By David Dayen, a lapsed blogger. Follow him on Twitter @ddayen
On Saturday night the Democrats held a successful debate – and by successful I mean that the party successfully hid it from public view, getting half the rating of the weekday version. Ceding all kinds of eyeballs to Republicans in a bid to protect your front-runner seems to me like the opposite of a political party’s job, but I guess that’s why they pay Debbie Wasserman-Schultz the big bucks.
That front-runner, Hillary Clinton, is taking some heat for oddly deciding to relate her campaign donations from Wall Street to aiding Lower Manhattan after 9/11. Depressingly, the crowd cheered, clearly conditioned to react to any invocation of September 11 like trained seals (obviously the overlay of the Paris attacks played a role). Only when mentioned by a Twitter user later in the debate did the full recognition of the strangeness of that comment shine through. Here’s some commentary by the establishment organ The Economist:
Mrs Clinton’s reply combined indignation, an irrelevant appeal to feminist pride, and a bizarre riff about the September 11th attacks, by which she seemed to imply that taking money from big banks was her way of making sure that the terrorists behind that 2001 atrocity did not win… Readers with furrowed brows may be assured that it made no more sense when Mrs Clinton said it.
This seems to be what the Gang of 500 has decided on as a gaffe, and it definitely has that odor. But I actually think Clinton said something even more egregious and revealing Saturday night. The problem is that the commentariat has deemed it some brilliant insight.
In both debates and numerous interviews, Clinton uses as part of her rejection of breaking up the big banks, as well as proof that her plan for financial regulation is more superior and comprehension, versions of this quote:
Look at what happened in ’08, AIG a big insurance company, Lehman Brothers, an investment bank helped to bring our economy down. So I wanna look at the whole problem. And that’s why my proposal is much more comprehensive than anything else that’s been put forth.
This is the kind of thing smart people say when they want to dupe the ignorant by sounding informed. But upon any reasonable inspection, the statement becomes completely absurd.
Let us first be so intemperate as to point out that, in the eyes of the federal government, AIG was a bank. They bought a small savings & loan in Wilton, Connecticut, explicitly so they could choose the Office of Thrift Supervision as their regulator. OTS’ oversight was so laughable that they were the only federal agency eliminated by Dodd-Frank.
Guess what? Lehman had a thrift too, Aurora Bank, which was ALSO regulated by OTS!
I should also note that AIG couldn’t be regulated as an insurance holding company at the federal level because Gramm-Leach-Bliley expressly prohibited it. That facilitated AIG shopping around for the worst possible regulator, one that wouldn’t delve deeply into its credit default swap and securities-lending activities.
(The Volcker rule actually forced AIG to sell this thrift, incidentally, and they do have increased regulatory oversight at the federal level through being labeled a nonbank SIFI, which unlike some other firms they don’t appear to be so concerned about.)
So even on Clinton’s terms, she’s dissembling. But the real problem here is that just stating that AIG and Lehman weren’t banks tells you absolutely nothing about the role of money center banks in the crisis. It was their entry into the mortgage securitization business that drove everything that happened. Big banks – universal investment/commercial hybrids – funded the non-bank mortgage originators with warehouse lines of credit. Big banks lumped that steady stream of home mortgages into the securities they issued. Big banks served as trustees to facilitate those mortgage-backed securities. Big banks funded the investment banks, like Lehman, with repurchase agreements and lines of credit and other forms of short-term funding. Big banks created an entire business line in credit default swaps for asset-backed securities; without them, AIG would have had nothing to insure. Big banks issued CDOs to repackage unsold MBS, generating a secondary market to the secondary mortgage market. And every CDO issuer bought everyone else’s CDOs, converting them into CDO-squared, derivatives off the derivatives, and so on, leading to both the interconnection and exponential layering of risk that were essential elements of the crisis. Big banks also had subsidiaries that were the biggest mortgage servicers, by the way, just to add on another malicious actor.
So pulling out two firms, Lehman and AIG, without acknowledging their funders and counter-parties, is the epitome of a half-truth. Lehman’s largest creditors in the bankruptcy were global banks from Germany and Switzerland. AIG’s largest counter-party was Goldman Sachs. Singling them out of a hopelessly interconnected financial system is a meaningless argument, especially when you consider that the largest recipient of federal government support was a universal bank called Citigroup, which only didn’t end up failing after having their pockets stuffed with trillions from the Treasury and Federal Reserve.
Any serious analysis of the central drivers of the crisis necessarily lead you to the largest banks as the focal point for the interconnection and risk buildup. The Lehman/AIG postulate is totally disingenuous. But it’s more than that. It’s a distraction maneuver, designed to cast a sympathetic eye on the same mega-banks going forward. Because if they weren’t responsible, how could more stringent regulation on them make sense? Why should they be broken up, if they aren’t the sole source of the trouble? Why should their political power and influence represent a threat? This is a clear case of the dictum that if everyone’s responsible, nobody’s responsible.
Shadow banking is absolutely a threat, and one Bernie Sanders, Elizabeth Warren, Sherrod Brown and the leading financial reformers should talk about more. I’d love to see more attention on collateralized loan obligations and fintech and all sorts of credit vehicles. But it’s beyond clear what Clinton is up to with this silly tactic, one that falls apart upon the slightest scrutiny.