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Did finance really learn from the Lehman shock?

The crisis has revealed the fragility of banks, the lightness of some regulators and a culture of unbridled risk. Third episode of our series on the ten years of crisis that have changed the world economy.




THE WORLD ECONOMY | 05.07.2017 with 06:39 • Updated 05.07.2017 at 11h02 | By Véronique Chocron

With the fall of Lehman Brothers, rulers, central bankers, bank supervisors have glimpsed the end of the world. Once the system is on the ground, they intend to rebuild it, setting new rules for the banks to learn the lessons of the crisis. The task is immense and, ten years later, the work is still not finished.

Subprime mortgages? In the United States, the Dodd-Frank law passed in 2010 and new rules of the US Federal Reserve (Fed) in 2011 better regulate lending to US households and Lenders and brokers. For example, residential mortgage brokers can no longer be paid based on prevailing interest rates.
It must be said that subprime mortgages, granted to modest households or already indebted, and therefore lacking the profile to benefit from borrowing at reasonable rates, had developed at a rapid rate before the bubble Lehman burst. In 2006, these risky loans weighed 600 billion dollars (about 470 billion euros at the time), or 23% of the credits distributed in the United States. At the time, with the real estate market rising, lenders are reassuring, relying on a resale of houses if the borrower can no longer pay back.

But when real estate starts to turn around in mid-2006 and the defaults of US households increase, the whole system is derailed. Especially since securitization allowed the crisis to spread. What does this technique consist of? Banks form credit packages, mixing subprime and better credit, then cutting them into tranches, offering, depending on the risk, higher yields.

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