Millions of Americans saw "The Big Short" over the holidays. The blockbuster movie, based on the book by Michael Lewis, is a primer on how the crookedness and fraud rampant in the U.S. financial system brought down the global economy in 2008.
If you left the theatre with steam coming out of your ears, you might want to take a look at the Wall Street reform plan just fielded by presidential candidate Bernie Sanders.
Rather than relying on regulators to do a better job of policing the massive financial services sector, Sanders downsizes and leashes the largest players on Wall Street and overhauls the Federal Reserve in an effort to put America's central bank to work for working families.
"Greed is not good," Sanders said, countering the famed Wall Street move character Gordon Gekko played by Michael Douglas in the 1987 film Wall Street. "In fact, the greed of Wall Street and corporate America is destroying the very fabric of our nation."
Before the plan was even released, the Clinton campaign was worried. Clinton's reform proposal, released online in October, had many positive elements including a limited tax on high speed traders, a risk fee on the biggest banks and greater transparency in the derivatives markets, but it did not go much further than the reforms contained in the 2010 Dodd-Frank bill. It said nothing about restoring Glass-Steagall and did not call for the break up of the nation's dangerous mega banks, whose very size and complexity could bring down the U.S. economy.
This puts Clinton out-of-step with respected reform advocates like Americans for Financial Reform. So before Sanders even rolled out his plan in New York on Tuesday, former CFTC Chair and Clinton advisor Gary Gensler issued a statement slamming it and urging Sanders to "go beyond his existing plans" to break up too-big-to-fail banks and endorse a "risk-based approach that also deals with non-bank financial institutions."
Clinton objects to the restoration of the Glass-Steagall Act on the grounds that the 1935 legislation doesn't address the modern "shadow banking system," and players like Lehman and AIG. (For a great primer on what shadow banking means, see this piece by Vermont Law Professor Jennifer Taub.)
But this is nonsense, say experts.
"It's "a bit like objecting to the iPhone 6s because your flip phone had inadequate functionality," says Cornell Law Professor Robert Hockett in the Hill. "The updated Glass-Steagall proposals pushed by Sanders, Warren, McCain and others is a 21st-century Glass-Steagall, designed to end or to regulate today's shadow banking and conglomeration just as the original Glass-Steagall ended the last century's shadow banking and conglomeration."
"The truth is that 'shadow banking' is and always has been deeply entangled with the major 'too-big-to-fail' dealer banks that dominate Wall Street," said Marcus Stanley of Americans for Financial Reform. "During the financial crisis, securitizations and other forms of 'shadow banking' benefited from all kinds of implicit and explicit guarantees by the major dealer banks. The major reason that the financial disruptions created by the crisis spread to the giant banks at the center of the economy, like Citibank, JP Morgan Chase, and Bank of America is because these banks were connected to shadow banking in all kinds of ways."
Sanders plan tackles the "shadow banking system" in a variety of ways by putting these entities on the list of "too-big-to-fail" institutions that may need to be broken up, by advocating for a modern Glass-Stegall and by implementing a financial transaction tax to tamp down on reckless trading.
A centerpiece to Sanders plan is a pledge to break up the biggest banks and financial institutions, whose size and complexity threaten the financial system as a whole and the U.S. economy.
Why is this more critical than ever before? Because the massive banks that fueled the 2008 financial crisis are even bigger today.
Sanders points out: "Three out of the 4 largest financial institutions (JP Morgan Chase, Bank of America and Wells Fargo) are nearly 80 percent bigger than before we bailed them out. Incredibly, the six largest banks in this country issue more than two-thirds of all credit cards and more than 35 percent of all mortgages. They control more than 95 percent of all financial derivatives and hold more than 40 percent of all bank deposits. Their assets are equivalent to nearly 60 percent of our GDP. Enough is enough."
Sanders says that if he were elected president one of his first acts would be to tell the Treasury Department to establish a "too-big-to-fail" list of commercial banks plus shadow financial institutions and insurance companies whose failure would pose a "catastrophic risk" to the U.S. economy and move to downsize them to make them safer.
Indeed, the Treasury Department already has a start on this list as the 2010 Dodd-Frank reform bill required the nation's top bank regulators to identify "systemically important" (or risky) institutions, banks and non-banks, which must establish "living wills" to give the government a blue print on how to resolve them in an orderly manner if needed. Eleven firms have already produced living wills; meaning eleven are already so dangerous that their collapse could harm the U.S. economy. While the Chamber of Commerce fights tooth and nail to prevent other firms from being added to this list, Sanders suspects there may be more than eleven firms to worry about.
But federal regulators have never used their new authority under the Dodd-Frank bill to order any of these eleven to sell or transfer assets to unaffiliated institutions. Sanders appears ready to take action where the Obama team has dithered.
In addition to using existing authority under Dodd-Frank to downsize some of the largest and most dangerous institutions, Sanders wants to restore Glass-Steagall protections against risky "shadow" banking activities, citing the version of the bill authored by Sens. Warren and McCain. (The details are broken down in this fact sheet by watchdog group Better Markets.)
This proposal would restore the separation between old fashioned commercial banking and investment banking and place a cap on bank size. Commercial banks would once again be banned from hedge fund activities and dealing in swaps. The law "would not only push the riskiest activities outside the traditional FDIC insured banking system, but, would have the advantage of avoiding the seemingly neverending efforts to carve out exceptions to new bank regulations," says expert Jennifer Taub.
Glass-Steagall "worked for more than five decades until Wall Street watered it down under President Reagan and killed it under President Clinton," said Sanders pointedly in his speech.
And Sanders cites Bill Clinton's former Labor Secretary Robert Reich: "Giant Wall Street banks continue to threaten the well-being of millions of Americans, but what to do? Bernie Sanders says break them up and resurrect the Glass-Steagall Act that once separated investment from commercial banking. Hillary Clinton says charge them a bit more and oversee them more carefully ... Hillary Clinton's proposals would only invite more dilution and finagle. The only way to contain the Street's excesses is with reforms so big, bold, and public they can't be watered down - busting up the biggest banks and resurrecting Glass-Steagall."
Sanders plan also calls for a small tax on financial transactions, called a Robin Hood Tax by National Nurses United and international campaigners, that would downsize and stabilize high-speed, high-volume trading and at the same time raise an estimated $350 billion a year. Some experts think this reform may bring bigger benefits to the U.S. economy than other aspects of Sanders's plan. "In many ways the financial transactions tax is more fundamental. It would dramatically reduce the size of the industry. Tens of billions of dollars that are spent each year creating complex financial instruments and rapidly trading stocks, bonds, and other assets would instead be diverted to the productive economy," said economist Dean Baker. Sanders says he would use the money to provide for free and universal higher education.
Putting Ratings Agencies Out of Business: In the run up to the 2008 financial collapse, the ratings agencies, like Moody's and Standard and Poor's, failed to do their job because they were being paid by Wall Street. Sanders plan would turn for-profit credit rating agencies into non-profit institutions, so that Wall Street can no longer pay for the ratings they desire.
Implementing a National Usury Law: "In The Divine Comedy, Dante reserved a special place in the Seventh Circle of Hell for those who charged people usurious interest rates," said Sanders. "We don't need the pitchforks," says Sanders, but we do need a national usury law that would cap ATM fees at $2 and interest rates at 15%. The big banks systematically destroyed state usury laws in the 1990s.
Putting an End to Predatory Payday Loans Through Postal Banking: Millions of unbanked have no options that going "to a payday lender who could charge an interest rate of over 300 percent and trap you into a vicious cycle of debt. That is unacceptable," said Sanders who has long advocated a Postal Banking system for small loans, savings accounts and bill paying. This system is common in nations around the world and was available in the United States until 1967. It would have the double benefit of also helping the U.S. Postal Service, one of the nation's largest employers of African Americans and a bedrock of middle class jobs, and would create a type of banking "public option" that could open the door to more experiments of this kind.
Democratizing the Federal Reserve: Sanders reiterated his call for democratizing the Federal Reserve and getting the bankers off the board, "I think the American people would be shocked to learn that Jamie Dimon, the CEO of JP Morgan Chase, served on the board of the New York Fed at the same time that his bank received a $391 billion bailout. That is a clear conflict of interest that I would ban as president." Sanders had previously suggested, "board positions should instead include representatives from all walks of life -- including labor, consumers, homeowners, urban residents, farmers and small businesses."
Forcing the Federal Reserve To Take Job Creation Seriously: Sanders took time to lay out some of the ways the Fed could actually be put to work for Main Street, citing an idea first fielded by University of Massachusetts Amherst Professor Robert Pollin in Tools for a New Economy. "The Fed should stop paying financial institutions interest to keep money out of the economy and parked at the Fed. Incredibly, the excess reserves of financial institutions that are sitting in the Federal Reserve has grown from less than $2 billion in 2008 to $2.4 trillion today," said Sanders. The Fed should charge banks that simply sit on their money "a fee that could be used to provide affordable loans to small businesses to create hundreds of thousands of jobs."
Ending Too Big to Jail: Sanders pointed to the fact that not one major Wall Street executive has been prosecuted for causing the near collapse of our entire economy, throwing 6 million out of work and the disappearance of some $22 trillion in wealth from Americans rich and poor. Then he went further: "The reality is that fraud is the business model on Wall Street. It is not the exception to the rule. It is the rule." Sanders cited the billion in fines federal regulators applied to the big banks since the financial crisis. These firms quietly paid up, accepting no responsibility for their actions. These small fines are becoming the price of doing business and the fraud continues as December's fines against Morgan Stanley, and JP Morgan attest.
In a recent interview, "The Big Short" author Michael Lewis was asked by film reviewer Nell Minow what he would do to fix the financial system and protect consumers from the next bailout, which doled out many trillions of dollars to America's largest financial institutions.
"The first thing I would do is break up the banks so that they are much smaller and they could all fail. They would be subjected to honest market forces because you've got these essentially socialist enterprises in the capitalist system and inside the socialist enterprises are the most highly paid people in the society, which is crazy. That is probably the first thing I would do but there is a long list," said Lewis.
From popular movies to policy wonks, the solutions seem clear, so what is the problem? Sanders got to the nub of it. "Congress does not regulate Wall Street, Wall Street regulates Congress."
This provides another reason to break up the banks. Their tremendous size and power blocks Congressional reform and legal accountability, and will continue to do so until big, bold reforms turn it around.