A certain type of structural transformation in American capitalism occurs gradually over a number of crises, each of which serves as a rationale for political acts that would not have been feasible in isolation. The most obvious modern illustration of that pattern is the course of Wall Street from the fall of Lehman Brothers in September 2008 to the present. Over the course of seventeen years, what was meant to be a moment of reckoning for the banking sector has instead turned into a moment of consolidation. The large banks are larger. At the top, the benefits are more substantial. By nearly every conceivable metric, there has been less accountability for the individuals who really made the decisions.
Even if the specifics become complex, the main plot is rather simple to convey. The credit markets clogged up almost instantly after Lehman declared bankruptcy on a Sunday night in lower Manhattan. AIG was on the verge of failure. Once thought to be as secure as cash, money market funds started to “break the buck.” Under the direction of Henry Paulson and Ben Bernanke, respectively, the Treasury Department and the Federal Reserve determined that the cost of letting more institutions fail was just too great. In addition to facilitating forced mergers and extending emergency liquidity, the government used the Troubled Asset Relief Program to provide capital to the biggest banks whether or not they actually required it. The system was spared. Except for Lehman and Bear Stearns, the institutions responsible for the crisis were not only kept intact but were frequently permitted to absorb their bankrupt rivals.
The aspect of the narrative that most clearly explains why the banking sector looks so different now than it did in 2007 is that consolidation. Washington Mutual and Bear Stearns were acquired by JPMorgan. Merrill Lynch and Countrywide were purchased by Bank of America. Wachovia was taken by Wells Fargo. As a result, the “Big Six” American banks came out of the crisis with a far higher proportion of all banking assets than they had before. At the international level, the similar pattern emerged. Today’s biggest banks each have trillions of dollars in assets, and the gap between the next tier and the systemically significant institutions has only gotten bigger. By all honest measures, the “too big to fail” issue that the Dodd-Frank Act of 2010 was intended to solve has gotten worse rather than better.
The business model itself has evolved in tandem with the consolidation. In general, Wall Street was a securities company in the 1990s and early 2000s. Banks managed clients’ funds, created markets, underwrote deals, and offered merger advice. In 2026, Wall Street will look different. Derivatives, structured products, and private market activities that function outside of the conventional public-securities framework account for a sizable amount of the earnings of the biggest institutions, which have evolved into sophisticated trading and lending houses.
The expansion of private credit, which is getting close to two trillion dollars worldwide, and private equity, which currently oversees multitrillion-dollar capital pools, has produced a whole shadow banking system that functions with far less regulatory control than the conventional banking industry. One of the less noticeable but most significant changes of the post-Lehman era has been the movement of activity into less regulated markets.
The story’s compensation section elicits the strongest emotional response from the general audience. Over the past fifteen years, senior Wall Street traders and executives have amassed wealth at a rate that has separated from the whole American economy. The compensation of bank CEOs and senior managing directors has reached levels that would have been politically impossible to defend in 2009, while median household net worth stagnated for years following the financial crisis, especially among lower- and middle-income families that lost homes during the foreclosure wave. The talent’s ability to command a worldwide market price has always been used as justification. In actuality, a relatively small number of people have benefited most from the emergency Federal Reserve operations.
Historians will likely spend the most effort analyzing the accountability gap. According to any credible analysis of the public record, certain decisions made by some individuals at certain institutions were the cause of the 2008 financial crisis. There was deliberate mis-selling of mortgage-backed securities. Litigation exposed internal correspondence that showed traders freely describing their products in ways that implied they were aware of the fraud being committed. However, it is impossible to tally the number of senior executives at significant U.S. financial institutions who have been found guilty of crimes related to their roles in the crisis. Penalties were paid. Shareholders, frequently those who had already lost the majority of their capital during the crisis, compensated them. With very few exceptions, the culprits were not held directly accountable.
These issues were intended to be addressed by the Dodd-Frank Act, which was passed in 2010. It established new regulatory agencies, such as the Consumer Financial Protection Bureau and the Financial Stability Oversight Council. Stress testing, resolution planning, and increased capital requirements were implemented. By most accounts, the financial sector is now more resilient than it was in 2007 thanks to some of these improvements.
Despite being unpleasant, the 2023 failures of Silicon Valley Bank, Signature Bank, and First Republic did not result in a systemic disaster. That is a significant accomplishment of the post-Lehman regulatory framework. However, Dodd-Frank did not change the fundamental political economy of bailouts or lessen industry concentration. The biggest institutions are still almost assured that if their failure jeopardizes wider stability, the government will step in.
Perhaps more than before, the revolving door between Wall Street and Washington has been turning. The frequency with which senior Treasury officials, Federal Reserve governors, and SEC commissioners have taken lucrative jobs at the companies they once oversaw is astounding. Although there have always been personal and cultural linkages between the financial sector and policymakers, the post-crisis decade has, if anything, normalized them. It is reasonable to argue that the financial sector requires seasoned regulators with extensive technical expertise. It is more difficult to dispute the claim that those same regulators nearly often wind up working for the biggest companies after leaving public service. By now, the pattern is just anticipated.