Another financial collapse more possible than you’d think

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Nearly five years to the day since Lehman went belly up, everyone is asking the same question: Can a similarly catastrophic financial collapse happen again? Wall Street says no. Pundits aren’t so sure.

MarketWatch contributor Mark Hulbert, who keeps a stockpile of client communication from financial advisers, dug through more than 200 files and found that the discourse is as upbeat now as it was just two months before the 2008 financial collapse. “With very few exceptions, they were remarkably complacent at that time — if not downright upbeat.” Sounds rather similar to the current environment.

Obviously Hulbert’s argument has some holes. Wall Street was generally blindsided by the collapse, with few big names fully acknowledging how overleveraged and under-capitalized banks truly were. Dodd-Frank and other regulations have fixed some of those problems, forcing banks to carry more capital and curbing risky maneuvers like prop trading. But several warning signs still exist.

One, banks aren’t getting smaller. In fact, they’re growing. The six largest U.S. banks have seen their combined assets increase 28% since 2007, according to Bloomberg. And while leverage on Wall Street has subsided, governments continue to print paper.

Another key barometer of stability on Wall Street is transparency. Yes, things have improved incrementally, but the markets still operate in a rather opaque fashion. Banks have been rather successful in hiding risk since the crisis – just look at the “London Whale” derivatives bets. The bets weren’t just hidden from regulators, but also from top J.P. Morgan executives. As much as $5 trillion in derivative assets are still kept off balance sheets at U.S. banks.

Finally, there’s a lack of teeth and timing when it comes to Wall Street regulations. Several aspects of Dodd-Frank have been softened while their implementation has been delayed numerous times.

Now that’s not to say that another collapse is in our near future. But to say there is a near zero percent chance of something similar happening again, well that seems like hopeful thinking. There is still plenty more to be done.

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  1. Forget business casual. Wear a suit or jeans.
  2. Time is too short to be doing your own laundry.
  3. Buy a tux before you are 30, and stay that size.

(Source: Business Insider)

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