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"Hands up if you know someone who’s a bullshitter.”

Jamie Dimon, chief executive officer of JPMorgan Chase & Co., stood unsmiling before a class of 300 new analysts in a conference room at the Madison Avenue headquarters of the firm’s investment banking division. The analysts stared back in silence, seemingly confused. It was September 13, 2011. Markets were beginning to stabilize after a volatile summer that had seen Europe’s debt crisis spread to Italy and Spain and the U.S. lose its triple-A credit rating. Occupy Wall Street, the messy affair that would take root in lower Manhattan’s Zuccotti Park, was still four days away.

“You know — a bullshitter,” Dimon continued. “Someone who cheats on their tax forms, who gets dinner delivered to the office when they don’t need to be there. We all know one.” First one, then two, then a small forest of arms was raised in agreement. Yes, the analysts — including myself, then a new JPMorgan recruit — all knew a bullshitter. “Right,” Dimon continued. “Now hands up if you’re a bullshitter yourself!” More silence. No hands went up. Dimon, prowling at the front of the auditorium, did not approve. “There are probably a couple of you in here who are bullshitters. If you’re a bullshitter, you should leave now. We don’t want you.”

A year later the swagger that Dimon put on display that morning had all but disappeared. Complex derivatives trades made in early 2012 by JPMorgan’s chief investment office, supposedly to hedge risk, had racked up losses of more than $6 billion. Two of the traders involved have since been charged with wire fraud and conspiracy to falsify books. Despite haranguing his trainee analysts on the evils of deception, Dimon had apparently been blind to such behavior within his own firm.

“The reason the London Whale story was so compelling was that here was an institution that was supposed to be the best-operated bank on Wall Street,” says Phil Angelides, who chaired the U.S.’s Financial Crisis Inquiry Commission from 2009 to 2011. “But it turned out that even the best-managed institution on the Street couldn’t monitor or control its own exposures or even adhere to its own internal risk parameters.” Excessive risk-taking was one of the key accelerators of the cocktail of deregulation, lax underwriting and leverage that led to the financial crisis. But risk remains a persistent feature of the postcrisis world. And as Jamie Dimon can no doubt attest, it is an exceptionally difficult beast to control.

The Legacy of Lehman: A Look at the World 5 Years After the Financial Crisis

Five years after the collapse of Lehman Brothers Holdings precipitated the worst financial crisis since the Great Depression, is the world any safer? The question defies an easy answer. Governments in the U.S. and Europe have drafted new laws, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, that broaden the scope of regulation to areas such as credit default swaps and give authorities new powers to resolve troubled institutions. Global regulators have imposed substantially higher capital requirements on banks to strengthen their ability to handle losses. New institutions, such as the Financial Stability Oversight Council in the U.S. and the Financial Policy Committee in the U.K., have been created to monitor systemic risks and — officials hope — nip future problems like the subprime crisis in the bud. (See also “ The Ponzi Nation Topples”)

“The state of readiness to deal with threats to systemic financial stability is far greater today than it was in 2008,” asserts Mary Miller, the U.S Treasury’s undersecretary for domestic finance, who oversees the department’s work on financial stability.

Yet the changes shouldn’t leave anyone feeling particularly safe. Consider the banking system. Western governments spent hundreds of billions of dollars to prop up the system with capital injections, deposit guarantees and outright nationalizations, in some cases imperiling their own health to do so. But today the big banks are even bigger than before, and new, untested mechanisms designed to allow the authorities to resolve failed banks have convinced few in the markets that the days of bailouts are over.

Big chunks of the new regulatory infrastructure remain incomplete. The U.S. was the source of the crisis and has been at the heart of the response. Dodd-Frank contains the most comprehensive suite of reforms adopted by any government, ranging from overhauling the securitization process to bringing over-the-counter derivatives onto clearinghouses to creating a new consumer protection apparatus. Yet three years after Congress enacted the law, only 40 percent of its rules have been completed, according to Bart Chilton, who has sat on the Commodity Futures Trading Commission since 2007. The five main U.S. regulatory agencies charged with implementing the law were supposed to finish the job two years ago but are still struggling to write the myriad detailed rules required to make it effective. “Regulators by and large should have done much better,” Chilton says. (See also “ Bankers in a Bind”)

In the meantime, the market is innovating in ways that may render many of the rules obsolete. One example comes from the swaps market. As the CFTC has strained to develop rules for swap execution facilities — the exchangelike platforms that are intended to bring transparency and clarity to a previously opaque OTC market — exchanges such as CME Group and IntercontinentalExchange have offered hybrid “swap futures” products that, in broad terms, reproduce the economic relationship of a swap at a fraction of its price. These products promise to shift risks previously associated with swaps into a new vehicle. Business is booming, with the CME clearing more than 100,000 in August, up from 30,000 in December, the month it launched the contract. Regulators are now engaged in a mad dash to catch up, with the CFTC and the SEC scrambling to finalize their swaps rules. (See also “ New Rules, Old Risks”)

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The broader shadow banking system, moreover, remains a major source of risk to financial stability. This network of lightly regulated vehicles, including repurchase agreements and money market mutual funds, provides the short-term funding that lubricates the wholesale financial markets. Shadow banking played an instrumental role in the crisis: A run by institutional investors on short-term bank debt, mainly in the form of repos and commercial paper, threatened to bring the financial system down after Lehman’s failure. Today the shadow system is nearly as large as it was before the crisis, and regulators have struggled to rein in risk. Last year the U.S. Securities and Exchange Commission had to abandon a major reform proposal for money market funds in the face of industry opposition; it’s unclear whether the agency will succeed in its current effort to adopt a watered-down proposal. Market participants face a looming collateral shortfall that could disrupt wholesale markets. And technology poses as much peril as promise to financial institutions, judging by the latest snafu, which shut down the Nasdaq Stock Market for several hours in August.

The picture, critics say, is far from reassuring. “We’ve preserved and in many ways made significantly worse a very broken financial system dominated by a handful of financial institutions that have grown too large and too systemically significant,” says Neil Barofsky, former special inspector general for the $700 billion Troubled Asset Relief Program and now a senior fellow at the Center on the Administration of Criminal Law at the New York University School of Law. “And the bad incentives that were in place prior to the crisis have been made more significant and severe. We haven’t done anything to solve that — and unless we do, we’re still on the pathway toward the next crisis.” (See also “ Can Finance Be Fixed?”)

AS MAJOR COUNTRIES HAVE TIGHTENED capital requirements through the Basel III accord, big banks have pushed back. If standards are raised too high, they contend, banks will have less capacity to make loans, causing the economy to slow and financial risk to move into less tightly regulated entities, such as hedge funds and clearinghouses, that make up the shadow banking system. To date, however, there’s no evidence that raising capital has constrained lending or created new risks. Mutual funds have provided a substantial increase in credit to the U.S. high-yield corporate sector in recent years, says Tobias Adrian, head of capital markets research at the Federal Reserve Bank of New York. “There is nothing inherently unstable about this,” he says. Private equity funds and hedge funds have also stepped into the credit space more prominently, he adds, and because these funds are generally required by the very banks that lend to them to be well capitalized, no single fund constitutes a systemic risk to financial stability.

Yet shadow banking remains a primary concern of most observers. Size explains part of the preoccupation: Although the shadow banking system has shrunk somewhat since the crisis, reflecting a decline in securitization, it still accounts for nearly 40 percent of all liabilities in the U.S. financial sector, or $14.6 trillion, according to the New York Fed (see chart, page 52). Liabilities of commercial, federally insured banks, by contrast, are less than $17 trillion.

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