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Bernie Sanders's plan to break up the banks, explained

Photo by Andrew Burton/Getty Images

One of the sharpest and clearest points of contrast between Bernie Sanders and Hillary Clinton regards his desire to "break up" the largest Wall Street banks. According to Sanders, a bank that is too big to fail is too big to exist, a theme he offered as the title of his major legislation on the subject.

But Sanders has gone beyond offering dream legislation to suggest that if he is elected president he will achieve a bank breakup within one year, whether Congress likes it or not. It's a dramatic claim that, if true, would drastically elevate the stakes of a Democratic primary that is mostly being conducted against the backdrop of a likely Republican majority in the House.

The bad news for Sanders (and the good news for Citigroup) is that it's almost certainly not true. There's considerable expert skepticism that Sanders could accomplish this through executive action alone, and essentially nobody thinks a commitment to do it within one year is credible. The fact that he would make this promise so casually encapsulates the combination of progressive ambition and sloppiness about details that we also saw from his health care plan.

But even if Sanders can't pull off what he promises, the road he says he'll travel underscores what's likely one of the biggest differences with a theoretical President Clinton: who would get appointed to key financial regulatory posts. A Clinton administration would likely offer continuity with Obama's focus on the stability of the financial system, while a Sanders administration seems likely to feature a considerably tougher approach to enforcement that on its own might lead to a substantial decline in megabanks' economic and political significance.

Bernie Sanders's commitment to break up the big banks

In a January 5 speech on Wall Street and the economy delivered in New York, Sanders sought to raise the stakes of his disagreement with Clinton over the desirability of breaking up major financial institutions by asserting that he could and would accomplish this through executive action.

Here's the relevant part of the speech:

Within the first 100 days of my administration, I will require the secretary of the Treasury Department to establish a "Too-Big-to Fail" list of commercial banks, shadow banks and insurance companies whose failure would pose a catastrophic risk to the United States economy without a taxpayer bailout.

Within one year, my administration will break these institutions up so that they no longer pose a grave threat to the economy as authorized under Section 121 of the Dodd-Frank Act.

This puts bank bailouts on the table in a way a legislative proposal simply doesn't. If it's true, it means Clinton can't argue to liberals who agree with Sanders on the merits that the whole issue is moot anyway because congressional Republicans won't go for it. Unfortunately for Sanders, the actual text of Section 121 doesn't really give his hypothetical administration this power in the way he seems to think.

Experts are deeply skeptical Sanders can do this

Rob Blackwell is Washington bureau chief for American Banker, a trade publication for the financial services industry that counts many professionals at smaller regional or community banks among its subscribers. It's home to hot takes like "New Ways to Raise Capital for Your Bank" and "Four Ways to Save the Dying Bank Branch," along with its newsier stories.

Blackwill's take on Sanders's plan is that it's "cuckoo."

"There is more likelihood that I will be eaten by a great white shark while eating lunch at my desk," he writes, "than of this plan ever being enacted."

It's easy to find experts who are sympathetic to Sanders and therefore a lot kinder in their phrasing of this criticism. But it's difficult to find one who disagrees with Blackwill's basic point, and the Sanders campaign didn't get back to me when I asked for a response. The problem is that while Dodd-Frank does give a collective of federal regulators the authority to order bank breakups, this process isn't under Sanders's direct control:

Section 121 of Dodd-Frank requires a vote from the Fed that such institutions pose a "grave threat to the financial stability of the United States," and a further vote from two-thirds of the Financial Stability Oversight Council. That means Sanders needs four of the seven Fed governors to go along with this plan, and seven of the 10 voting FSOC members to approve it. And that is just not going to happen.

For one, the current composition of the Fed board would never embrace such a draconian solution absent proof that these banks are a grave threat to the economy (proof that Sanders hasn't supplied as of yet). If the current Fed board thought the big banks needed to be broken up, it would be doing so already. Moreover, while Sanders could fill the two current vacant seats on the Fed board, the other five have long terms that extend until 2022 at the earliest. (Janet Yellen's term as Fed chair expires in 2018, but her term as a governor extends until 2024.) That's a long time to wait to gather the votes necessary for Sanders to implement his plan.

Even if the Fed assented, it would also need the concurrence of five of the following heads of these seven agencies: Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, Commodity Futures Trading Commission, Securities and Exchange Commission, National Credit Union Administration, and Federal Housing Finance Agency. (The two other votes are an independent insurance expert and the Treasury secretary, the latter of which would presumably not be a problem for Sanders.)

In other words, a breakup in year one is entirely impossible. A separate, but related, question is whether regulators committed to this agenda could get confirmed at all.

Executive branch appointments is the big issue missing from the primary

Sanders's campaign has thus far focused on really big legislative ideas that are unlikely to be passed into law by any Congress in the foreseeable future. But when I speak to Clinton's strongest critics in the labor movement and the world of professional progressive politics, what they bring up are the little things, and especially executive branch appointments.

When Bill Clinton took office in 1993, Democrats had been out of power for 12 years, and he had little interest in bringing back veterans of Jimmy Carter's administration. He initially staffed an economic team that represented a diverse range of viewpoints.

But National Economic Council Chair Robert Rubin, a former Goldman Sachs banker who later went on to become Treasury secretary and then chair of Citigroup, quickly emerged as the most significant voice. Over time, his allies and former subordinates came to dominate economic policy jobs in the Clinton administration.

There was once great hope among the more populist, more union-friendly faction of politically connected economists that these "Rubinites," as they were called by their detractors, would be overthrown from their dominance of the party's policymaking, especially if Hillary Clinton did not become the nominee in 2008.

Things didn't work out that way. Seeking seasoned hands to guide the country through a financial crisis, Barack Obama picked Clinton administration veterans Tim Geithner, Larry Summers, and Peter Orszag for his key economic policy roles. It's generally assumed that a Hillary Clinton administration would exhibit considerable continuity with the Obama administration on economic policy personnel, just as Obama exhibited considerable continuity with Bill Clinton, while a Sanders administration would probably look to a different pool. Indeed, in order to make any progress on his goal of using Section 121 authority to break up banks, Sanders would essentially have to draw his appointees from outside the existing universe of Democratic Party economic policymakers.

Unfortunately, both formal and informal debates between Clinton and Sanders haven't really focused on the question of appointments, even though it seems from a distance that they likely have a big disagreement here.

Different regulators could make a big difference — if confirmed

While appointing enough Federal Reserve Board members to start dismantling big banks would be a labor of years, appointing a different team of financial sector regulators would start making a difference right away.

Simply put, while Obama officials deeply believe in the need to regulate the financial system to reduce the likelihood that excessive risk taking will lead to new financial crises, they do not doubt the fundamental legitimacy of Wall Street's role in American politics, economics, and society. They think the presence of large, multinational financial services firms headquartered in the United States is a source of national strength, as is the existence of a large and deep stock market and other financial trading markets. They think speculative markets in commodities and foreign exchange futures serve a useful purpose for the real economy. They think hedge funds and private equity shops do useful work in financing startups and corporate reorganizations.

Many of them have worked for private sector financial companies in the past, and many will do so in the future. They all think the presence of people with private sector experience in the regulatory state helps make the policymaking process better-informed.

Sanders has not focused in great detail on his view of these matters, but he has recently taken to slamming the revolving door between Washington and Wall Street and calling out Rubin by name as an example of its pernicious influence.

In contrast to Sanders, Elizabeth Warren really has delved deeply into these issues, offering detailed criticism of Obama's Securities and Exchange Commission, calling for a "truth in sentencing" bill for white-collar criminal cases, and, most of all, calling for criminal prosecutions of financial institutions.

The upshot of Warren's critique of Obama is that the administration's desire for financial stability has led it to be serially soft on financial crime, when what it should be doing is taking every possible opportunity to throw the book at the banks — seeing the possible collapse of whole institutions as more of a feature than a bug of a rigorous approach to enforcement.

As a template for bank shrinkage, this is in many ways more plausible than Sanders's explicit proposal, and it's clearly compatible with his rhetoric and his values. The problem, in practice, is that a Sanders administration will find it challenging to get bank regulators confirmed when he's explicitly stated his intention to have his appointees use Section 121 to begin dismembering banks.

Republicans would be opposed to that, naturally, but so might moderate Democrats, and even the fairly liberal Dems who represent New York, New Jersey, and Connecticut. On the other hand, the political context of a universe in which Sanders upsets Clinton for the nomination and then wins a general election would be different enough from what we've seen in the past that prognosticating about it is difficult.