Comparing Wall Street reform plans: Hillary vs. Bernie
Which is the better Wall Street reform plan? So far most of the debate involves endorsements, rather than details, and Hillary wins the endorsement battle hands down.
Hillary's plan has been endorsed by Paul Krugman, Elizabeth Warrren, and Joseph Stiglitz. That's sort of the trifecta there. So if endorsements are what matters to you, then there is no need to keep reading this because Hillary won.
However, if substance matters to you then there is plenty more to talk about.
Before I go any further I should point out that both proposals have good points. Paul Krugman put it this way:
In other words, while there are some differences in financial policy between Mrs. Clinton and Mr. Sanders, as a practical matter they’re trivial compared with the yawning gulf with Republicans.
For instance, both Hillary and Bernie want a financial transaction tax aimed at eliminating high-frequency trading, which is really nothing more than front-running the market and should already be outlawed.
You can see Hillary's Wall Street reform plan here, and Bernie's Wall Street reform plan here.
When you look at these two proposals the first thing that stands out is that Hillary's web page is 4,800 words, while Bernie's is maybe 300. Normally that would imply Hillary's plan has more substance, but in fact that isn't the case here. What it actually means that Bernie and Hillary have different visions of what Wall Street reform should be, and this difference increasingly revolves around the terms Glass-Steagall and Shadow Banking..
"It's fine for you to say what you're going to say," she told Sanders. "But I looked very carefully at your proposal. Reinstating Glass-Steagall is a part of what very well could help. But it is nowhere near enough. My proposal is tougher, more effective, and more comprehensive because I go after all of Wall Street, not just the big banks."
There are several problems here, and many of those problems are the fault of the news media for not demanding that Hillary Clinton define the term Shadow Banking and why Glass-Steagall isn't sufficient. She has told the Des Moines Register, “A lot of what caused the risk that led to the collapse came from institutions that were not big banks.”
The most obvious problem with Hillary's statements can be summed up with one simple question..
“If you don’t think Citibank was center to this crisis, it’s hard to imagine why we spent billions bailing them out,” said Robert Borosage, co-director of the liberal Campaign For America’s Future, who referred to Clinton as “Wall Street’s favorite Democrat.”
“Her comments on their face are wrong,” said Christopher Whalen, senior managing director at Kroll Bond Rating Agency and author of Inflated: How Money and Debt Built the American Dream. “It is incorrect to blame the crisis on shadow banks. You can’t really differentiate between what they were doing and what Citi was doing.”
It seems amazing that only seven years after the financial crisis, in which all of the Wall Street banks went broke, a leading Democrat is now saying that they were victims in this crisis rather than the perpetrators.
Plus, while AIG was certainly was a key part of the financial crisis and was a Shadow Bank as Hillary pointed out, the counterparty that most benefited from the AIG bailout was Goldman Sachs, another big Wall Street Bank. In fact, all the major beneficiaries of the AIG bailout were Big Banks.
The logic of Hillary's point breaks down even further while Krugman defines Shadow Banks.
“shadow banks” like Lehman Brothers
If Lehman Brothers didn't qualify as a Big Wall Street Bank than no one, such as Goldman Sachs does.
Hillary has seven bullet points under the segment of her plan which would fix Shadow Banking. They include:
Enhance public disclosure requirements for repurchase agreements
Enhance regulatory reporting requirements for hedge funds and private equity firms
Enhance transparency requirements and disclosure for exchange-traded product
Review recent regulatory changes to the money market fund industry
These are all great for more transparency, but don't actually change anything. She also includes:
Impose, in coordination with other major international financial centers, margin and collateral requirements on repurchase agreements and other securities financing transactions
This is also good, but could easily be outside of her ability because London (which has even less financial regulations than America) might very well think otherwise. And there is this:
Strengthen the tools and authorities of the Financial Stability Oversight Council (FSOC) to tackle risks in the shadow banking system—wherever those activities may migrate or emerge
Anytime you include the word "wherever", it's a mission statement, not an actual concrete proposal. Finally, there is this:
Strengthen leverage restrictions and liquidity requirements for broker-dealers
This is an actual concrete proposal, but it's also just an addition to what was already done with Dodd-Frank.
So while Hillary may have been very proud of having addressed Shadow Banking, while Bernie hasn't, the list of proposals leaves much to be desired.
Speaking of Dodd-Frank, that is exactly the feeling you get when you read Hillary's long list of proposals. If you prefer Dodd-Frank over Glass-Steagall, then Hillary's plan is right for you..
It’s Dodd-Frank 2.0: a list of regulatory tweaks requiring various agencies to write complicated new rules governing obscure corners of the financial markets.
This is technocratic incrementalism, the idea that the best way to approach a very big problem—a complex, interconnected financial system anchored by large banks that are so poorly managed they are not even aware of the risks they are taking on—is with better disclosure here and stronger incentives there. That was the philosophy of Dodd-Frank, which, with the exception of the Consumer Financial Protection Bureau, largely amounted to giving existing regulators a handful of complicated new tools (living wills, hedge fund registration, the Office of Financial Research, derivatives clearinghouse regulation, and so on). Now Clinton is offering more of the same.
Since Barney Frank is on Hillary's team, it shouldn't be a surprise anyone that Dodd-Frank would be the blueprint for Hillary's reforms.
Another point of Hillary's plan is how "it ends TBTF".
Unfortunately, there’s less here than meets the eye. The Federal Reserve and the Financial Stability Oversight Council can already force a large financial institution to scale back its operations if it poses a grave risk to the financial system. (That’s the Kanjorski Amendment, or Section 121 of the Dodd-Frank Act). And per Dodd-Frank, regulators also have the power to make life difficult for systemically important financial institutions in all sorts of ways—they can impose capital requirements, leverage limits, liquidity requirements, disclosures, or short-term debt limits. (For the most part, though, these tools haven’t been widely used.) In short, when it comes to too-big-to-fail banks, Clinton is proposing very little beyond what currently exists—nor does she explain how she will get regulators to use the powers they already have.
Dodd-Frank already gave the Federal Reserve System the power to regulate all institutions of systemic importance, including Shadow Banking, but the Fed shows no inclination for using that power. I would also point out that financial regulators failed spectacularly leading up to the 2008 crash, so giving them more responsibilities is a very questionable method of reform.
Other provisions include registration requirements for advisers of hedge funds which have assets totaling more than $150 million.
There will be some debate about the success or failure of Dodd-Frank, but three things are beyond question - it's still not fully implemented after five years, the Too-Big-To-Fail banks are bigger, and there are fewer small banks. Around one community bank or credit union is closing every day.
Critical parts of Dodd-Frank were gutted by Wall Street.
For instance, the Volcker Rule was initially conceived by former Fed Chairman Paul Volcker as a three-page approximation of Glass-Steagall. But by the time the regulators adopted the final version of the rule, it was hundreds of pages long and riddled with loopholes, exceptions, exemptions and other legal gobbledygook. Similarly, bank-friendly legislators effectively repealed Dodd-Frank's swaps pushout rule — which would have greatly reduced banks' exposures to the most risky derivatives — by hijacking the congressional budget approval process at the eleventh hour in December 2014.
In comparison, reimposing Glass-Steagall, something Elizabeth Warrren supports, would actually cut compliance costs for banks.
Let's get back to the term Shadow Banking.
It's a relatively new term coined by economist and money manager Paul McCulley in 2007. According to McCulley, Shadow Banking includes entities such as hedge funds, money market funds, structured investment vehicles (SIV), "credit investment funds, exchange-traded funds, credit hedge funds, private equity funds, securities broker dealers, credit insurance providers, securitization and finance companies".
What is missing from this list is Investment Banks, such as Lehman Brothers and Goldman Sachs, but since there is no agreed upon definition for Shadow Banking that shouldn't be important. However, Hillary and Krugman make it important by including investment banks in the list while at the same time discounting the importance of Glass-Steagall.
The 1933 Banking Act, known as Glass-Steagall, was all of 37 pages. Dodd-Frank, in comparison was 848 pages, and mandated 400 new rules which would create thousands of pages of regulations.
The reason for the vast difference in size and complexity wasn't because of the difference in ages in which they were created. The reason is because of a vastly different approach to reform. This difference in approach can be seen in Clinton's and Sanders' web pages today.
Basically, Dodd-Frank's approach was to take Wall Street business practices at face value and without judgement, and bring it all under the regulatory arm of the government. It didn't change how business is done on Wall Street, except to say that you must take safety precautions now and disclose what you are doing.
Glass-Steagall, OTOH, did make value judgements. It said any banking that deals with regular people will be boring, and if you don't like it then you are on your own. Notably, it separated commercial and investment banking, forcing many large banks to break into two.
I point this out because it shows that Glass-Steagall does indeed reform Shadow Banking, as defined by Clinton and Krugman, by definition. Lehman Brothers and Goldman Sachs were investment banks, and critical parts of the 2008 crisis, and Wall Street banks such as TBTF JP Morgan Chase would be broken up if Glass-Steagall were reinstated.
Those are two very different ways of reform. Dodd-Frank was reform by regulation. Glass-Steagall was reform by changing the way things are done.