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It’s been more than four years since Wall Street collapsed. What’s happened since then?

Banks have raised tens of billions of dollars in capital. They’re less leveraged and have more liquidity than before.

Consumers have far less debt. Total debt-to-GDP has been declining for four years.

New regulations dictate what should happen if a huge bank faces collapse, ostensibly ending bailouts (in theory, anyway).

We’ve made big strides in the right direction. But so much can still go wrong, and so much still is wrong. Is the financial system actually safer than it was five years ago?

I recently asked that question to former AIG CEO Hank Greenberg. Here’s what he had to say (transcript follows):

Morgan Housel: Do you think the global financial system is safer today than it was in 2007?

Hank Greenberg: It’s now so tight you can’t do anything.

Morgan Housel: That’s an interesting point of view. It might be as dangerous, but there’s not much we can do about it?

Hank Greenberg: I think that, if you look at the regulators that we have, and had at the time, how did all this start in housing? It started with the government.

When our governor was the head of HUD, they loosened the reins. The decision by the administration was, “We want more Americans to own their homes.” They dropped the qualifications for getting mortgages, and people who couldn’t afford a home got a home.

Morgan Housel: The mortgages are being purchased by Fannie and Freddie, right?

Hank Greenberg: Yeah.

Morgan Housel: But a tremendous amount, virtually all of the subprime that was being done in 2005-06 was all in the private market, correct?

Hank Greenberg: Yeah.

Morgan Housel: It wasn’t until 2007 that Fannie and Freddie started getting into subprime.

Hank Greenberg: No, I understand that. I understand that, but they fed on it. Once you start down that road, it became a little easier next time, to the next one, the next one, and the next one.

Then you go beyond that. The SEC, where were they when the investment banks were leveraging the capital 40 to 1? Did you hear anybody say anything?

The blame is widespread. I think if you look at some other countries — a city-state like Singapore — a tiny state, but very well run, and the regulators are terrific. They get paid as much as they would if they were in the private sector, or maybe more. They’re intelligent, smart.

We need to change the dynamics here in the regulatory structure.

For more on AIG
At the end of last year, AIG was the favorite stock among hedge fund managers. Have they identified the next big multi-bagger, or are the risks facing the insurance giant still too great? In The Motley Fool’s premium report on AIG, Financials Bureau Chief Matt Koppenheffer breaks down the key issues that you need to know about if you want to successfully invest in this stock. Simply click here …read more
Source: FULL ARTICLE at DailyFinance

By Morgan Housel, The Motley Fool

Filed under: Investing

Hank Paulson, Ben Bernanke, and Tim Geithner have probably been criticized and critiqued more than any other trio in the history of business for the Wall Street bailouts they designed in 2008 — as they should be.

But criticizing is one thing; saying, “Here’s what I would have done differently, and here’s why it would have been better,” is quite another, and something that happens far less often.

Last week, I sat down with former AIG chairman and CEO Hank Greenberg (who left AIG in 2005, before the company’s downfall and bailout). I asked him what Paulson, Bernanke, and Geithner should have done differently in 2008. Here’s what he had to say (transcript follows):

Morgan Housel: How should Paulson, Bernanke, and Tim Geithner have responded in September 2008?

Hank Greenberg: They had their mind made up. They wanted to use AIG as a back-door bailout. You had Goldman Sachs, you had Morgan Stanley, you had many institutions who were using AIG to get them funds, and they did.

Now, they could have had access to the window, and they ultimately got access to the window, but they would have gotten a lot more access to the window. Their debt would have been much greater. This eliminated a lot of debt that they otherwise would have had to come up with.

Morgan Housel: What did you think about the terms and the validity of the other bailouts that were given to companies like Citigroup, Bank of America, Goldman Sachs?

Hank Greenberg: The Fed guaranteed — Citi and a number of others — guaranteed a lot of their assets at a fraction of the cost. If the Fed, as an example, had guaranteed AIG FB for whatever; 100 or 200 basis points…

Morgan Housel That was the Financial Products division of AIG that was running the derivatives?

Hank Greenberg: Yeah. It all would have been over. AIG would have regained its AAA rating, and there would have been no collateral calls necessary, and a lot of those assets came back. In fact, AIG was buying some of them last year. Buying them out of the Fed, so clearly if they hadn’t lost their nerve and they’d done it the right way, it all would have been over.

For more on AIG
At the end of last year, AIG was the favorite stock among hedge fund managers. Have they identified the next big multi-bagger, or are the risks facing the insurance giant still too great? In The Motley Fool’s premium report on AIG, Financials Bureau Chief Matt Koppenheffer breaks down the key issues that you need to know about if you want to successfully invest in this stock. Simply click here now to claim your copy, and you’ll also receive a full year of key updates and expert analysis as news continues to develop.

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Is the Financial System Safer Today Than It Was in 2007?

Interview: Former AIG CEO Hank Greenberg: What the Government Should've Done in 2008

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