As we approached the tenth anniversary of the start of the financial crisis on August 9, 2007, global financial regulators are declaring victory.  They claim the financial system is sound, stable and that another financial crisis is unlikely in our lifetimes.

What complete and utter bunk!

In many ways, the global financial system is even more fragile now than it was in 2007.

Why do I say this? Because the risks in large parts of the financial system are still hidden behind a veil of opacity.

For example, after the financial crisis accelerated in 2008, the Bank of England’s Andy Haldane referred to banks as black boxes.  In the last decade, nothing has happened to shed light on the risk hiding in these black boxes.  In fact, these black box banks have been made even murkier by the suspension of mark-to-market accounting.

I realize many will say we know the banks are safer because they have passed an annual stress test.  Why you would think the regulators’ pronouncement on bank solvency are trustworthy when these same regulators missed the London Whale?

Banks are not the only place risk is hidden in the financial system.

We still have $350 trillion of derivatives (aka Warren Buffett’s weapons of mass financial destruction).  We don’t know the terms of these derivatives or who the counter-parties are.

I realize many will say we now have central clearing platforms for many derivatives to prevent contagion from spreading between counter-parties.  While these platforms may slow the spread of contagion, they won’t stop contagion.  The reason why is simple. Inter-bank exposure is not limited to derivatives.  A bank that can not repay its derivatives is likely to not be able to repay its other exposures too.