Gaius Publius: Wall Street Reviews What Sanders Plans for Wall Street

Yves here. This post provides a solid overview of the Sanders Big Finance reforms, and as important, some of the ways it has been caricatured or flat-out misrepresented.

I wanted to add a couple of points.

Disingenuous critics treat the less-than-well-thought out details of the Sanders plan as if it were cast in stone. For example, the idea of a usury ceiling is sound. Classical economists like Adam Smith called for them because they could see in their day that lending with no interest rate curbs led creditors to target borrowers who were desperate or reckless but still had some ability to pay, which then was wealthy gamblers, not productive enterprise. The defect of the Sanders proposal is it sets one rate that is fixed across all products. It should instead be set in relationship to prevailing interests rates and (at a minimum) vary with the maturity of the obligation.

But as an aside, scare talk that there would be no credit cards except to very safe customers under this system is just bogus. The old pricing model for credit cards was to have an annual fee. That meant that the credit card issuer made money on every type of user: ones who didn’t use it much or paid off their balances in full every month, ones who only occasionally ran a credit balance (say by virtue of missing a payment or using a credit card to finance Christmas or vacation spending) and customers who ran balances all the time. This model was so well established that when I was at McKinsey I got a call from a Lazard banker in 1984, basically asking me to confirm his belief, which was not just conventional wisdom but a deeply held article of faith then, that the pricing model for credit cards (which really was very well set) was immune to change. I said, basically, that assuming this approach would last forever was not wise.

A second issue that Gaius does not challenge is how critics almost without exception mischaracterize Sanders’ “Glass Steagall” plan. It is not to restore the 1933 law, as most imply or even state explicitly, as the Wall Street analyst who is the focus of this post, Jaret Seiberg, does. It is to implement the bill proposed by Elizabeth Warren and backed by some Republicans, such as John McCain, which is described as the 21st Century Glass Steagall Act. It would break up banks along Glass Steagall lines, which is something the Bank of England and the Financial Services Authority fought hard to get implemented. They faced fierce opposition and had to settle for the half a loaf of ring-fencing. But it also included features to curb shadow banking, such as rolling back the section of the 2005 bankruptcy reform act that make derivative positions effectively senior in bankruptcy by allowing counterparties to hang on to collateral. Seiberg, who has actually never been a lawyer a bank regulator, or apparently even a bank employee but appears to have moved up the food chain from being a trade journalist to a niche analyst, reveal an embarrassing failure to do basic homework, meaning understand that Sanders is referring to existing, draft legislation that addresses modern finance and read that bill.

By Gaius Publius, a professional writer living on the West Coast of the United States and frequent contributor to DownWithTyranny, digby, Truthout, and Naked Capitalism. Follow him on Twitter @Gaius_Publius, Tumblr and Facebook. Originally published at at Down With Tyranny. GP article archive here.

This has been mentioned in a number of places (for example, here), but the whole document is worth studying as a document. It was produced by a Wall Street analyst who looks at and describes the Sanders plan for sweeping Wall Street reform — for example, for breaking up the big banks, among other proposals. Like much analysis of this type, it’s insider-to-insider talk, thus dispassionate and mainly accurate in description, in addition to the advocacy it contains.

As an example, imagine an advisory note that determines whether a stock is worth or not worth your buying it. This is that kind of document. I don’t present it for its advocacy, but for its analysis.

Who Is Jaret Seiberg?

The analyst’s name is likely unfamiliar to most readers. According to Huffington Post writer Zach Carter, “Jaret Seiberg [is], a regulatory specialist at Guggenheim Partners — and one of the most astute finance-friendly observers of American politics.” Here’s Seiberg’s biography, from an event at which spoke and moderated, the 2013 Milken Global Conference:

Jaret Seiberg
Managing Director and Senior Policy Analyst, Guggenheim Partners

Jaret Seiberg is managing director and senior policy analyst at Guggenheim Securities Washington Research Group, where he follows the financial services and housing sectors for institutional investors. He has been with the group for nearly a decade after serving as Washington bureau chief for The Deal and deputy Washington bureau chief for American Banker. He began his career following legislation coming out of the savings and loan crisis. Seiberg speaks frequently to industry groups and regulators, including the American Bankers Association, SIFMA, the Federal Housing Finance Agency and the Federal Reserve Bank of Kansas City. He has briefed bank management teams, Congress and congressional staff and is cited often in the media. He has a bachelor’s degree from American University in Washington, D.C., and an M.B.A. from the University of Maryland at College Park. 

At that conference, Seiberg moderated a panel on “Global Financial Regulation,” a panel that included a sitting U.S. senator, a former Associate U.S. Attorney General and a couple of financial industry directors. The subject was well within Seiberg’s area of expertise.

Jaret Seiberg’s Note to Clients

Here is most of the full text of Jaret Seiberg’s note to Guggenheim’s clients (pdf) detailing and analyzing the Bernie Sanders Wall Street plan. (Sanders’ speech announcing the plan is here; video here.) Read this advisory to understand (a) the simple-version Sanders plan itself, and (b) what Wall Street thinks it will do.

Seiberg does get a few things wrong, one of them egregiously (see if you can spot it). But first the advisory note, starting with Seiberg’s takeaways (bolding within his takeaways is mine):


January 6, 2016

Election 2016
Sanders Plan Radically Changes Financial System

Financial Services Policy Bulletin
Jaret Seiberg

What Is Happening

Sen. Bernie Sanders outlined a financial reform plan that would result in radical impacts to big banks, credit raters, nonbank financial firms,and payday lenders.

Our View

• Implementation of this plan is unlikely, though we do worry that it will influence how other candidates — conservatives and liberals — approach financial reform. There are also pieces of the plan that could garner bipartisan support.

• More broadly, we believe the speech fits with our theme that the political environment is very populist. Such populism greatly increases the risk of more onerous actions against big banks.

Rest of the Story

Sen. Bernie Sanders yesterday afternoon outlined his vision for how he would reform the financial system. We believe his comments went well beyond what the immediate headlines suggested, which is why we are following them up with an additional note.

On the macro level, we believe there are five key takeaways for investors:

  • This is not just about breaking up the biggest banks. Sanders is calling for a system in which financial firms are smaller, the government controls the interest rates that banks charge, certain fees are capped, the Postal Service becomes a viable competitor to banks and payday lenders, CEOs would be criminally liable if employees defraud customers, and those with Wall Street experience would be banned from working for the government on financial issues.
  • Sanders appears to argue that he could implement much of this agenda on his own even without the need for legislation. We caution against dismissing this view. There is much that the White House, Treasury, or the financial regulators could do by executive order. There is a good chance the courts would strike down these efforts, but that would then create political momentum for Congress to change the law.
  • This is not about whether Sanders can win the nomination or the general election. Bashing Wall Street is a populist message that appeals to conservatives and liberals. Sanders has now laid out the most radical option on the table that other candidates will be judged against. At the least, this creates pressure on populist candidates on both sides of the aisle to lay out their approaches.
  • Do not let the facts get in the way of this political argument. We suspect that many investors would start yelling at their screens based on some of the allegations that are made. While it would be interesting to see the speech fact checked by the Washington Post or others, the accuracy of the allegations is irrelevant. This is about creating a political narrative in which Wall Street is nothing more than evil predators taking advantage of innocent consumers and small businesses. That narrative has political power, which is why it is being used by progressive and conservative candidates running for the White House. It is also why we continue to worry about negative government actions for the biggest financial firms coming out of this election.
  • At some point, the debate will shift to using the financial system to boost economic growth and to get more people to work. We would have expected to already be at that point. This speech suggests this tipping point may be at least another presidential election cycle away.

The final bullet point sounds to my ear like industry self-praise and wish-fulfillment. Judge for yourself whether the current financial system boosts economic growth or retards it by extracting and pocketing billions in profit and fees. That aside, the rest of what’s above seems well considered, including the comment about predators.

Now Seiberg’s list of planks in the Sanders plan itself. For the most part I find this an excellent summary. Note the italicized comments by the author following each plank. (Can you spot the one he gets egregiously wrong? Look for the one discussing jail time.)

Seiberg again:

As we heard the speech, there were 10 planks to it. We discuss those planks below:

1. Break Up the Banks and Other Big Financial Firms. The Treasury Secretary within the first 100 days would compile a list of the banks, insurers, and nonbank financial firms whose failure would cause catastrophic damage to the economy. The White House would then break up those financial firms by the end of the [sic] 2017.

It is unclear from the speech [how] Sanders would legally do this, though media reports suggest the senator would rely on authority in Dodd-Frank that permits the Federal Reserve to break up financial firms that threaten financial stability if there is not a less onerous option available to mitigate the risk. In our view, this is unrealistic. It would require a wholesale replacement of Federal Reserve leadership, as we don’t see Janet Yellen taking orders from the White House to act. On top of that, this would get tied up in court for years as Sanders appears to be skipping over the requirement to try less onerous options first.

To us, the bigger picture here is that Sanders has made it a priority to break up the biggest banks. This will then add to the pressure on other candidates who are making populist pitches to take similarly tough positions.

2. Turn Credit Raters into Nonprofits. This did not get nearly the attention it deserved. Sanders accused the credit rating agencies of picking profits over truthful ratings. His cure is to require any company in the credit rating business to be structured as a not-for-profit company. In addition, the financial firm engaged in the securitization could not pick the credit rater.

While we are skeptical that credit raters would be transformed into nonprofits, we continue to believe there is a real risk that the next president could try to separate the hiring of the rater from the payment for the rating. This would be negative for the incumbents such as S&P and Moody’s.

In our view, the only reason this change has not already occurred is because this White House has not focused the spotlight on the issue. If the spotlight is focused on it, we believe change becomes inevitable given the populist nature of the country at this point.

3. Cap ATM Fees. Sen. Sanders would cap ATM fees at $2. It was unclear if he was referring to the fee to use a machine by the owner of the ATM, the fee a bank charges its customers for foreign ATM usage, or both. We suspect it was the latter, which could mean a sharp reduction in ATM fees.

This is hardly a new issue, but it is one that cannot be dismissed. This is especially true if a Democrat takes the White House. Voters hate ATM fees, which makes limiting them politically popular.

4. 15% Usury Cap. The senator would limit the interest rate on any type of loan to no more than 15%. We would note that his cap appears to be unrelated to the 10-year Treasury or some other benchmark. It would apply to credit cards, mortgages, and any other type of loan. We also believe it could apply to payday lenders, which effectively in our view would put them out of business.

No issue better symbolizes the disconnect between Wall Street and populists than the usury cap fight. With a 15% interest rate cap, banks are going to only extend credit to the most pristine borrowers because they cannot afford for these loans to go bad. This means many borrowers may lose access to credit cards. Of all of his ideas, this seems to be the one that is least likely to survive.

5. Post Office Banks. This is the solution to payday lenders and check cashers. Sanders wants to implement an idea that the Inspector General for the Postal Service first raised a few years ago. The plan is to use the post office to provide basic banking services — including small dollar loans — to consumers so these voters never need to use a payday lender again.

We continue to believe this idea is not as unlikely as it sounds. The Postal Service is in debt and needs new revenue sources. We could see Congress viewing Post Office banking as both a way to help consumers and to solve the Postal Service’s financial woes.

6. Charge for Excess Reserves. The Federal Reserve at the start of the
financial crisis won the right to pay interest on reserves; this was a central bank priority, as it provides another means to control the money supply. Sanders would end this practice by requiring banks to pay for the privilege of holding reserves at the central bank. It is unclear if this would apply to required reserves or just excess reserves. The revenue generated would be used to provide subsidized loans to small businesses. It is unclear what agency or company would originate these loans or how the program would work.

This is another idea that could well survive the campaign regardless of which candidate wins. The idea that the Federal Reserve is paying big banks — including foreign banks — is going to upset lawmakers on both sides of the aisle and could well lead to legislation. This is only going to generate more attention as the Federal Reserve hikes interest rates.

7. Tax Wall Street Speculation. We did not get many details on this idea, though it appears to be a traditional transaction tax as the senator said it would generate enough revenue to make public universities free for students.

Transaction tax plans have risen periodically in Congress and gone nowhere even while budget stresses were greatest. As a result, we see this as one of the lower risk ideas in the speech.

8. Bring Back Glass-Steagall. We only put this toward the end because it already has gotten so much attention. The senator would restore the separation between commercial banks, investment banks, and insurers that existed prior to its repeal during the Clinton administration.

He argued this would limit the size of shadow banks by preventing commercial banks from providing them with depositor-provided funding.

We are confused by this plank of the Sanders plan, as Glass-Steagall was never about whether banks could loan money to nonbank financial firms or buy their commercial paper. In addition, we believe Sanders really is talking about moving trading desks into nonbanks. That strikes us as interesting, as these trading desks would then be freed from the Volcker Rule and could engage in proprietary trading. In any event, the threat here is that this becomes the populist thing for progressives and conservatives to advocate without regard for its merit.

9. Criminalize Business Disputes. There was a lot of rhetoric in the speech about the need for the CEOs of big banks — especially JP Morgan — to be prosecuted. The general view appears to be that every settlement is an admission of criminal behavior for which the government should prosecute the CEO over [sic]. This appears to include holding CEOs criminally responsible for wrongdoing committed at banks that they acquired.

We almost don’t know where to start with this other than to say that there will be tremendous pressure from populists on the left and the right to criminally convict bankers. We have real doubts that this strategy will work but it may well be an overhang for the industry.

10. Limit the Federal Reserve’s Power in a Crisis. Sen. Sanders referred often to how the Federal Reserve did the bidding of the biggest banks during the financial crisis while ignoring consumers. As a result, he would further limit the ability of the Federal Reserve to provide emergency lending.

This is just dangerous. Congress created a central bank so that commercial banks could continue to lend even if liquidity dries up in the market. It helped end bank runs and results in a stronger economy. Yet we cannot completely discount this plan, as populists on the left and the right see such liquidity as nothing more than a bailout of the big banks.

Just a few comments from me, since I want you to focus on Seiberg’s thoughts. He rightly sees the danger to his industry, though in one or two places he wrongly characterizes that danger. Scan that list of ten proposals again. The list is worth keeping in mind as you advocate and vote in this electoral season.

What Seiberg Gets Wrong

Jaret Seiberg’s analysis gets a few things wrong, and they’re worth noting briefly. His description of points one through eight are accurate, and his commentary, sometimes panicked, is mostly appropriate from his point of view. For example, his concern that point four, a 15% usury (interest rate) cap, would put payday lenders out of business is likely accurate. And his comment in point two, that turning credit rating agencies into non-profits “did not get nearly the attention it deserved,” is excellent. David Dayen gives that point a closer look here.

I disagree with his comment on point four that a cap on interest rates would force banks to “extend credit to the most pristine borrowers” only. First, this is similar to CEOs saying if their taxes are higher, they’ll just refuse to work. Of course they’ll work; it’s how they’ll get more money, taxes or no. But second, the problem isn’t lending but predation. So if banks are limited to 15% interest in credit card debt, do you think they’ll take it or walk away from a still lucrative business?

To answer that, consider that prior to the 1978 Supreme Court case that deregulated interest rates for national credit cards, the cap on interest rates in Minnesota was 12%. Do you think Minnesota banks were going out of business, or lending only to “the most pristine borrowers”? Of course not.

But his most egregious characterization, that the Sanders plan would “criminalize business disputes,” is just plain wrong. And it’s wrong in the same way that the fossil fuel companies are wrong when they say RICO prosecution of their climate change-denying activities would “criminalize differences of opinion.” This mischaracterization is a well-tested ploy. RICO prosecutions would hold companies accountable for fraud, not “differences of opinion.” The fraud, in fact, arises from the fact that the fossil fuel CEOs, like tobacco CEOs, hold exactly the same opinions as those they’re defrauding, not opinions that differ at all; the fraud is that they lie about what they know to make money.

Here’s financial analyst and Sanders campaign writer RJ Eskow to explain: “Bank CEOs would not broadly be ‘criminally liable if employees defraud customers.’ But they would not enjoy the de facto immunity they appear to enjoy today as the result of lax law enforcement. They would be held responsible for their own actions and the deterrent effect would help forestall future crimes.”

I invite the reader to consider the prosecution of bankers during the 1980s Savings and Loan crisis: “[Following] the savings and loan crisis of the ’80s and early ’90s … more than 1,000 bankers were convicted by the Justice Department. Among those jailed were Charles Keating Jr., whose Lincoln Savings and Loan cost taxpayers $3.4 billion, and David Paul, who was sentenced to 11 years in prison for his role in the $1.7 billion collapse of Centrust Bank.”

Yet in the aftermath of the 2008 crisis, which “left 8.8 million Americans jobless and led to a $700 billion government bailout,” the number of criminal prosecutions for crisis-related fraud remains … zero. That’s what Sanders wants to change.

But these are small disagreements relative to the value of this analysis, and we should be grateful to Mr. Seiberg to be able to learn from it.

(Blue America has endorsed Bernie Sanders for president. If you’d like to help out, go here; you can adjust the split any way you like at the link. If you’d like to “phone-bank for Bernie,” go here. You can volunteer in other ways by going here.)

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  1. TedWa

    The New Deal was about much more than Social Security –

    “Few today remember that a half-century ago a number of New York and Chicago’s top bankers were sentenced into penitentiaries-the New Yorkers into Sing Sing-the senior partner of J.P. Morgan and Company, the president of the National City Bank, the president of Chase Bank. Every one of them had been found to be doing reprehensible financial tricks. They were selling their own friends short. They were opening their friend’s mail and manipulating the stock market. They were manipulating everybody. They were way overstepping the moral limits of the privileges ethically existent for officers in the banking game, so a great housecleaning was done by the New Deal.”

    Buckminster Fuller “Critical Path”

  2. Lune

    Seiberg may be wrong on a few details, but he’s absolutely right in one way: whether this gets passed or not, this defines the liberal end of the Overton Window when talking about finance reform. That was the most aggravating part to me about Obama and his minions. When the Republicans say we should give JPM a few extra hundred billion dollars, and repeal some regulations to boot, and Obama’s “liberal” response was we should only give them one hundred billion dollars, and only repeal one or two regulations, I would stare at the TV and ask “what happened to the option to take them all out back and shoot them? Like Reagan did in the S&L crisis?”

    If Sanders succeeds in moving “Acceptable” talk in the beltway to include such proposals as breaking up the banks, real jail time for CEOs, and a Post Office Bank, he will accomplish far more just during his candidacy than Obama will have done in 8 years as President.

    Also, I think Seiberg is astute when he says much of this can be accomplished without Congress. Given how much power Treasury and the Fed has usurped from Congress to forestall “populist” measures for the past 8 years, I’m sure the bankers realize if a populist becomes head of the Treasury, that power can be aimed right back at them…

  3. Lune

    Also, one point about #6, charging for excess reserves.

    Seiberg is incorrect. Paying interest on excess reserves was not used as a tool to control money supply. It was used as a way of shoveling money onto bank balance sheets when they were insolvent. During the GFC, the ostensible purpose of all the bailouts and interest rate reductions was to get lending restarted. That means using reserves to make loans (or more accurately, putting reserves into productive use through fractional reserve lending). Paying interest on reserves incentivizes banks to take on reserves and just sit on them rather than making use of them. IOW, paying interest on reserves *shrinks* lending and money supply, which is the exact opposite of the macroeconomic goals the Fed purported to have during the GFC.

    So why did they do it? Because lending reserves at near zero and then paying interest on those same reserves is a great accounting trick for giving free money to banks and not calling it a bailout. It’s not a small amount either. Annual payments under this scheme are over $5billion.

    Imagine a bank stupid (or in this case, corrupt) enough to lend at a lower rate than it pays interest on its savings account. Everyone would line up to borrow as much as possible and stick it right back in their savings account. Which is exactly what happens. Welcome to the Fed. If only average citizens could access this savings account to repair *their* balance sheets…

    1. Smurphy1

      This is false. Paying interest on reserves is no different than paying interest to treasury bonds that were bought with excess reserves ie what was done for decades up to 2008. The purpose is not a handout to banks. The purpose is to create an overnight base interest rate above 0. Now if you want to argue that the overnight rate should be 0 that’s a different argument than the one you’re making.

      1. Lune

        The Fed only gained Congressional approval to pay interest on reserves in 2008. From its very inception until 2008, The Fed never had trouble maintaining the overnight base rate above 0 without paying interest on reserves. So why all of a sudden in 2008 did it become critical to pay interest?

      2. aka

        “The purpose is to create an overnight base interest rate above 0. “ Smurphy1

        Let’s see. The US Federal Government GIFTS the commercial banks with massive reserves by directing all of its spending (to Social Security recipients, to the US Military, to Federal employees, to defense contractors, etc. ) to commercial bank accounts instead of to individual, business, and organizational accounts at the Federal Reserve (since they are NOT ALLOWED) and the commercial banks then have little need to borrow any more fiat (aka “reserves” in the case of commercial banks)?

        Little wonder, eh?

        Let’s direct all future spending by the US Treasury to individual, business, and organizational accounts at the Federal Reserve and further let’s abolish government provided deposit insurance.

        Do you think then that the overnight rate would tend to 0% without Fed intervention? Or would the commercial banks have to scramble for new reserves by having to borrow or buy them from the American population? At honest interest rates?

  4. flora

    Thanks for this post.
    My guess is that reining the Wall St. banks would help the Main St. banks compete on a more level playing field. I think that would be good for the real economy.

    1. flora

      and… re-reading this, I think Tall Paul would approve the general outline of reforms per items 1 – 8. Just a guess.

  5. sharonsj

    Personally I think Lune’s idea of taking the banksters out back and shooting them could still come to pass and it won’t take another presidential cycle–it only needs another economic implosion with banks instituting bail-ins and Congress and the Fed giving them bailouts.

    1. david trouitman

      Another financial crisis, unfortunately, will porbably not result in any reforms. But it will probably result in another giveaway of money to the banksters. The greed of Wall Street and their lackeys in Congress (which includes what? 75% of all Congressmen) knows absolutely no limits. Like the fisherman who overfish their waters until the fish are all gone, they will continue until they have control of all assets in the world.
      Taking them out back and shooting them would help. Unfortunately, there are many more waiting to take their places.

  6. Hayek's Heelbiter

    Many thanks, Yves, for unthreading and clarifying.

    Point 7 (i.e., a Tobin Tax). What do you think the realistic chances are?

    1. Lune

      I fully support the Tobin Tax but just make sure you realize it won’t generate any revenue. The entire point of a Tobin Tax is to make those high-frequency trades uneconomic, which means they’ll vanish. So the actual tax collected will be minimal. Sanders is pulling a bit of a fast one saying it will pay for Universities, because he’s assuming transactions will occur at current levels, which it won’t. That’s the whole point of introducing the tax.

      BTW, this is still a great thing. HFT is nothing more than blatently illegal front-running of customer orders. They’d be in jail if the SEC was actually interested in doing any actual enforcement. So a tobin tax that stops it would be a good thing for our markets. Indeed, if Republicans recoil at anything that’s called a tax, it’s easy to achieve the same effect if the SEC simply states that any order placed can’t be cancelled for 10 milliseconds. That’s much less time than you or I need to cancel an erroneous order, but is about a thousand times slower than most HFTs operate.

  7. Si

    Maybe I have become too cynical. Unless campaign reform gets corporate money out of the ‘bought and paid for system’ any plans are simply part of an vote getting strategy.

    I believed Obama’s hope and change rhetoric. The idea that a politician will bite the hand that feeds it was naive, I see that now.

    We love the analysis of the false promises because it occupies our minds and means we don’t have to face the reality of our situation.

    There is simply political and judicial capture and we are powerless in the face of it. Discussions about technical detail give us a sense that we understand and provides us with the illusion of control.


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