Markets.

The format consisted of a keynote address by Sen. Elizabeth Warren, D-Mass., followed by a panel discussion and concluding with closing remarks by author William Cohan that he expanded into another keynote, much of which refuted what Warren said in her speech.

Keynote by Sen. Warren

In her speech, Warren referred to a Dallas Fed estimate of the cost of the 2008 episode of the ongoing financial crisis at $14 trillion and that the Senate Permanent Subcommittee on Investigations issued a 600-page report that found the cause to be toxic mortgages, failed regulation and failed congressional oversight.

She asserted that the crash occurred suddenly and caught the nation unaware, but allowed that "warning signs were everywhere." She called for more transparency in lending terms and praised Dodd-Frank as a strong bill, then she asked where the country is five years after the episode and three years after enactment of Dodd-Frank.

Warren focused on the issue of "too big to fail" and noted that the largest banks are 30 percent larger than they were in 2008 and that the 10 largest banks are benefiting from a cumulative subsidy of $83 billion per year.

In her view, after three years, with only 40 percent of Dodd-Frank regulations issued, Congress should not wait any longer to strengthen Dodd-Frank. At a Senate Banking Committee hearing, Warren asked Treasury Secretary Jack Lew how long it should take to convince the market that the too big to fail is policy over, and he responded, by the end of the year.

She warned that the industry would continue to fight regulation "every inch of the way." Several senators, including Warren, have offered a solution in the form of a "21st century Glass-Steagall Act," which would restore the separation between "boring banking" and risky trading activities.

However, other conference participants torpedoed Warren's proposal after she left.

In an introduction to the panel discussion, Dennis Kelleher, CEO of Better Markets, pointed to a joint pronouncement of Feb. 23, 2009, by the financial regulators that the full faith and credit of the government stands behind the too big to fail institutions as evidence that the doctrine of too big to fail is still in force. Also, trillions of dollars have been thrown at these banks, and the Fed has backed the foreign exchange market with $5.4 trillion.

By his estimate the total cost of the crisis might be tens of trillions, and he accused the financial industry from the industry's role in causing it to the regulatory burden the industry is asked to bear.

Panel Discussion

Next came a panel moderated by Jennifer Taub, an associate professor of law at the University of Vermont Law School, and consisted of Neil Barofsky, former inspector general of the Troubled Asset Relief Program (TARP), now a partner with Jenner and Block in New York; John Coffee, Adolf A. Berle professor of law at Columbia Law School, a foremost expert in corporate governance; Jamie Galbraith, a professor of government at the LBJ School of Public Affairs, University of Texas; and Ted Kaufman, a visiting professor at Duke Law School, who served an unexpired term as senator from Delaware when Joe Biden took office as vice president. Kaufman served as chairman of the Congressional Oversight Panel appointed to oversee the TARP.

Coffee declared bluntly that "the big point is that the classic strategy of delegating to regulators no longer works." Administrative paralysis has set in, and the regulators have become extremely risk averse. He chided the Securities and Exchange Commission (SEC), the agency he follows most closely for "focusing on the capillaries rather than the jugular," rearranging the proverbial deck chairs.

Other targets for Coffee are the Supreme Court's decision in Citizens United, which he faults for enabling the financing of strident anti-regulation campaigns, and the D.C. Circuit's strict interpretation of the requirement that agencies submit cost-benefit analyses to support their proposed regulations.

Barofsky stated the issue as one of accountability. He charged that "as bad as the conduct of Wall Street was, it could not have happened had it not been (enabled) by the regulators." He referred specifically to Treasury Secretary Bob Rubin leaving the Treasury for Citigroup, and then extracting $100 million from the bank, "and he kept every penny."

He recalled Larry Summers bragging that he had 13 bankers in his office, and Barofsky sarcastically recalled that Summers' successor at the Treasury, Tim Geithner, a booster of "financial innovation," had testified that as president of the Federal Reserve Bank of New York he was not a regulator, and this was the truth.

Barofsky predicted that the regulators would again lead the charge against reform, but he took comfort that Warren is on the scene. There was a palpable sense of alarm and opposition to the prospect of Larry Summers as chairman of the Fed, and now it is known that the Democratic opponents of Summers have won their point.

Galbraith saw trouble in the "dead weight" financial institutions impose on the global economy, which needs to be remedied by shrinking the financial sector. Meanwhile, the next panic could come about as a result of a political upheaval in Europe that the system might not be able to manage.

Kaufman reiterated the resolution of Dodd-Frank conferees that the policy of big bank bailouts must end, but he asked whether these banks are still too big to fail, suggesting that they are still too big and too risky and vulnerable to dislocations in short-term money markets.

Next, Kaufman cited derivatives risks that have still not been addressed, nor has the Volcker rule against proprietary trading by insured banks been implemented. He agreed with Coffee that too many issues have been kicked to the regulators. He stated flatly that no legislative action would be forthcoming, including the new Glass-Steagall proposal, due to industry opposition.

Tellingly, Taub reinforced Kaufman's point, concluding, "From where I sit, it looks pretty bleak. There's a $2 trillion overnight repo market that precipitated the failure of Bear Stearns and still hasn't been fixed."

Concluding Remarks by William Cohan

Cohan extended what were billed as brief concluding remarks to a rant of nearly an hour, declaring, "I am frankly infuriated by the last five years." He pronounced himself "immensely disappointed" and added that he had advised Warren that she could do more good by getting a job at Goldman Sachs than by getting elected to the Senate.

To Cohan, Dodd-Frank is "horrendous, because it was intentionally designed to be manipulated" by Wall Street lawyers paid $1,000 an hour. He is further disappointed that the Commodity Futures Trading Commission cut down the number of required derivative bids from five to two.

He accused Goldman of triggering the failure of AIG by making margin calls on AIG after purchasing swaps from them at 50 that AIG had valued at 100 and Merrill at 95. Further, Goldman shorted derivatives that, when marked down in April 2007, immediately caused Bear Stearns' hedge fund to fail.

Cohan called Dodd-Frank "worthless" and devalued the new Glass-Steagall idea by recalling that only two firms were affected by the original Act, JPMorgan and Bank of Boston, and both got around the restrictions by forming Morgan Stanley and First Boston, respectively. He observed that very little has changed, so that bankers are again bidding up properties in the Hamptons with the gains they have made by taking huge risks with other people's money.

Not done, Cohan protested an article by New York Times reporter Ben Protess that he called an apology for a conflict of interest among former SEC enforcement head Robert Khuzami, his former firm Cadwalader and Lehman Brothers. Finally, he highlighted a change in the culture of Wall Street to emphasize payment for transactions rather than for advice to clients, and he called JPMorgan Chase CEO Jamie Dimon "a pathetic excuse for a leader."

Cohan's reform ideas would create securities that investment bankers would receive as part of their compensation that would be subject to attachment by creditors.

I would add that when Wall Street firms were organized as partnerships, they were subject to the most effective possible regulation, that of partners whose personal assets were at risk watching each other to make sure their colleagues didn't bring down the firm.