Wall Street’s Lessons: A Year after the Big Crash

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Wall StreetSeptember 14, marks a year to the day since the U.S. financial system crashed, but today Wall Street is poised to stretch gains from last week as investors bet that the economic recovery is gaining strength and company outlooks are turning better by the day. President Barack Obama is scheduled to speak at noon in New York on financial reforms and the need to strengthen the system to avoid another collapse.

This week’s anniversary of the collapse of the 158-year-old investment bank, Lehman Brothers Holdings, and the tumult that subsequently rocked Wall Street have not dampened the current optimistic mood. U.S. stocks are at new 12-month highs, and, if this week’s economic reports show that the recession continues to abate, those stocks should extend their run-up.

Signs that corporate profits are improving have been increasing after FedEx Corp and Procter & Gamble joined other bellwethers in giving upbeat financial outlooks last week. More companies could yet offer welcome news in their outlooks this week.

On the economic front, August retail sales, due on Tuesday, along with the Producer Price Index and a reading on July business inventories, will command attention. Data on New York state manufacturing is also due on Tuesday. Moreover, data on the Consumer Price Index and industrial production in August are due on Wednesday. All of these data will be studied for evidence that the economic recovery is gaining traction.

Even so, many problems are lurking ahead. Wall Street appears to have learned very little from the events of the past year. The nation’s biggest banks are bigger and regaining their appetite for risk. Goldman Sachs, JPMorgan Chase, Wells Fargo, Citigroup and Bank of America – which have received tens of billions of dollars in federal aid – are once more betting big on bonds, commodities and exotic financial products, the kind of trading that nearly stopped during the financial crisis. And the surviving investment banks – after the demise of Lehman, Bear Stearns and Merrill Lynch – now have fewer competitors and greater market share. These banks posted second-quarter profits totaling $13 billion, 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.

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. The Obama administration has proposed measures to diminish the risk posed by large banks. They include forcing banks to hold more capital to cover losses and trying to increase the transparency of markets.

One major component of the reform plan – creating an agency to oversee the marketing of financial products to consumers – is getting a pushback from Wall Street.  Another issue calling for urgent reform is the out-of-proportion compensation for executives and traders that Wall Street has retained. Goldman Chief Executive Lloyd Blankfein said at a banking conference in Germany last week that excessive banker pay works against the public interest. He said bonuses are important to attract and retain top talent, but misapplied, they can also encourage excess.