In August, Gillian Tett noted in Eliminate financial double-think that for the first seven years of this decade, most politicians, voters (and journalists) effectively ignored the extraordinary revolution brewing in the debt and derivatives world, because these areas of finance were widely (and wrongly) believed to be very boring, or so complex they could only be understood by a tiny technocratic elite. She continued with nice examples of unchecked inconsistencies (bankers promoting free market rhetoric while preventing the widespread dissemination of detailed data on, say, credit derivatives prices... Bankers having taken the idea of creative destruction as an article of faith, while assuming their own industry would never suffer too violent a wave of creative destruction... Bankers assuming securitisation (slicing and dicing risk) would create a more “complete”, free-market financial system while, by 2005, credit products had become so complex and bespoke, that most never traded at all).
The situation is the same today. Trader bashing still has a few addicts but how many articles did you see explaining how finance works, challenging assumptions and status quo (at the moment, challenging the consensus means defending financiers).

In June, an analysis by Martin Wolf was making clear the cautious approach to fixing banks will not work.

In August, Jean-Claude Trichet, the head of the European Central Bank, cautioned against a relapse into complacency and failure to carry through on promised financial reforms, as reported by the FT.

When Mr Caruana, the head of the Bank for International Settlements (BIS), warned against complacency ahead of the G20 in September, he stressed that higher capital requirements were the key reform, and would feature “counter-cyclical buffers” designed to ensure banks had enough high-quality capital in good times that they could eat through in times of trouble. Ahead of the same summit, I had commented on capital requirements. In preamble of his excellent analysis on narrow banks as a solution, Martin Wolf wrote: What entered the crisis was (...) an ill-managed, irresponsible, highly concentrated and undercapitalised financial sector, riddled with conflicts of interest and benefiting from implicit state guarantees. What is emerging is a slightly better capitalised financial sector, but one even more concentrated and benefiting from explicit state guarantees. This is not progress: it has to mean still more and bigger crises in the years ahead. Still...

In November, Clive Crook accurately wrote that the Congress misses the point of reform: the need for higher capital requirements is universally acknowledged. Better-capitalised institutions can weather storms that would sink their under-capitalised counterparts. Even if nothing else happens, additional capital would mitigate the problem of “too big to fail” by making failure less probable. But, as Lord Turner also remarked, discussion of what those requirements should be has hardly even begun.
He also fairly noted that a second main cause of the financial meltdown is barely even recognised (...) Too many US households and financial institutions got too deeply in debt. Housing-related debt was especially implicated in the mess. And it just so happens that debt in general, and housing-related debt in particular, attracts enormous implicit subsidy, especially in the US. (...) one surely ought to look hard at the tax policies that actively encourage indebtedness.

No wonder faith in governments' ability to reform is questioned.

Beyond capital, the reform was meant to focus on regulating derivatives markets.

In September, rooting speculators out of derivatives market was such a focus that final clients started worrying they'd be excluded as well from such markets! Progress was made on central clearing mostly by reforming the quoting mechanism of credit derivatives (toward fixed, standard, running spreads and variable up-fronts), with strong support from exchanges, but the movement is not finalized yet. Mid-October, it seemed no further progress was achieved. As reported on Bloomberg, Thomson provided the first test of the procedures for settling contracts triggered by a restructuring in Europe when it said in August it was deferring payments on $72.5 million of 6.05% private notes due this year. Deferring on part of the debt is a credit event, but is not a full default... The system for restructurings uses multiple auctions that set different payouts based on swap expiration dates. Dealers couldn’t settle the Thomson contracts with simpler failure-to-pay procedures that produce one recovery value because they were unable to prove the electronics company defaulted. To determine the size of the payouts on contracts covering $2 billion in debt, bonds and loans were split by maturity date ranges into three so-called buckets and sold at auction. So far so good, but then contracts that expired on June 20, 2012 -- the first bucket’s latest date -- sold for 96.25% of the face amount, meaning swap holders received 3.75% of the amount "covered." Swaps expiring a day later paid 34.875% (because the debt in that bucket went for 65.125%). Clearly the progress achieved did not yet lead to a satisfactory situation.

Finally, after capital and after regulating derivatives, the last pillar of the reform should have been accounting standards

In March, I had warned on the looming scandal but I was still under-estimating the horror that was to come. Early July, European Union finance ministers backed proposals for urgent reforms to lessen the impact of economic cycles on the banking sector. Meeting in Brussels, ministers agreed fundamental changes were needed to banking and accounting rules to encourage banks to build up bigger capital cushions in good times, which could be drawn on in an economic downturn. The City was already fighting back the U.K. chancellor's proposals on regulatory capital, so the busy U.K. government would not fight too hard for accounting standards... BIS chief called for evolution, not revolution, but despite repeated calls for reform, Europe did postpone reforms: Brussels  warned that a radical overhaul of rules on how banks value their assets could lead to greater volatility in their accounts, undermining broader financial stability. With such poor justification, the EU delayed adoption of accounting rule changes.

At this stage, you might be forgiven for asking: what were the politicians thinking? Well, very early, the U.K. resisted any European influence on the City ("protecting the competitiveness of the City"). This led France, who already had ambitions, to push even stronger for control of the key job of internal market commissioner in the new Commission. France successfully got Michel Barnier in the job, which is a disaster given the minister was well known for not understanding a word from his advisers when he briefly was Foreign minister in France! He was known to have been a decent regional commissioner, but I guess agricultural subsidies and bank subsidies are not similar. Cows and credit derivatives, all the same? The English and their City fear the worst, and they may be right on this one... As long as politics think about their pawns in this job or that job, rather than reforms, no good reform will come up.

Last but not least, lessons are not learnt yet.
Tony Jackson wrote in the FT an excellent article about carbon trading and its simplicity and harmless potential, but included a warning sign: When I first studied credit derivatives six years ago I decided they were harmless, precisely because they were still fairly simple. I also took heart from the fact that several banks and insurers had blundered into this (at the time) new market and retired hurt. But in the event, that simply gave remaining operators the false assurance that they knew what they were doing. (A situation that contributed to the recent financial crisis) And sure enough, several continental banks and insurers have recently retired hurt from carbon trading.
From another perspective, Richard Bernstein wrote to the FT that lessons of investing are still ignored.

2009, the wasted opportunity?