In April, amid growing speculation that she would run for president, Sen. Elizabeth Warren gave a pivotal speech titled "The Unfinished Business of Financial Reform." In it, Warren laid out what the next Democratic president could and must do to complete the task of post-crisis financial reform.
Specifically, Warren said the next president’s agenda should:
- Defend Dodd-Frank against attempts to weaken or compromise it.
- Scale up enforcement, investigations and convictions: "When big financial institutions are not deterred from breaking the law… then that’s what they will do."
- "Tackle the shadow-banking sector," which created "runs and panics in the short-term debt markets that spread the contagion across the financial system."
- Create a "targeted financial transactions tax."
- Break up the biggest banks. First "cap the size of the biggest financial institutions," then create a new Glass-Steagall Act "that rebuilds the wall between commercial banking and investment banking."
Warren didn’t wind up running for president. But her five points are a good rubric for evaluating Hillary Clinton’s newly released plan to tame Wall Street. Clinton’s agenda is a very detailed and comprehensive dive into financial reform. It is broad, covering parts of the financial markets that aren’t often discussed. If anything, it goes into such footnoted specifics that it can be overly wonky. But it fits into the Warren framework well enough to compare and contrast the two approaches.
Using the Warren criteria, Clinton gets points on the first four, but approaches the fifth by working through Dodd-Frank rather than against it. Bernie Sanders gets major points on the last two, but hasn’t gotten specific on tackling shadow banking and the broader financial sector. Rather than stronger or weaker, we’re left with two different ways of prioritizing financial reform, with Sanders focusing on eliminating the threat of the largest banks and Clinton looking to the financial markets as a whole.
Test 1: Defend Dodd-Frank
Republicans are united in wanting to weaken or eliminate Dodd-Frank. Major 2016 contenders such as Marco Rubio, Ted Cruz, and Carly Fiorina have called for the outright elimination of the law without specifying any alternative. So rallying against this is the first test.
This is a pretty easy test for a Democratic candidate, which Clinton, like Sanders, passes. Clinton has sent three important signals to financial reformers. First, she wrote a letter pushing back on recent attempts to change the structure of the Consumer Financial Protection Bureau, an important short-term priority.
Second, her fact sheet emphasizes Dodd-Frank’s Section 956, which is the requirement to limit incentive pay for executives at large financial firms. Section 956 is crucial to changing the nature of CEO pay at major banks so that it rewards long-term thinking and can be revoked if a firm fails. To the chagrin of reformers, it has stalled in rule writing. Clinton would prioritize finalizing it.
Third, and most important, in the fact sheet Clinton warns against efforts to roll back Dodd-Frank’s financial reforms in "the upcoming budget and debt ceiling negotiations" while vowing to "veto any legislation that attempts to weaken the law and would fully enforce its protections." One of reformers’ biggest worries at the moment is that this December’s budget chaos could allow Republicans to push through major deregulations, and that the president and Democrats would allow it. Clinton is making a direct challenge to President Obama, who may be called on to veto a budget if lobbyists are successful in their sneak attacks on reform.
Test 2: Increased enforcement
Clinton wants to enforce financial regulations by leveling charges against individuals as well as corporations. Following the criticism of regulators leveled by Warren and others, the Clinton plan would have the Department of Justice curtail the deferral of prosecutions, a tactic used often to the benefit of banks and other firms facing criminal charges. Clinton would have the SEC forgo these agreements in cases of "egregious or repeated law-breaking and misconduct" and require that firms admit wrongdoing. Another important change would be the SEC curtailing large penalties and restriction on activities for repeat offenders, a process all too common now. This "broken window" style of policing is unpopular for community policing, but is being emphasized in financial policing. Restrictions on repeat offenders in particular are a core demand of Warren’s.
Clinton’s plan would also make funding for the Commodities Futures Trading Commission (CFTC) and SEC independent so that, like other regulators, they would not be subject to the booms and busts of congressional dysfunction. This would give them the ability to better enforce the rules of the financial sector.
Warren’s agenda goes a bit further than this and takes the fight to the Federal Reserve, arguing that the Fed should require votes on all major enforcement and supervisory decisions and that Fed governors should have independent staff. This is a response to the lax supervision and enforcement the central bank displayed during the foreclosure crisis. Clinton focuses on the other banking regulators and the Department of Justice, but doesn’t touch on the Federal Reserve in her plan.
Though Bernie Sanders has been vocal about abuses in enforcement, so far he hasn’t laid out specifics.
Test 3: Shadow banking
Many reformers, including the Roosevelt Institute with its "Rewriting the Rules" report, have demanded a comprehensive policy agenda on shadow banking, the network of lending and borrowing that takes place outside the formal banking sector. Warren’s speech calls for it to be a priority, leaving the details to be determined later. That’s a reasonable way to start the conversation, since it is a difficult topic, but eventually people need to start putting the specifics on the table.
The Clinton fact sheet does exactly that, with a detailed description on everything from stronger capital requirements for broker-dealers to requiring more disclosures for private equity.
This section clearly reflects the influence of Gary Gensler, the former CFTC commissioner (and Goldman Sachs banker) who fought with Obama’s Treasury secretary, Tim Geithner, over making financial reform stronger. The section discusses the international coordination of derivatives, a topic that dominated the end of Gensler’s tenure at the CFTC. According to reports, his efforts to fight for the toughest regulations on this end also led to major conflicts with Obama’s next Treasury secretary, Jack Lew.
Consistent with his approach of focusing on the biggest banks, so far Bernie Sanders hasn’t released a plan to deal with shadow banking.
Test 4: Financial transaction tax
Hillary Clinton proposes a tax to combat high-frequency trading (HFT) by targeting orders that get canceled. This is a worthwhile thing to combat, but Clinton’s proposal would not raise much money, since it only applies to HFT and would shrink the entire market substantially by design. It’s also not clear if it will make a dent on HFT unless it is broader or paired with efforts to regulate how often trades are made by, say, requiring them to batch up every 100 milliseconds.
A transaction tax on the financial sector as a whole could raise as much as $50 billion a year according to the Tax Policy Center. The Sanders campaign proposes such a financial transaction tax as a way of combating HFT as well as a way to pay for free college. So this targeted versus expansive approach is a clear difference, with Sanders taking a more aggressive approach.
Test 5: Breaking up the banks
Clinton, unlike Warren or Sanders, doesn’t call for breaking up the banks by size and by business line through a new Glass-Steagall Act. Clinton also doesn’t limit the Federal Reserve’s emergency lending further than it has been limited since Dodd-Frank, as Warren wants to do. But she does have a different approach.
Clinton would instead build on the reforms in Dodd-Frank. Instead of direct limitations, her plan includes tax surcharges on the largest banks, which are designed to slim them down. President Obama proposed such a tax in 2010, but it was designed to raise revenues. This would instead supplement capital requirements, which have become the most practical way of pressuring the largest banks to downsize, as GE Capital recently did. It is not clear how aggressive this tax would be in practice, but it is a different way of combating size.
Dodd-Frank’s Volcker Rule — which separates hedge funds from commercial banking — has been described as the Obama administration’s replacement of Glass-Steagall. And, as Matt Yglesias described yesterday, Clinton’s plan would bolster the rule by removing loopholes, including the one introduced during last year’s budget fight. Strengthening the Volcker Rule is a different approach to separating financial business lines, one that sees hedge funds as more of a threat than the mingling of commercial and investment banking.
Sanders’s plans are more traditional. He has breaking up the banks as the first two main items on his Wall Street agenda webpage. He is a supporter of Glass-Steagall, and was also an early supporter of the SAFE Banking Act, which would have broken up banks to be around $500 billion in size. His newest bill, the "Too Big to Fail, Too Big to Exist Act," would ask regulators to break up banks they deem too risky, explicitly including the biggest globally significant banks in the US, like Citigroup, JP Morgan, and Goldman Sachs.
Where should we aim?
Stepping back, there are two clear stories about what's wrong in the financial sector. Bernie Sanders’s agenda is based on the idea that Dodd-Frank did little to combat the threat of the largest financial institutions, and we need to focus directly on them as both a political and an economic threat.
Clinton’s approach looks to the financial markets as a whole. Their focus on the largest banks is driven by turning up the regulations introduced in Dodd-Frank, rather than going completely outside the framework. The core of what they introduce that is new is meant to frame the problem of finance as broader than any group of large institutions.
There are pros and cons to each approach. There’s a real sense that slightly higher capital requirements could force the largest banks to reduce their size, a process politically easier than breaking up the banks directly. Depending on specifics, the Clinton tax could do this. There’s little reason to do only half a financial transaction tax as Clinton does, especially if it isn’t clear the moderate approach would be enough to put a dent in HFT. The continued focus on Glass-Steagall hangs oddly over the debate, since the primary housing and financial crisis occurred outside the traditional commercial banking sector, and future worries are as likely to be in opaque corners of the financial markets.
Mike Konczal is a fellow at the Roosevelt Institute, focusing on financial reform and other economic policy topics. His views are his own and do not necessarily reflect those of Roosevelt.