Published on Portside (https://portside.org/)
Chatting With
Bernie Sanders About a Looming Financial Crisis
Matt
Taibbi
October
3, 2018
Rolling
Stone
Ten years ago,
George W. Bush signed into law the Troubled Asset Relief Program, better
known as the TARP bailout. The rescue forked over $700 billion of taxpayer
money to bail out giant Wall Street banks that were already too big, and were
about to get bigger.
On Wednesday, Sen.
Bernie Sanders (D-VT) and Rep. Brad Sherman (D-CA) introduced new legislation
on TARP’s anniversary. It is aimed at the central, still-unaddressed issue of
the last disaster: the ungovernable size of the country’s biggest banks.
Dubbed the “Too
Big to Fail, Too Big to Exist” act, the Sanders-Sherman bill revolves around a
simple concept: If a bank controls assets that collectively represent more than
3 percent of the country’s GDP, or about $584 billion, it has to shrink or be
broken up.
“We bailed these
banks out ten years ago because they were ‘Too Big To Fail,’” Sanders
tells Rolling Stone by phone. “Now it turns out that our four
largest financial institutions — J.P. Morgan Chase, Bank of America, Wells
Fargo and Citigroup — are on average 80 percent bigger than they were before we
bailed them out. That’s not right.”
Banks have long
been a focus for Sanders, who is hoping to use new tactics to take on old foes.
He has been experimenting with the use of public pressure and journalism-like
tactics — including the launch of a series
of video testimonials about workplace conditions at companies
like Disney and Amazon — to try to augment legislative efforts at reform.
Recent successes
on that front have Sanders in a good mood. Just a month after being blasted by
Amazon for “misleading accusations” and triggering a national controversy that
saw much of the pundit class, along
with Democrat-aligned think tanks, take Amazon’s
side in the labor debate, he watched as the retailer this week appeared to
capitulate, announcing a $15 minimum wageacross U.S. operations.
“Look, at the end
of the day, you rally public opinion, you force people to have to do the right
thing,” says Sanders, who has spoken openly in the past about his frustration
with the slow pace of change on the Hill.
It’s hard to
understate just how much bank concentration has eaten at Sanders over the
years. Beginning decades ago, the administrations of both Republican and
Democratic presidents embarked on a series of policies intentionally designed
to consolidate financial power.
The first major
move on this front was the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994. This law torpedoed restrictions on opening
bank branches across state lines. These rules dated back to the McFadden Act of
1927, passed specifically with the idea of preventing financial concentration.
Signed into law by
Bill Clinton, Riegle-Neal helped usher in the era of giant national banks. By
2016, Americans had 57 percent fewer FDIC-insured banks than they had
in 1994. Sanders cast the only “no” vote against Riegle-Neal on the House
Financial Services Committee.
The next major
move was the Gramm-Leach-Bliley Act, better known as the repeal of the
Glass-Steagall Act. A post-1929 safety measure passed in FDR’s day,
Glass-Steagall prevented the mergers of insurance companies, investment banks
and commercial banks.
The ostensible
justification for the repeal of this historically successful reform was that
such restraint was no longer necessary. Moreover, the creation of “supermarket”
financial institutions was needed to keep America competitive with giant
“universal” banks in Europe and Asia.
In reality,
Gramm-Leach-Bliley was passed to retroactively legalize the Citigroup merger,
which had brought Travelers Insurance, Salomon Smith Barney and Citibank under
one roof. That deal had been struck before Glass-Steagall was even
repealed in 1998.
In one of the
all-time revolving door atrocities, then-Treasury Secretary Bob Rubin, who
helped push through the deal, later took a job with
Citigroup and earned over $100 million as a “senior
adviser” over the course of about a decade.
This early effort
at banking concentration had Sanders even back then thinking about possible
bailouts. In an examination of then-Fed chief Alan Greenspan in 2000, Sanders
asked why any regulator would approve placing so many assets under one roof.
“Are you concerned
about such mergers as Travelers Insurance and Citicorp when they form a company
with assets of almost $700 billion?” Sanders asked. “What happens if they
fail? Who in God’s name is going to bail them out? Are you concerned about
that?”
Greenspan
characteristically demurred. “We do not believe that in the event that it turns
out that a substantial institution fails that they should be bailed out,” he
said.
About the same
time, future Treasury Secretary and then-CEO of Goldman Sachs Hank
Paulson began lobbying for the relaxation of the so-called net
capital rule, which ostensibly barred investment banks from borrowing more than
12 dollars for every one they actually had.
Within four years,
the top five investment banks were meeting with the SEC to press for this
change, and soon achieved it. Although the actual impact of the net capital
rule change has been hotly debated, what’s not in question is the fact
that by 2008, debt-to-equity ratios on Wall Street hovered around 33 to 1.
A trader on the
floor of the New York Stock Exchange holds his head as he walks off the floor
September 29th, 2008. Photo credit: Timothy A. Clary/AFP/Getty Images
Of the five
investment banks that pressed for the changes in 2004, three of them (Bear
Stearns, Merrill Lynch and Lehman Brothers) would be dead within four years.
When the big crash
happened in September 2008, most of the economic world focused on crafting a
rescue to “stabilize” the economy. Sanders, however, honed in on the fact that
any state-aided mergers and rescues would likely continue the dangerous
concentration trend. As far back as September 17th, 2008, in fact, he
complained on the floor of the Senate that any rescue of Wall Street that didn’t include
mandated breakups would leave the underlying problem unaddressed.
“This country can
no longer afford companies that are too big to fail,” he said back then. “If a
company is so large that its failure would cause systemic harm to our economy,
if it is too big to fail, it is too big to exist … We need, as a Congress, to
assess which companies fall in this category … Those companies need to be
broken apart.”
By that time,
however, officials in the Federal Reserve and George W. Bush’s Treasury
Department — including, notably, Paulson, who by then was Bush’s Treasury
Secretary — had already moved in another direction.
They’d begun
concocting a rescue plan, the chief characteristic of which was to double- or
triple-down on the concentration narrative, using public funds to make
dangerously large financial firms even bigger and more powerful.
This brand of
rescue would continue in the next administration. Barack Obama’s chief bailout
architect, Treasury Secretary Timothy Geithner, had also been involved in the
Bush rescues as head of the New York Fed, and had been a protégé of
Rubin in the Clinton Treasury.
When Bear Stearns
teetered, Geithner and other officials used Fed funds to help stuff the
mess into the balance sheet of JP Morgan Chase. Later, when Merrill Lynch
failed, it was folded into Bank of America. Bailout recipient Wells
Fargo was prodded to swallow the toxic disaster over at Wachovia.
The FDIC seized another basket case, Washington Mutual, and crammed it
into Chase for a bargain price, with the state eating much of the loss.
These shotgun
weddings had the immediate impact of preventing further meltdowns, but everyone
knew that the longterm impact would be to further concentrate economic and
political power.
For some, this
created a major safety issue, as this kind of concentration virtually assures
that future bailouts will be necessary. Even former TARP administrator (and
Goldman banker) Neel Kashkari estimated as recently as this summer that
the likelihood of a future bailout was 67 percent,absent some kind of effort to
address Too Big To Fail.
For Sanders,
however, the extreme concentration of economic power is a problem even if there
isn’t another collapse in the next 10 minutes.
“It’s a movement
to an oligarchy in this country,” he says. “Are we comfortable as a nation with
a situation in which six financial institutions have assets equivalent to 54
percent of the GDP? What kind of economic power is that, what kind of political
power is that?”
When work
began in the summer of 2009 on the Dodd-Frank financial reform act,
which was to be the signature legislative response to the crisis, everyone with
a brain on the Hill knew two things.
First, the by-far
biggest problem that needed to be addressed was the Too Big To Fail issue. And
second, any meaningful effort in that direction would be a complete political
non-starter.
Not only did the
banks still own so much of Congress that such a move could never pass, but the
government had long ago stepped away from its mandate to break up dangerous
concentrations of corporate power.
“We don’t do
[antitrust] anymore as a nation,” Sanders says.
Still, there have
been scattered efforts to address the issue of economic concentration. Sanders
issued his first attempt at a bill to break up the banks in November
2009. Senators Sherrod Brown of Ohio and Ted Kaufman of Delaware also
introduced an amendment to Dodd-Frank that mandated breakups of over-large
companies based on simple, numerical caps.
A trader works on
the floor of the New York Stock Exchange (NYSE) September 17th, 2008 in New
York City. Photo credit: Spencer Platt/Getty Images
That bill was
walloped in the Senate, 61-33, with 27 Democrats voting against it, often using
some version of a “size doesn’t matter” argument. “Size is not the appropriate
restriction,” is how Virginia Democrat Mark Warner put it.
Brown, Sanders and California’s
Sherman over the years kept at it, introducing different proposals to
target Too Big To Fail banks. A consistent problem with these efforts has been
a lack of support within the Democratic Party, whose economic policies have
been dominated by the same Rubin-Geithner-Lawrence Summers Wall Street-friendly
ideology (what one financial analyst friend of mine deems the “Rubino crime
family”) for two-and-a-half decades now. It will require massive voter
repudiation of these ties on the Democrat side to even begin to take real
action on these ideas.
Sanders has been
consistently ripped by Democrats for his bank-breakup concepts. During the 2016
campaign, when the official position of the party and the Clinton campaign was
that shadow banking had caused the crisis, Barney Frank went so far as to
pen an editorial for the Washington Post saying “Too Big To
Fail is an Empty Phrase.”
Pundits piled on.
The Financial Times claimed Sanders had “struggled to
articulate how” he would go about a breakup, and claimed Fed reports had
described the banking system as safer since Dodd-Frank. Slate said
it was “hard to take Bernie Sanders seriously” on this issue.
Today, however,
Sanders feels like he has a new weapon in the effort to bring about change on
matters the public cares about. Amazon represents an example of how his office
feels it can bypass the logjam both on the Hill and in the press, and take
issues directly to the public.
“We changed the
office around to a television station, Sanders Broadcasting,” he says,
laughing. “You know, we do our agitation and we rally people.”
Sanders wants to
use these tools to make the concentration of financial power among certain
companies a leading issue for Democrats heading into the 2020 election season.
The new bill would affect the six richest banks in the country — JP Morgan
Chase, Citigroup, Wells Fargo, Goldman Sachs, Bank of America and Morgan
Stanley.
“We’re going to have
to reeducate people,” Sanders says. “This is the ten-year anniversary of
economic calamity that resulted in millions of peoples lives being radically
altered for the worst. Losing jobs, losing their homes, losing their life’s
savings. It was a cataclysmic impact on our entire society.”
He adds: “We think
that breaking up any financial institutions [that have] assets of more than 3
percent of GDP — which is about 580 billion dollars — is the right thing to do.
It’s what should have been done a long time ago.”
Looking back at
the catastrophe of three decades of concentration, it’s hard to conclude that
he’s wrong. At the very least, the public is likely to agree with him on
this score. Let’s hope that this time around, the Democrats realize this in
time for the presidential election.
Taibbi has
reported on politics, media, finance, and sports, and has authored several
books, including Insane Clown President (2017),[1]The
Divide: American Injustice in the Age of the Wealth
Gap (2014), Griftopia: Bubble Machines, Vampire Squids, and the Long
Con That Is Breaking America (2010) and The Great Derangement: A
Terrifying True Story of War, Politics, and Religion (2009).
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The master class has had all to gain and nothing to lose, while the subject
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