Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and former chief economist of the International Monetary Fund, said that the seeds of another collapse had already sprouted. If major banks are allowed to keep making bets that are ultimately backed by taxpayer guarantees, they will return to the practices that led them to underwrite trillions of dollars in bad loans, Professor Johnson said.
“They will run up big risks, they will fail again, they will hit us for a big check,” he predicted.
The doomsday view is far from universal. Wall Street executives say the Lehman Brothers bankruptcy opened their eyes to the fragility of their institutions. They note that they have pulled back on risk and reduced leverage, creating a bigger cushion against losses. And they say that regulators were right to support the financial industry over the last year, rather than imposing new rules or allowing weak banks to collapse.
“There is less leverage in the entire financial system,” said David A. Viniar, Goldman’s chief financial officer. At Goldman, $1 in capital now supports about $14 in loans and investments, compared with $24 a year ago.
