Lehman 5 Years On: Safer Banks, but New Risks to Watch

The five-year anniversary of Lehman Brothers’ collapse is a good time for reflection on some fundamental questions: What have we learned? Are we better off? Are there still risks out there that could spark another crisis?

Without a doubt, we all learned how vulnerable the financial system was because of an overuse of debt, and came to see how complex – and risky – it was when so much of that debt was turned into financial instruments that connected with so many different parts of the economy and markets.

Lehman didn’t cause the credit crisis that was already underway, but its failure was a watershed moment. (An excellent “Economist” overview of the events leading up to Lehman's demise is available here) At the moment of truth for Lehman, Fannie Mae and Freddie Mac had just been nationalized, and Merrill Lynch and AIG were on the ropes. Given the complications and confluence of these events, our policy makers justifiably made a decision to allow the Lehman failure to play out.

That decision helped lead to regulatory overhauls that unquestionably have made our financial system safer. Banks now have some of the highest levels of capital ever. They are relatively less complex – and therefore less risky – institutions.

It’s a fair question whether the Lehman collapse could have been handled differently, perhaps in a way that caused less immediate pain and greater long-term results for that firm, its employees and clients, not to mention the government and the economy at large. The UK tried to take such a path when it nationalized the Royal Bank of Scotland.

Regardless, we now have a safer banking system. But the big risks we face tomorrow likely will be different than those we’ve already seen.

Two such risks are front of mind for me.

The first is that regulators are looking to move some of the most complex financial instruments out of the shadows and onto exchanges and clearing houses that help guarantee and process trades. Understandable and admirable, but we’ve now got to ensure the clearing houses and exchanges are fully up to the job and will be properly regulated going forward.

The second post-Lehman risk – and this is the one that really keeps me up at night – is the retirement crisis brewing in America and elsewhere. Partly because of all the fear and anxiety after Lehman failed and markets tanked, investors have lost faith in our corporations. They’re scared to invest in the equities they need to build the returns they’ll need to pay for retirements that could last three decades. I wrote about this in my first LinkedIn post, which you can read here.

Yes, I feel better about our banks and our markets five years after Lehman went under. But that doesn’t mean we don’t have more work to do to ensure the best outcome for investors and savers all over the world.

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The opinions expressed are current as of September 2013, and are subject to change. The information and opinions expressed are derived from proprietary and non-proprietary sources deemed by BlackRock, Inc. to be reliable, but not guaranteed. Reliance upon information in this article is at the sole discretion of the reader. This article is not a forecast, research, investment advice, or a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.