Bank crisis lessons ‘not learned’

A year after Lehman Brothers collapsed, a think tank has warned the lessons of the crisis have not been learned.

The Institute for Public Policy Research (IPPR) says the rapid return to the City’s bonus culture shows real reform has been “very limited”.

The warnings echoed a speech by US President Barack Obama, who warned of complacency in the banking sector.

Also, UK Prime Minister Gordon Brown said that there was “unfinished business” with banks.

Bailouts

The scale of the turmoil in the global economy in the past year has been unprecedented since the Great Depression.

Lehman Brothers, once the fourth-largest US investment bank, filed for Chapter 11 bankruptcy protection in the early hours of 15 September 2008.

At the same time, Bank of America announced it was taking over Merrill Lynch to rescue it from bankruptcy.

Governments around the world subsequently had to pump billions into their financial systems through bank bail-outs, central bank actions and huge stimulus plans to save their economies from collapse.

In the UK, Northern Rock was nationalised and the Royal Bank of Scotland was brought under government control.

The US nationalised mortgage giants Fannie Mae and Freddie Mac, and took control of its biggest insurer, AIG. It also took a stake in Citigroup.

Mr Obama and Congress passed the $787bn (£472bn) stimulus package, known as the American Recovery and Reinvestment Act, and China passed a similar $586bn aid plan to boost domestic demand.

And countries including Iceland, Serbia and Latvia have had to seek international aid to stay afloat.

Lehman’s legacy

In all, trillions have been spent by governments to avert an even worse outcome.

BBC business editor Robert Peston said that Lehman’s collapse had huge repercussions on the psyche of investors and the scale of the financial crisis.

“The significance of Lehman Brothers was in the massive panic that it caused in the marketplace, where funds were withdrawn from any bank anywhere in the world that was perceived as remotely vulnerable,” Mr Peston told the Today programme.

“That was the moment people thought, crikey, we’re on the verge of a depression.”

Most economists now think the world has avoided a second Great Depression.

But there is now concern that as the banks start to recover, they have not taken the necessary steps to prevent a repeat of the crisis.

“Alarm bells should be ringing with the early signs of a ‘back to business’ attitude in the City and little evidence that policymakers are taking measures to ensure the next economic recovery is better balanced than the last one,” said Tony Dolphin, senior economist at the IPPR.

The report warned that unless urgent action is taken, the banking crisis may not be the last of its type.