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October 19, 2015

Hillary Clinton's Take on Banks -- More of the Same

By Matt Taibbi, Rolling Stone


The Democratic frontrunner seems to be counting on America's ignorance about the
2008 crash

The inaugural Democratic debate Tuesday night was a strange show. It felt like two
different programs.

One was a screwball comedy starring red-faced ex-Marine Jim Webb and retired
Keebler elf Lincoln Chafee, whose Rhode Island roots highlighted the Farrelly
brothers feel of his performance. The latter's "I voted to repeal the Glass-Steagall Act
because it was my first day at school" moment was the closest thing I've seen to a
politician dissolving into his component elements on live television.

The other drama was serious and highly charged argument between two extremes on
the political campaigning spectrum, pitting the unapologetic idealist Bernie Sanders
against the master strategist Hillary Clinton. (Martin O'Malley seemed like an irrelevant
spectator to both narratives.)

One of the most revealing exchanges in the Clinton-Sanders tilt involved the question
of Wall Street corruption. Sanders has always been a passionate crusader against
Wall Street perfidy, but Hillary's take on the subject was fascinating.

Asked about it Tuesday night, she gave an answer that to me sums up her candidacy
and the conundrum of the modern Democratic Party in general. She seemed to hit a
lot of correct notes, while at the same time over-thinking and over-nuancing a
question where a few simple unequivocal answers would probably have won everyone

The key exchange began with a question from CNN's Anderson Cooper:

"Just for viewers at home who may not be reading up on this, Glass-Steagall is the
Depression-era banking law repealed in 1999 that prevented commercial banks from
engaging in investment banking and insurance activities. Secretary Clinton, he raises
a fundamental difference on this stage. Sen. Sanders wants to break up the big Wall
Street banks. You don't. You say charge the banks more, continue to monitor them.
Why is your plan better?"

Backing up: When Bill Clinton took office, it was still illegal in the United States for
commercial banks to merge with investment banks and insurance companies. But
toward the end of Clinton's second term, he signed a bill called the Gramm-Leach-
Bliley Act that essentially created Too Big to Fail "supermarket" banks like Citigroup.

This isn't the only reason the financial system is so dangerous now. There's also the
matter of the extreme interconnectedness of the financial services industry. This
problem came violently into play in 2008, when the failure of a single idiot investment
bank, Lehman Brothers, caused a chain reaction that nearly blew up the whole
financial system.

This latter problem was partially a consequence of another Clinton-era law, the
Commodity Futures Modernization Act, which deregulated derivatives like swaps that
were the agent of many of those chain-reaction losses.

So Cooper's question to Hillary Clinton was really about a financial system that
became dangerously over-concentrated thanks to multiple laws passed during her
husband's administration. Her answer:

"Well, my plan is more comprehensive. And, frankly, it's tougher because of course
we have to deal with the problem that the banks are still too big to fail. We can never
let the American taxpayer and middle-class families ever have to bail out the kind of
speculative behavior that we saw. But we also have to worry about some of the other
players: AIG, a big insurance company; Lehman Brothers, an investment bank.
There's this whole area called 'shadow banking.' That's where the experts tell me the
next potential problem could come from."

A few observations:

First, it's definitive now that Hillary has no intention of reinstating Glass-Steagall.
Cooper gave her a prime opportunity Tuesday night to announce otherwise, stories
have filtered out of her campaign that she has no plans along those lines, and she's
explicitly stated that she wants to find a "different way" to reduce risk.

The second and probably more important observation is about Hillary's rhetorical

Hillary, like her close advisor Barney Frank, has been pushing an idea that banks
aren't at the root of any financial instability problem. Last night, she pointed a finger
instead at "shadow banking," non-bank actors like AIG, and a dead investment bank
in Lehman Brothers. (Interesting she didn't mention a still-viable investment bank like
Goldman, Sachs, which has hosted her expensive speaking engagements.)

This squeamishness about criticizing banks is laughable to people in the industry. But
of course, that's probably the point – that the average voter won't know how absurd
and desperate it is to point to faceless "shadow" financiers as villains when the real
bad guys are famed mega-firms that are right out in the open, with their names
plastered all over every second city block.

Companies like AIG and Lehman Brothers did, of course, shoulder blame for what
took place in 2008. But there is no way to untangle what those non-bank actors did
without also talking about the banks. This stuff is all connected, and it's not really that

The root of the 2008 crisis lay in a broad criminal fraud scheme, in which huge
masses of home loans were given to people who couldn't afford them. Those loans in
turn were bought back up by giant banks and resold to investors who weren't told how
crappy the merchandise was.

AIG blew up because it insured this fraudulent market. Lehman blew up because it
overinvested in it. But it was banks that financed the problem and that were possibly
the most depraved actors in the narrative (apart, perhaps, from the Countrywide-style
mortgage lenders who were handing loans out to anyone with a pulse).

We know this, among other things, because it was big banks like JPMorgan Chase
and Citigroup that paid the biggest chunks of the $100 billion in fines Hillary later
referenced in the debate. There is a vast record of documentary and witness
evidence now attesting to the mass fraud, which was of a type that can and probably
will happen again. The policy issue is how to curb the impact of that inevitable next
crooked scheme.

And the question there is how to make sure companies are small enough that the
really corrupt ones can be allowed to implode organically, rather than requiring mass

How do you make Too Big to Fail companies smaller and safer? Probably, you just do

The two main attempts so far have been the Brown-Kaufman amendment, proposed
(and routed) during the Dodd-Frank negotiations, and the more recent Terminating
Bailouts for Taxpayer Fairness Act, also sponsored by Ohio Sen. Sherrod Brown,
along with Louisiana Republican David Vitter.

Both efforts relied on automatic, hard-number concepts. In Brown-Vitter, banks were
hard-capped at 10 percent of America's deposits. In Brown-Vitter, banks would be
required to hold a hard 15 percent capital buffer. The key idea here in both cases is
that there is no wiggle room. If banks get too big, they get whacked.

Hillary Clinton last week released a plan that sounds very similar to these proposals.
This is the "comprehensive" plan she mentioned in the debate.

Her plan would create a "risk fee" for banks over a certain size. If banks get too big,
they would be asked to get smaller. But my reading of her proposal is that it doesn't
contain an automatic mechanism. Hillary's plan would merely give regulators the
authority to do something about risky companies.

"Clinton did say large firms should be required to 'downsize or break apart,'" says
Dennis Kelleher of the Wall Street watchdog group Better Markets. "But only if they
can't prove to regulators that they can be managed effectively."

It's a subtle difference. But such subtle differences between real action and
ambiguous verbiage are what turned the Dodd-Frank bill into a mountain of legislative
leprechaun tricks, as opposed to the sweeping, simple, FDR-style reform of a plainly
corrupt marketplace that it should have been.

Whether or not you think Hillary Clinton plans on doing anything to fix Wall Street
corruption really comes down to your read on her intentions. Both regulators and
criminal prosecutors already have enormous theoretical power over the market.
They're not particularly handicapped by a lack of regulatory tools. The issue is how
much political will a future executive plans on exerting.

By going out of her way to downplay the influence of bank corruption, Hillary is
probably signaling that she doesn't plan on leaning into the reform effort all that
much. This is consistent with her history as a politician who has accepted an
enormous amount of money from Wall Street (both in donations and speaking fees)
and has surrounded herself with policy advisors who in many cases bear primary
responsibility for the very messes we're talking about.

It's smart politics, well thought-out. Or is it? The modern Democratic Party seems
forever to be looking for nuance, when taking a stand would do just as well. Let gay
people be soldiers, don't invade the wrong country, break up dangerous banks. An
idea isn't automatically bad just because it's simple.