Roughly seven years after the financial crisis of 2008, the Democrats running for president in 2016 agree on this much, at least – risky behavior on Wall Street brought the American economy to the brink once before, and it must not be allowed to do so again.
Hillary Clinton, Bernie Sanders and Martin O’Malley all support the Dodd-Frank financial industry reforms signed into law by President Obama in 2010, but they’ve all said they would go further to prevent future recklessness on Wall Street.
They’re concerned about banks that remain “too big to fail” – some are actually bigger than they were before the crash – and the possibility that taxpayers could be put on the hook for another bailout of a failing financial behemoth. They’re mindful that no financial industry executives have been sent to jail for their contributions to the 2008 crisis, and they want to ensure there are real punishments in place for any future misdeeds. And they want to empower regulators to identify and stop risky behavior before it snowballs into a real problem.
Here’s a look at some of their specific proposals.
Hillary Clinton has proposed an annual “risk fee” on financial institutions with more than $50 billion in assets that’s designed to penalize banks from engaging in risky trading practices or taking on too much debt. The fee would increase as an institution’s exposure to risk increases. She would also levy a tax on high-frequency stock trading, a practice that some believe contributes to market volatility and uncertainty.
She would strengthen the government’s ability to punish Wall Street executives for wrongdoing by allowing regulators to impose fines on senior financial executives, rather than on the institutions as a whole. And she would limit executive pay at some banks by stiffening so-called “claw-back rules” that allow the government to restrict an institution’s executive compensation if that institution has turned to the government for financial assistance.
Clinton has also said she would strengthen the Volcker Rule, a part of Dodd-Frank that’s intended to prevent banks from making risky investments with money that’s insured by taxpayers. Her plan would close a loophole in the rule that allows banks with taxpayer-insured money to invest in hedge funds, which are, by design, generally less risk-averse than banks.
She would increase funding for the Securities and Exchange Commission and other agencies tasked with overseeing Wall Street, and she would increase oversight of other financial institutions like hedge funds and non-bank lending organizations.
Perhaps the biggest flashpoint in the Democratic debate over financial reform has been the question of whether to reimpose Glass-Steagall, a Depression-era law that separated commercial banking from investment banking. Many progressives have cited the repeal of that law (signed by President Clinton) as one factor behind the 2008 crash.
Clinton has declined to support the reinstatement of Glass-Steagall, arguing that her proposals would actually do more to rein in Wall Street and reduce the risk of another financial crisis. She’s pointed out a number of firms that were central players in the 2008 crisis – AIG, Lehman Brothers and Bear Stearns, among others – that did not engage in traditional commercial banking and would therefore have not been limited by Glass-Steagall. “My plan is more comprehensive. And frankly, it’s tougher,” she said at the first Democratic debate. “If only you look at the big banks, you may be missing the forest for the trees.”
Bernie Sanders, in a break with Clinton, has thrown his support behind a bill from Sens. Elizabeth Warren and John McCain that would reinstate Glass-Steagall. “Allowing commercial banks to merge with investment banks and insurance companies in 1999 was a huge mistake,” he declared in a statement. “It precipitated the largest taxpayer bailout in the history of the world. It caused millions of Americans to lose their jobs, homes, life savings and ability to send their kids to college.”
He has also introduced the “Too Big to Fail, Too Big to Exist Act,” which, according to his website, “would break up the big banks and prohibit any too-big-to-fail institutions from accessing the Federal Reserve’s discount facilities or using insured deposits for risky activities.”
In a proposal similar to Clinton’s, Sanders would place a tax on high-frequency trading and “other forms of Wall Street speculation,” his website says, and he’d direct the revenues it produces to help reduce the cost of higher education.
He supports a bill introduced by Wisconsin Sen. Tammy Baldwin that would prohibit large financial institutions from paying big bonuses to senior executives who depart for a job in the government. He also supports limiting credit card interest rates to a maximum of 15 percent.
Martin O’Malley has joined Sanders in calling for the reinstatement of Glass-Steagall, and he’s emphasized that it would be an updated version that would also address some of the omissions Clinton highlights by including non-bank financial institutions like hedge funds, venture capital firms and others.
“We need a defined firewall between Wall Street and taxpayers so that we are never again forced to bail out a bank’s reckless behavior,” he’s said. “We need a modernized Glass-Steagall… Anything short of that is a failure to deliver on our promise to prevent a repeat of financial collapse in 2008.”
O’Malley would require big banks with more than $500 billion in assets to have capital reserves of no less than 15 percent, to reduce risk by discouraging banks from overextending their investments and becoming over-leveraged. Like Clinton and Sanders, he would also impose a financial transaction tax to raise revenue and cut down on high-frequency trading.
To stiffen the consequences for financial wrongdoing, O’Malley would, according to a recent white paper, create a DMV-style “point system that will assign points to infractions committed by financial firms and their affiliates. He will make the points system fully transparent– so that employees, creditors, and investors all have access to them and can make decisions based off them–and have the end result be the revocation of an entity’s right to operate. This approach will send a strong message to institutions that racking up repeat violations of the law will have real consequences, and it will give them the opportunity to pursue course-correcting measures if they rack up points.”
O’Malley would double the funding for the Securities and Exchange Commission and the Commodity Futures Trading Commission and other Wall Street regulatory agencies. And he would also create a new, separate division within the Justice Department to focus on economic, white collar crimes.
So what’s the problem?
Despite some debate over the details, the plans of the three Democrats share a number of core similarities. The most obvious hurdle facing their implementation, though, remains Republican opposition.
GOP lawmakers largely opposed the Dodd-Frank reforms signed by Mr. Obama in 2010 – they even took a shot at rolling back a number of the law’s provisions earlier this year in the House – and they’re dead-set against the notion of piling additional regulations on top of a system to which they’re already opposed.
Republicans and some conservative economists have argued that the law did not actually end “too big to fail,” citing the financial firms that have only grown larger since the 2008 crash. They worry that it empowers regulatory agencies like the SEC and the CFTC that they believe have proven ineffective in the past. They say the law disproportionately hurts small and community banks that don’t have the resources to navigate the regulatory maze to their advantage like bigger banks do. They also contend the law will hurt consumers by restricting access to credit and making it more difficult for small businesses and individuals to obtain loans.
Democrats should answer the substance of these criticisms and explain why the additional regulations they’re proposing would not create similar problems. They also need to clearly acknowledge how much of their plans can be accomplished by executive action and adjustment of regulations and how much will require legislation. In the latter case, they need to explain how they hope to move a bill cracking down on Wall Street through a Congress that, more likely than not, will remain at least partly under GOP control by January 2017.