NEW YORK - A year after the financial system nearly collapsed, the nation's biggest banks are bigger and regaining their appetite for risk.
Goldman Sachs, JPMorgan Chase and others - which have received tens of billions of dollars in federal aid - are once more betting big on bonds, commodities and exotic financial products, trading that nearly stopped during the financial crisis.
That Wall Street is making money again in essentially the same ways that thrust the banking system into chaos last fall is reason for concern on several levels, financial analysts and government officials say.
- There have been no significant changes to the federal rules governing their behavior. Proposals that have been made to better monitor the financial system and to police the products banks sell to consumers have been held up by lobbyists, lawmakers and turf-protecting regulators.
- Through mergers and the failure of Lehman Brothers a year ago, the big banks whose near-collapse prompted government rescues have gotten even bigger, increasing the risk they pose to the financial system. And they still make bets that, in the aggregate, are worth far more than the capital they have on hand to cover against potential losses.
- The government's response to last year's meltdown was to spend whatever it takes to protect the financial system from collapse - a precedent that could encourage even greater risk-taking from the private sector.
Lawrence Summers, director of the White House National Economic Council, says an overhaul of financial regulations is needed as soon as possible to keep the financial system safe over the long haul.
"You cannot rely on the scars of past crises to ensure against practices that will lead to future crises," Summers says.
No one is predicting another meltdown from risky trading in the near term. Rather, the concern is what happens over time as banks' confidence grows and the memory of the financial crisis of 2008 fades.
"We're seeing the same kind of behavior from the banks, and that could lead to some huge and scary parallels," says Simon Johnson, former chief economist with the International Monetary Fund.
Some risk-taking is good. When banks are willing to invest in companies or lend to home buyers, that nurtures economic growth by generating employment and consumer spending, feeding a cycle of expansion.
The problem is when banks' quest for profits leads them to take on too much risk. In the case of the housing bubble, which burst last year, banks lent too freely to consumers with weak credit and wagered too much on complex financial instruments tied to mortgages. As real-estate prices turned south, so did the financial industry's health.
The administration is seeking tougher capital requirements for banks as part of its proposed changes, arguing that banks' buying of exotic financial products without keeping enough cash on reserve was a key cause of the crisis. Treasury Secretary Timothy Geithner has urged the Group of 20 nations - which meets this month in Pittsburgh - to agree on new capital levels by the end of 2010 and put them in place two years later. He hasn't said how much extra capital banks should be required to keep on hand.
Data from the April-June quarter show that the banks are leaning heavily again on their trading desks for revenue.
- During the fourth quarter of 2008, when the financial crisis made even the shrewdest bankers risk-averse, Goldman's trading of risky assets nearly stopped. But in the second quarter of 2009, trading revenue had climbed to nearly 50 percent of total revenue, closer to where it was two years ago before the recession began. JPMorgan's reliance on trading revenue has exhibited a similar pattern.
- Also in the second quarter, the five biggest banks' average potential losses from a single day of trading topped $1 billion, up 76 percent from two years ago, according to regulatory filings.
The failure of Lehman Brothers - the biggest bankruptcy in U.S. history - and the panicky sales of Bear Stearns to JPMorgan and Merrill Lynch to Bank of America, also have transformed Wall Street. The surviving investment banks have fewer competitors and more market share.
Five of the biggest banks - Goldman, JPMorgan, Wells Fargo, Citigroup and Bank of America - posted second-quarter profits totaling $13 billion. That's more than double what they made in the second quarter of 2008 and nearly two-thirds as much as the $20.7 billion they earned in the second quarter of 2007 - when the economy was strong.
"The big banks now are more powerful than before," said Johnson, now a professor at the Massachusetts Institute of Technology. "Their market share has grown and they have a lot of clout in Washington."
And big banks and their traders are still finding creative - some say speculative - ways to profit.
They're still packaging risky mortgages into securities and selling them to investors, who can earn higher returns by purchasing the securities tied to the riskiest mortgages. That was the practice that helped inflate the real estate bubble and spread financial pain around the globe.
Obama speech today
President Barack Obama will make a speech today from Wall Street on the government's response to the financial crisis. He is expected to seek support for his efforts to overhaul the financial regulatory system.
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The fall of Lehman rocked Wall Street
Sept. 14, 2008, is the day that shook Wall Street and triggered the Great Recession. The day began with banking chiefs and government finance officials meeting at Manhattan's Federal Reserve Bank of New York. Lehman Brothers needed a cash infusion or it would collapse the next day under the weight of $6 billion in losses in six months from trades gone bad and greater losses to come from souring mortgage-related securities. One by one, potential buyers of the 158-year-old investment bank dropped out. By late afternoon, talks shifted from saving Lehman to figuring how to let it die without destroying the financial system. As midnight approached, Lehman prepared its bankruptcy filing. The ripples the next day would be felt from Wall Street to Main Street.