By the time Lehman Brothers filed for the largest bankruptcy in American history on Sept. 15, 2008, the country had been navigating stormy global financial waters for more than a year. Bear Stearns had been rescued in a bailout-facilitated merger with JPMorgan Chase, and the government had nationalized housing giants Fannie Mae and Freddie Mac. For anyone paying attention to the financial system, the situation had been quite dire for a long time.
And yet throughout the mess, the Federal Reserve and the U.S. Treasury had been permitting the largest banks in the country to funnel as much cash as they wanted to their shareholders ― even as it became clear those same banks could not pay their debts. Lehman itself had increased its dividend and announced a $100 million stock buyback at the beginning of 2008. Insurance giant AIG paid its highest dividend in company history on Sept. 19, 2008 ― three days after the Federal Reserve handed the insurance giant $85 billion in emergency funds. According to Stanford University Business School Professor Anat Admati, the 19 biggest American banks passed out $80 billion in dividends between the summer of 2007 and the close of 2008. They drew $160 billion in bailout funds from the U.S. Treasury, and untold billions from the Fed’s $7.7 trillion in emergency lending.
When poor people engage in such activity, we call it looting. But for the princes of American capital and their lieutenants at the Fed and the Treasury, this was pure crisis management.
Today, Ben Bernanke, Hank Paulson and Timothy Geithner insist they did what they had to under conditions of extreme duress. Mistakes were made, the government’s former top financial overseers acknowledge in a recent piece for The New York Times, but they did ultimately “prevent the collapse of the financial system and avoid another Great Depression.”
Except they didn’t really rescue the banking system. They transformed it into an unaccountable criminal syndicate. In the years since the crash, the biggest Wall Street banks have been caught laundering drug money, violating U.S. sanctions against Iran and Cuba, bribing foreign government officials, making illegal campaign contributions to a state regulator and manipulating the market for U.S. government debt. Citibank, JPMorgan, Royal Bank of Scotland, Barclays and UBS even pleaded guilty to felonies for manipulating currency markets.
Not a single human being has served a day in jail for any of it.
The financial crisis that reached its climax on that Monday morning 10 years ago was not fundamentally a problem of capital, liquidity or regulation. It was a crisis of democracy that taught middle-class families a grim lesson about who really mattered in American society ― and who didn’t count.
“The failures of the crash and the bailout were not technocratic failures. They were about power.”
For most of American history, financial policy was a central political battleground. There was the feud between Thomas Jefferson and Alexander Hamilton over Revolutionary War debt; the Whiskey Rebellion; Andrew Jackson’s assault on the Second Bank of The United States; the greenbacks Abraham Lincoln issued to help finance the Civil War; William Jennings Bryan and the cross of gold; the creation of the Federal Reserve; FDR’s New Deal. These were among the most heated political issues of their day. And they were all understood to be questions of power and democratic accountability, not merely matters of growth or efficiency.
But beginning in the 1950s, the United States increasingly came to understand finance as apolitical ― something best handled by technocratic experts insulated from the passions of a democratic electorate. This idea went by different slogans ― “the liberal consensus,” “the great moderation,” “central bank independence” ― but they all amounted to the same thing: The economy was nonideological. The decisions made by experts tending to the financial machine were were strictly tactical. Any mistakes were a matter of pulling the wrong lever or setting a dial too high.
The financial crisis exploded this myth. “The failures of the crash and the bailout were not technocratic failures,” says University of Georgia law professor Mehrsa Baradaran. “They were about power.”
Lehman would be the only major American financial institution to out-and-out fail in the crisis. Everyone else was bailed out on generous terms that not only protected their creditors, but their shareholders and ― with the exception of AIG ― the jobs of their top executives. Criminals who broke the law were shielded from prosecution.
Here’s what happened to everyone who didn’t work for a bank: As a percentage of each family’s overall wealth, the poorer you were, the more you lost in the crash. The top 1 percent of U.S. households ultimately captured more than half of the economic gains over the course of the Obama years, while the bottom 99 percent never recovered their losses from the crash.
These were policy choices, not economic inevitabilities. Under presidents George W. Bush and Barack Obama, the government saved the financial sector by pumping it full of cash, and then taking unprecedented steps to elevate the value of financial assets. For anyone who owned stocks and bonds (otherwise known as rich people), this was great news.
But there was no similar commitment to housing ― where middle-class people held their wealth. Instead, over 7.7 million homes were lost to foreclosure between 2007 and 2016, while millions more found the source of their savings ― home equity ― wiped out.
It could have been different. When Obama took office, he promised to spend up to $100 billion from the bank bailout to prevent foreclosures. He ultimately spent just $21 billion. But the dollar amount was only a fraction of the failure. The bailout gave the government unprecedented authority over the foreclosure process ― it could have required banks to adjust monthly payments or reduce debt burdens for homeowners in distress. Instead, as Geithner put it, the foreclosure relief plan was designed to “foam the runway” for banks coming in for a hard landing. It allowed banks to slow down the pace of foreclosures, but did not actually help families keep their homes.
Geithner hadn’t set the dials wrong. He had made a choice about who deserved the government’s full attention and how aid would be distributed. And he had done it without any meaningful input from Congress, or even a public debate.
“It led to a breakdown and a lack of trust in institutions,” says Admati. “What we witnessed here … is kind of ominous. It raised a lot of questions about who controls society ― corporations or the elected government.”
Financial crises foment authoritarianism. In 2015, a trio of German economists studied financial panics in 20 advanced economies dating back to 1870, and concluded that they almost always result in major gains for “far right” political parties after a lag of a few years. The most pressing question for policymakers facing a banking meltdown is not, “How do we restore our banks to profitability?” but, “How can we prevent social collapse?”
And on this front, the technocrats at the top of American government failed every bit as thoroughly as their counterparts in Europe. By crafting bailout-and-austerity packages that protected German and French banks while imposing direct hardship on everyone else, the International Monetary Fund, the European Central Bank and German Chancellor Angela Merkel sent a very clear message about whom the European Union really represents.
The result has been a predictable and terrifying resurgence of authoritarian politics unseen since the Second World War. In Greece, it takes the form of the neo-Nazi Golden Dawn. In Italy, it has taken power as the Five Star Movement. In Austria, it is the Freedom Party; in Hungary, the government of Viktor Orban. And in the United States, it has manifested in the presidency of Donald Trump.
There’s an obvious paradox in the American plotline. Trump is part of a rising international authoritarian tide, but the financial crisis disproportionately hammered black and brown families. How did it empower a white nationalist presidency?
On average, black and Hispanic families lost fully half of their net worth in the crash. The racial wealth gap expanded during the recovery, as black housing wealth was obliterated. At the peak of the housing bubble, almost half of all mortgages to black families were subprime loans, and foreclosures were heavily concentrated in black neighborhoods. By 2013, median black family wealth had fallen to just $13,487, according to the Urban Institute. Even in 2016, it had only recovered to $17,409, about one-tenth the median white family wealth of $171,000.
The paradox has a simple answer. In America’s two-party system, black frustration with the Democratic Party registers as low voter turnout, while white people angry with the Democratic Party turn into Republicans. An increasingly racist GOP doesn’t offer much to black families, so they stay home on election day, while plenty of white Democrats were either willing to hold their nose and vote for Trump, or found his demagoguery more appealing once Democrats had privileged the concerns of banking elites over the middle class.
For incorrigible optimists, there are some signs of improvement in the banking sector a decade after its near-death experience. Banks have more capital than they used to, a new regulatory agency now exists to help protect families from abusive financial products, and the complex derivatives at the heart of the 2008 crash now have to be traded through clearinghouses.
There’s less here than meets the eye. Offshoring loopholes enable banks to hide their derivatives trades. The Consumer Financial Protection Bureau is being systematically gutted by the Trump administration. And banks aren’t really carrying all that much more capital. When Lehman failed, it was carrying debt equal to 31 times its total equity. This leverage amplified Lehman’s profits during good years, but it also amplified its losses in a bad year. The new rules from the 2010 Dodd-Frank law are an improvement, but they still allow 20-to-1 leverage. The Volcker Rule banning banks from making risky securities trades for their own accounts has never fully taken effect, and under a new proposal from Trump regulators, never really will.
But even debates over these rules miss the point. The crisis wasn’t just a breakdown of regulatory oversight. It was a failure of the democratic process, of economic management as an apolitical, technocratic field. When people don’t feel included in the most important decisions affecting their basic livelihood, they lose faith in democracy itself.
“You can’t pull something out of the democratic sphere and expect people to be happy with inequality,” Baradaran says.
Clarification: A previous version of this article stated an AIG dividend dollar amount on September 19, 2008 adjusted for a 2009 reverse-stock split. The dollar amount has been removed to better reflect the situation policymakers faced at the time.