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Risk-taking is back for banks 1 year after crisis
Banks' appetite for risk is rebounding 1 year after crisis: Is the financial system any safer?

By STEVENSON JACOBS, Associated Press
Last updated: 3:15 p.m., Sunday, September 13, 2009

NEW YORK -- A year after the financial system nearly collapsed, the nation's biggest banks are bigger and regaining their appetite for risk.
     
Goldman Sachs, JPMorgan Chase and others -- which have received tens of billions of dollars in federal aid -- are once more betting big on bonds, commodities and exotic financial products, trading that nearly stopped during the financial crisis.

That Wall Street is making money again in essentially the same ways that thrust the banking system into chaos last fall is reason for concern on several levels, financial analysts and government officials say.

-- There have been no significant changes to the federal rules governing their behavior. Proposals that have been made to better monitor the financial system and to police the products banks sell to consumers have been held up by lobbyists, lawmakers and turf-protecting regulators.

-- Through mergers and the failure of Lehman Brothers, the mammoth banks whose near-collapse prompted government rescues have gotten even bigger, increasing the risk they pose to the financial system. And they still make bets that, in the aggregate, are worth far more than the capital they have on hand to cover against potential losses.

-- The government's response to last year's meltdown was to spend whatever it takes to protect the financial system from collapse -- a precedent that could encourage even greater risk-taking from the private sector.

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.

"You cannot rely on the scars of past crises to ensure against practices that will lead to future crises," Summers says.

No one is predicting another meltdown from risky trading in the near term. Rather, the concern is what happens over time as banks' confidence grows and the memory of the financial crisis of 2008 fades.

Will they pile on bets to the point that a new asset bubble forms and -- as happened with mortgage-backed securities -- its undoing endangers banks and the broader economy?

"We're seeing the same kind of behavior from the banks, and that could lead to some huge and scary parallels," says Simon Johnson, former chief economist with the International Monetary Fund.

Some risk-taking is good. When banks are willing to invest in companies or lend to home-buyers, that nurtures economic growth by generating employment and consumer spending, feeding a cycle of expansion.

The problem is when banks' quest for profits leads them to take on too much risk. In the case of the housing bubble, which burst last year, banks lent too freely to consumers with weak credit and wagered too much on complex financial instruments tied to mortgages. As real-estate prices turned south, so did the financial industry's health.

Because the largest banks' trading divisions make their bets with each other, their fortunes are intertwined. The collapse of one can threaten another -- and another -- if it is unable to pay off its debts....................>>>>....................................>>>>.................http://www.timesunion.com/AspStories/story.asp?storyID=841461