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2008 Financial Meltdown: Could History Repeat Itself?

Five years ago on Sept. 15, 2008, the unthinkable happened: Lehman Brothers filed for bankruptcy and the worst financial crisis since the Great Depression was set in motion. As the excesses of Wall Street came to light, countless investors lost their life savings. The question now is what have we learned and could history repeat itself?

To be sure, several reforms –  including the Dodd-Frank Wall Street Reform and Consumer Act and the Troubled Asset Relief Program – have been created to improve regulatory oversight  of Wall Street and prevent a repeat performance of the 2008 financial meltdown. But are they enough? Many financial experts say “no.”

One view comes from former Treasury Secretary Henry Paulson, who recently told a group of bankers and economists that many of the factors that led to the financial crisis of 2008 remain today.  As reported Sept. 9 by Bloomberg Businessweek, when asked whether another crisis could, in fact, occur, Paulson responded with: “The answer, I’m afraid, is yes.”

A recent article by USA Today also addresses the effectiveness of the steps that have been taken since 2008 to restore financial stability to the nation’s financial markets. In the story, Sheila Blair, who served as chairperson of the FDIC in 2008, “warned that the U.S. stock and bond markets have grown overvalued in response to low interest rates and the Federal Reserve Board’s policy of quantitative easing – buying Treasury bonds and other government securities from financial markets in a bid to promote more lending and liquidity. The Fed has signaled it could start tapering the program as early as this month.”

Adding to the gloomy forecast of whether another financial meltdown could occur is the fact that the financial instruments – i.e. collateral debt obligations – largely responsible for bringing down Lehman Brothers appear to be staging a comeback on Wall Street. CDOs are the riskiest, most complex of asset-backed securities. Collateralized debt obligations pool bonds and offer investors a slice of the pool. The higher the risk, the more a CDO pays. To date, $44 billion worth of CDOs have been sold, putting this part of the structured finance business on course for its biggest year since 2007, said the industry group SIFMA in a recent USA Today article.

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