The Lehman Brothers implosion a year ago exposed fault lines in US financial rules and oversight, but reform of the complex regulatory system faces daunting challenges.
After the venerable investment bank collapsed on September 15, 2008, sending the global financial system into a tailspin, authorities highlighted major problem areas in US regulation: splintered tasks, loose rules and lax enforcement, a bonus culture that encouraged undue risk-taking, and a lack of broad oversight of financial activity.
President Barack Obama, acknowledging that financial innovations had overwhelmed a regulatory regime basically crafted in the wake of the Great Depression, has billed his administration's reform proposal as a "sweeping overhaul" of the system.
His Democratic administration is seeking the creation of a financial services oversight body, responsible for identifying emerging risks and co-ordinating the work of regulators.
It also wants to place all financial institutions whose collapse could threaten the financial system - including banks, hedge funds and insurers - under a single regulator, the Federal Reserve, and raise their capital requirements.
These proposals have been fairly well-received by those who see no problem with the Fed assuming such a regulatory role.
But critics say the administration plans do not go far enough in fixing the problems that allowed Lehman, and other financial firms, to pursue short-term profits entailing great risks that eventually plunged the economy into recession.
The administration reform is only an attempt "to plug some of the holes," former Republican congressman Michael Oxley, co-sponsor of the landmark Oxley-Sarbanes corporate governance law, said recently. Douglas Elliott, a financial institutions expert at the Brookings Institution, a Washington think tank, said the Obama administration has scaled back its ambitions to streamline regulation.
"We have an insane regulatory structure with six different regulators of banks, and this is counting the state regulators as one body," he said. The former investment banker noted that the White House reform plan now envisages five bank regulators instead of six, whereas the administration initially was leaning toward consolidating them into one or two. As for the bonus controversy, the administration has turned down the pressure by deciding not to seek constraints on corporate compensation policies.
Its plan would put under the control of one regulator nearly all the players in the financial sector, notably hedge funds and derivatives markets traders, which to date have been unregulated.
But the reform still needs to pass through the maw of Congress. And history teaches that financial regulation, like the battle against sports doping, always lags innovation. The authorities have repeatedly insisted that lessons must be drawn from the worst financial crisis since the 1930s Great Depression to avoid it happening again.
But for former tech stock analyst Henry Blodget, who lost his shirt in the dotcom crash in the early 2000s, the lessons will be quickly forgotten.
"We will 'fix' the 'problems' that we decide caused the debacle; we will create new regulatory requirements and systems; we will throw a lot of people in jail. We will do whatever we must to assure ourselves that it will be different next time. And as long as the searing memory of this disaster is fresh in the public mind, it will be different," he wrote in an article in The Atlantic monthly magazine. "But as the bust recedes into the past, our priorities will slowly change, and we will begin to set ourselves up for the next great boom."
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