Sanders vs. Clinton on Wall St. Reform

Former financial regulator Bill Black and Roosevelt Institute Fellow Mike Konczal take on the policies of the two contenders for the Democratic nomination

biography

William K. Black, author of The Best Way to Rob a Bank is to Own One, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.

Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.

Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.

Mike Konczal is a Fellow with the Roosevelt Institute, works on financial reform, structural unemployment, consumer access to financial services, and inequality. He blogs for New Deal 2.0 and the Rortybomb, and his work has appeared at The Atlantic Monthly's Business Channel, NPR's Planet Money, the Baseline Scenario, Huffington Post, and The Nation. He was formerly a financial engineer and mathematical analyst. Konczal holds a MS in Finance and a BS in Mathematics from the University of Illinois at Urbana-Champaign.

transcript

Sanders vs. Clinton on Wall St. Reform

PAUL JAY, SENIOR EDITOR, TRNN: But joining me now, first of all, in Bloomington, Minnesota. Bill Black is an associate professor of economics and law at the University of Missouri, Kansas City. He's a white-collar criminologist, a former financial regulator, and author of the book that has one of the best titles I ever heard: The Best Way to Rob a Bank is to Own One. And he's also a founding member of the Bank Whistleblowers United, and he'll get a chance to talk about that in a second. Also joining us from Washington, DC is Mike Konczal. He's a fellow with the Roosevelt Institute, where he works on financial reform, unemployment, inequality, and a progressive vision of the economy. Thanks very much for joining us, Mike.

Bill, let's start with you. There's been a lot of debate about financial reform between Hillary Clinton and Bernie Sanders. Compare the Clinton plan to the Sanders plan, in terms of reining in Wall Street. They both essentially say they want to rein in the excesses of capitalism, and Wall Street is the epitome of excesses of capitalism. So how do you compare the way that each of them might rein it in?

BILL BLACK: Okay, so first, there's, in the econ biz, we talk about revealed preferences. And clearly the revealed preference is that Wall Street hates Bernie's plan and doesn't view Hillary's plan as a threat. They've said that in repeated global financial publications, and you've seen that in their contributions and news stories out on Bloomberg today, for example, about this.

It is true that the Sanders plan is more aggressive on two critical matters. One is the so-called too big to fail, the systemically dangerous institutions, and the other is restoring Glass-Steagall, which a prior guest talked about some. But both the Sanders and the Clinton plans, in terms of Hillary's description of, the vision of life, both of them are actually poetry instead of prose. Most of what they've written can't be implemented without new legislation, and they all know they're not going to get that new legislation.

So what we did, we're a bunch of experienced folks from banking and regulation who, you know, got in trouble because we told the truth, and are unemployable in banking and finance, was create a very detailed series of plans that could be implemented without any new legislation and without any new rule making. You could, for example--.

JAY: Bill, just let me interrupt you for a second. This is something a president could do by executive order if the president wanted to? Or--.

BLACK: Not by executive order, but the regulatory appointees could do this without any new rules. And I can announce somebody in your locale, the first politician has agreed to pledge to support implementation of this plan in full, and the contribution limits, and it's Margaret Flowers. And she is the candidate for the Green nomination for the U.S. Senate for Maryland.

JAY: Okay. So, so in other words, this counters the argument that nothing can be done because of the current Congress, because you're saying a lot could be done because of the kind of people you would appoint to head the agencies that would actually implement existing law that right now doesn't get implemented so seriously. Is that, am I getting it correctly?

BLACK: Right. We have deliberately crafted it so that it can be done without new legislation and without new rules, and it's quite detailed. You can see about 25 pages that spell out the specific implementation steps to do it.

So you know, nobody, we're economists and bankers and such. Nobody ever accused us of having the capability for poetry. So it's all prose.

JAY: Mike, you wrote an article in the Nation where you talked about Sanders' proposal to break up the big banks, but that it doesn't really go far enough, that a lot more has to be done on the regulatory side, in terms of regulatory changes. And in fact, you were suggesting that Clinton regulatory changes actually could be more effective than simply breaking up big banks, that I guess what you want to see is Sanders and Clinton campaigns, are promises combined. Explain, explain that. And I wonder--go ahead.

KONCZAL: Sure. So as, as Bill described, this is a world, as opposed to some things like healthcare, where the priorities a president has can make a really big difference. Who their treasury secretary, who they appoint to the Federal Reserve, what kind of mandates they have. And it's specifically how they diagnose what the problem is will have a real difference. So these things are really important, even if Congress remains very polarized and very divided.

I think a quick way to summarize their differences is Bernie Sanders is really looking to the biggest institutions, where Hillary is tending to look a little bit more at the activities. So Bernie Sanders wants to take the biggest banks, the biggest institutions, especially the six biggest, and essentially break them up, both in terms of their business lines, like Glass-Steagall, and their size, in terms of size caps.

Hillary Clinton's focused a lot more on activities. Things that are called shadow banking. But essentially the idea that a lot of firms can get in trouble with the problems of banking, and thus need a certain kind of credential regulation that historically they haven't had. She's also talking a lot about something called short-termism, or just the kind of pressure finance puts on the real economy to put more money into shareholder payouts and dividends, and stockholders, as opposed to real investment and workers.

Let's be charitable and say Hillary Clinton's plans on those second two things are a good first step. What I would love to see is Bernie Sanders also take them on, and put the second and third steps that are really necessary to make them work. Because I think that's really the three parts of a full left agenda on finance. You have to look at the power of the biggest institutions. All the activities in the financial sector, not just the biggest ones. And also the way finance really distorts the real economy, and makes a much less productive economy. Put those three things together, which I think Bernie could do if he took Hillary's plan and kicked it up a little bit. And then I think we're really talking about a future that we can believe in.

JAY: Okay. But aren't you essentially saying Hillary's plan is actually more effective than the current Sanders plan?

KONCZAL: You know, I think they're just different focuses. You know, there's a matter of how much you want to relatively weight them. I think there's a lot of disagreement about the importance of Glass-Steagall. I think people who are very concerned about the financial sector can come to very different conclusions about how prioritized that could be. I'm a big fan of break up the banks. I think we've had such good results with forcing banks to fund themselves more with equity than debt, so-called capital requirements, that that's a really useful way to push forward, that I would like to see Bernie use that language a little bit more. I think there's a real consensus that moves there.

I do think it's fair to say that Bernie's plan is incomplete unless [there] really addresses those other two issues. I think it also, I think just from Bernie Sanders' point of view, is that it would kind of cut off some of the criticism, yes, that he's too myopically focused on the biggest banks. Just in absorbing these things as [inaud.] things. Because I think, you know, break up the banks is very powerful language, it points to a real problem in our economy. But there are also other problems in the financial sector.

JAY: Okay. Bill, respond to what Mike was saying, that essentially there's quite a few elements, if I'm hearing him correctly, of the Clinton plan. That makes sense, and he'd like the Sanders campaign to adopt them. What do you make of that?

BLACK: Well, I think there are parts to the Clinton plan that make sense, but they are the poetry parts. In other words, there are things that overwhelmingly, that Mike just stressed can't be done without new legislation in general. And so--and they would require, even when she got the legislation and rulemaking, and with the DC circuit and all those nasty type of things, you're talking about many years to get things done. Mike and I probably have very broad agreement on a large number of these things.

First, you should stress the five or six largest banks. And Mike would, as well. Because this is where all the derivatives are. Something like 95 percent of all the derivatives are in those five or six banks. And they do pose very special problems, and we need to get them to the point where we aren't rolling the dice every day for when the next global crisis will occur. Not if, when. Because these--all history says these institutions will fail over time, and they will take down the global system.

So--and capital in the way that Hillary is thinking of it will not work. Hillary still thinks that capital is actually money in a vault. It's simply an accounting residual. Assets minus liability equals capital. If you inflate assets or understate liabilities, voila, you have huge capital, your Lehman Brothers, Bear Stearns, et cetera, et cetera, et cetera. So yes, capital is part of the story, it's good. But you can't simply assume that because they report they have capital that there is actually any capital there.

So once you deal with those six, you have another 15 that you have to deal with that are also too big to fail. And I think the Sanders regime needs--actually I think all the candidates, Republican, Democrats, need to get rid of those institutions.

Now, our group thinks that it is really critical to bring back Glass-Steagall. Now, to pick up your discussion, you are correct, and I've said it before on Real News, that Glass-Steagall had endured the, you know, the death of a thousand cuts mostly at the hands of a certain head of the Federal Reserve, right.

JAY: And to a large extent during the presidency of Bill Clinton.

BLACK: Both the presidency of Bill Clinton and of Bush. But yes, much of it was done with Clinton. So you have to bring back Glass-Steagall when it actually wasn't swiss cheese. But it's a very good thing to do that. And most of the arguments against it really don't make a lot of conceptual sense.

So for example, you hear, well, this wasn't the cause of the most recent crisis. Well, A, that's irrelevant, because you don't just prepare to fight the last war, right? We all emphasize to our students, don't think that way. Second, before the crisis, once we repealed Glass-Steagall, there were a whole series of scandals, and a whole series of large losses, because we brought investment banking into commercial banking. And once we got to the crisis, the losses just in those actions authorized by the repeal of Glass-Steagall were sufficient to bring down Citigroup, one of the largest banks in the world. And while, yes, Lehman prompted the financial crisis, if there hadn't been Lehman, Citi would have brought it down as well.

And the so-called shadow banks, well, where did they get their financing? And indeed, in many cases they were actually affiliates of the largest banks in the world. So they wouldn't have gotten anywhere near as large, and the systemically dangerous institutions wouldn't have gotten anywhere near as large. Because when Glass-Steagall was repealed, virtually all the securities activities that go into banks, they went into the eight or so largest banks, and indeed overwhelmingly they went into the six largest banks.

And then there's the dispersion. If you're a libertarian or a conservative, in particular, you must think this is nuts. So an investment bank gets to take an ownership position. It gets to own things. It can buy an auto company. And it gets a direct federal subsidy from deposit insurance, and then it gets an indirect subsidy from this too big to fail. And they compete against some other company that doesn't have it. Now, that's, to economists that's nuts, that really distorts the economy. But we're also on the hook as treasury for all of that. And let's recall, turn around the shadow argument. Hillary argues, hey, three of the five investment--biggest investment banks in America failed. Quite correct. Out of five, that's a 60 percent failure rate. So why are we providing deposit insurance to people doing securities, right--.

So I think the place that we have in common is individual minimum capital requirements.

JAY: Mike, I want to come back to you and talk about breaking up the big banks. I mean, obviously a lot of how significant this is going to be is going to be in the detail. But I've not heard Bernie Sanders talk about how to break up the big banks. In other words, if you don't have some serious anti-trust kind of legislation, I would think, that would stop the same pools of capital owning the smaller banks, then does it really make that much difference? I mean, you have to--don't you have to break up who owns these other banks rather than just break up the banks? Mike.

KONCZAL: So Bernie Sanders has emphasized using powers within Dodd-Frank. Right now in Dodd-Frank, regulators, if they believe a bank is a systemic threat to the economy, can make very drastic and very dramatic changes to their structure. They can break off business lines, force them to do things very differently, break them up, as opposed--you know, impose size caps.

The process he has described for doing it is a hard one. It requires a lot of regulators. He would need to appoint essentially about seven out of ten of the regulators to be on board with the project. But just having a Treasury secretary and just having a Federal Reserve chair, Janet Yellen's term will end a year into the next person's--whoever the next president is, a year into their term.

You know, there's a lot of soft pressure in the regulatory atmosphere that could, you know, discourage consolid--further consolidation. Encourage, you know, stricter enforcement. It does have a trickle effect, and it does have--it can have a pretty big knock-on effect, even if you can't get the votes. Meaning if he can't get the pressure to where he wants it to be to fully break them down in size.

JAY: Bill, same question. I mean, when, in your whistleblowers group you're talking about using existing regulation. So can you use existing regulation to break up the big banks, and do it in a way that the same people don't wind up owning these various other structures, anyway? We saw breaking up of phone companies, and they wound up kind of re-concentrating and emerging as, you know, maybe more, but bigger monopolies again, and you know, similar pools of capital controlling them.

BLACK: Yes, you can do it. And you can do it in a much easier way than under Dodd-Frank, under authority that's existed for over a quarter century called the individual minimum capital requirement. And you don't need--Mike is quite correct about how the committee votes work, but you don't have to go through those kind of committee votes. So you can do that, and you use, as Mike talked about earlier, capital. But we're talking about capital requirements that actually track the global risk that these places impose. And that is enormous.

And that means the capital requirement would be--if you did it in an actuarially sound way, which is what we recommend, would be extraordinary. And the banks would have to shrink, and they would shrink to the level that they no longer posed a systemic risk. We would also use the same device to bring back, effectively, Glass-Steagall. Because, again, I've just said, you had a 60 percent failure rate when you are doing investment banking. So if somebody wants to do investment banking they're going to face capital requirements in the 40, 50, 60 percent range. They're not going to do it, in other words, in those circumstances.

And we suggest that this is also the way to do what is in many ways the most critical change. And that is the perverse compensation systems that exist now in both executive compensation, but also professionals. This is how they suborned the credit rating agencies, the top-tier audit firms, the appraisers and such. And there is really nothing effective in Dodd-Frank against this, and so you could use the individual minimum capital requirements, saying look, you have, you create perverse incentives. Your risk of failure is massively greater, and again, you will face capital requirements in the 40, 50, 60 percent range. In other words, you're not going to be able to do it in these circumstances.

So yeah, it doesn't matter where they come, try to hide through shell devices, as long as they have these kinds of perverse incentive systems. Either they're doing securities activities or they have the perverse compensation systems. And the individual minimum capital requirement, with no new regulations, no statutory changes, all prose, could be used by any president. So this isn't something we have offered just to Democratic candidates. We want any and every--we want voters, whoever you support, put your candidate on notice. Do you pledge to implement the whistleblowers plan?

JAY: All right, gentlemen, we're going to of course in coming days dig into all of this a lot more, but I want to thank you for joining us. Tonight we'll go back to Des Moines, but thank you ,Bill, thank you, Mike. And we'll go back to live in Des Moines and catch up with what's happening there.

BLACK: Thank you, Mike. Thank you, Paul.

KONCZAL: Thank you, guys.



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