Haunted by Lehman

On Monday a year ago,the world woke up to a Wall Street irrevocably or so we thought changed. In the course of one hectic weekend,two of the four great broker-dealers that had been the pillars of finance had vanished: Merrill Lynch was absorbed by the Bank of America and Lehman Brothers collapsed. That collapse probably served as a catalyst for a chain reaction of panic and freezing up of credit that spread worldwide and caused the fears of a repeat of the 1930s depression we have lived with for all this time.

A year later,perhaps the most worrying thing is how little reform has penetrated the sector that started it all. The frailties of high finance are a little better understood,and investment bankers are a little less popular at parties; but other than that there are few behavioural differences. Banks have changed their payment structure little: they still set up perverse incentives for their employees to max out short-term gains while taking on long-term risk a problem well-known enough in the industry to be referred to casually as IBG or Ill be gone by the time the effects of my actions fully manifest. Processes of securitisation which caused the freeze-up by making it extremely difficult to judge who was carrying what risk have hardly changed either,even though all experts,even those who maintain that the formulae that govern the slicing-and-dicing of risk are at heart correct,have said that without reform the methods will lead to chronic instability. And while the crisis caused a pull-back in the indebtedness of the large firms,what they call a reduction in leverage that now means 1 with them is lent out 14 times rather than 26,that is not a real behavioural change,but just a response to a tighter market. On the other hand,blaming the crisis on Lehmans fall has encouraged the sense that some financial institutions are too big to fail and thus they can use that implicit government guarantee to take on extra risk.

Something that started a year ago can really no longer be a called a crisis. But it hasnt ended either. The real effects,on producers of goods and services worldwide,continue very much in evidence,with jobs and profits still threatened. But it is possible to claim that now,the coordinated actions of governments and central banks have averted the worst. But until international finance genuinely changes its structure and behaviour to better fit the essential job it has to do,all that security will remain permanently under threat.