Wall Street has become a whipping post in the 2016 election, with candidates from both parties taking opportunities to talk tough about how they would regulate the sector of the economy that much of the electorate blames for the financial crisis and Great Recession.
Given this reputation and the populist tenor of this election (see: Donald Trump and Bernie Sanders), it's an easy way for candidates to score points. So, let's take a look at what leading Democratic candidates Hillary Clinton, Bernie Sanders and Martin O'Malley have to say about Wall Street, the post-crisis Dodd-Frank Act and the future of financial regulation:
1. Clinton and her complex criticism of Sanders regarding credit default swaps.
Clinton has criticized Sanders twice now in two consecutive Democratic debates for voting for the Commodity Futures Modernization Act, a statute approved in 2000 that exempted credit default swaps from regulation and is credited as a contributor to the 2008 financial crisis because it helped create crisis period poster-child American International Group.
"You're [Sanders] the only one on this stage that voted to deregulate the financial market in 2000...to make the SEC and the Commodity Futures Trading Commission no longer able to regulate swaps and derivatives, which were one of the main cause of the collapse in '08," Clinton said.
In the interest of full disclosure, Clinton should mention that her husband's administration, led by successive Treasury Secretaries Robert Rubin and Larry Summers, had been major advocates for swaps deregulation. The measure itself was approved into law in 2000 during the waning days of the Clinton administration with overwhelming bipartisan support. (In one stand-alone-bill vote in October 2000, then Rep. Sanders joined 376 other House members to support the provision with only four voting against it.)
"It is odd that Clinton's attacking Sanders for voting for it because that was what the Clinton Administration was pushing for," said one top ex-CFTC staffer heavily involved in the debate at the time.
As first lady at the time, HRC wasn't involved in the debate. But it's worth asking whether a second Clinton administration would follow in the footsteps of Summers and Rubin or plot a new path?
Clinton's plan for Wall Street suggests she would be tougher. The former New York Senator is seeking to reinstate a recently repealed Dodd-Frank provision that would require big banks to divest part of their derivatives business into separately capitalized subsidiaries. Known as the Lincoln Rule, after former Arkansas Senator Blanche Lincoln (Democrat), the measure was set up to have riskier credit derivatives trades of the kind that got AIG in trouble take place in a separately capitalized unit so that any trading failure there would not have access to the institution's commercial bank division, which is backed by insured deposits and taxpayers through the Federal Reserve's discount window.
2. Breaking up the big banks already on offer?
Clinton likes to point out frequently that Dodd-Frank gives regulators the authority to break up big banks. She also notes that her multi-point plan for reining in Wall Street would "empower regulators to break up big banks" if they posed a risk. In the last Democratic debate, Clinton acknowledged that Dodd-Frank "gives us the authority already to break up big banks...."
It is true that the statute gives the president and regulators in Washington the power to break up big banks. However, many Washington insiders believe that regulators, including the Federal Reserve, will never use that power without a very specific mandate from Congress telling them to dismantle big banks.
"They wouldn't use that authority," said Boston University Law Professor Cornelius Hurley. "We talk about too big to fail banks because we know they still exist. They [regulators] have the authority [to break up banks] if they pose substantial risk. But here were are five years after Dodd-Frank and they haven't exercised that authority. It's not a matter of authority but a matter of willpower."
Long-shot rival O'Malley is right to respond to Clinton as he did in last week's Democratic debate by saying "and we have never used it."
3. Democrats wrongly vilifying Republicans?
Clinton argues that "Republicans want to give them [big banks] more power, and repeal Dodd-Frank" and that's what Democrats need to stop. And while it is true that most of the GOP presidential candidates have advocated for dismantling parts or all of Dodd-Frank, some have pushed for tougher bank regulation as well.
Limited government conservative Mike Huckabee -- like Sanders but unlike Clinton -- wants to restore a version of the 1933 Depression Era Glass-Steagall Act that would separate commercial banks from investment banks. And GOP nominee Jeb Bush, while opposed to breaking up big banks, says the U.S. should raise their capital requirements so they aren't too-big-to-fail, a move that could indirectly drive large financial institutions to shed assets. Bush, like candidates Marco Rubio and Ted Cruz, would like to reduce the power of the Consumer Financial Protection Bureau, an agency created by Dodd-Frank that writes rules for mortgages and other credit products.
4. Say on pay.
Clinton wants top executives at the largest financial institutions categorized by Dodd-Frank as "Systemically Important Financial Institutions" (SIFIs) to defer some of their annual pay packages to future years with the possibility of losing some of it later if the firm's losses threatens its financial health -- and, therefore, the economy's. That puts her far to the left of many Republican presidential candidates, who argue that Dodd-Frank codified too-big-to-fail by creating the SIFI category.
"These banks go around bragging about it," said Marco Rubio at a recent debate. "They say with a wink and a nod 'we are so big and so important that if we get in trouble the government has to bail us out.'"
However, recent moves by big SIFIs General Electric's GE Capital unit and MetLife to divest financial assets in an effort to limit or remove their "systemic" status suggests that not all large financial institutions are happy about the regulation. MetLife has also launched a first-of-its-kind lawsuit against the government, arguing that it isn't systemically risky and doesn't' deserve the SIFI status. And at least two other SIFIs, Ally Financial, the former GMAC, and AIG, are under pressure by activist shareholders to break up or sell. Many large investors of these two firms don't appear to believe that the SIFI status has imposed some sort of special bailout protection on them. Plus, we couldn't find any evidence that the big financial institutions are bragging about being SIFIs.
5. How much more regulation is needed?
Clinton argues that restoring Glass-Steagall isn't enough. However, some critics of Wall Street's big banks argue that her package of reform alternatives give regulators too much discretion and doesn't go far enough to limit the potential damage to the economy from too-big-to-fail banks.
Clinton hasn't called for dismantling large financial institutions but her extensive plan would seek to impose a "risk fee" on the largest financial institutions with more than $50 billion in assets that would grow if they take on more leverage and engage in extensive short-term funding strategies. However, critics argue that for the plan to work it would need to be overseen by regulators who they contend wouldn't enforce the requirements effectively.
"We have concerns about over reliance on regulators," said one Democratic lobbyist who did not want to be named, echoing the sentiments of other players we spoke to for this post who also didn't want to be named. But if the legislators ever were to agree to a significant additional fee -- not likely -- it could drive big banks to slim down.
6. Giving Wall Street speeding tickets.
Both Sanders and Clinton have similar proposals seeking to impose a tax on high-speed trader transactions.
Clinton would impose a tax on "excessive" levels of order cancellations while Sanders would impose a fee on transactions. Clinton's is more targeted to specifically hurt high-frequency traders the most since the vast majority of high-speed trader orders are cancelled, while Sanders' idea would significantly raise the cost of transactions in a manner that could hobble much trading.
But would either ever become law? Don't expect it any time soon. In the immediate aftermath of the 2008 financial crisis when Democrats controlled the House, Senate and White House, there was an effort to impose a financial transaction tax that petered out quickly. With Republicans having no interest, expect that such an approach would never pass muster in the divided government that is the best Democrats can hope for past 2016.
"We see little chance for the Democrats to take the House, but there is a real chance for them to retake the Senate," said Guggenheim Securities analyst Jaret Seiberg in a January note.
If we have a divided government, expect little of the policy goals sought by either Republicans or Democrat candidates to be achieved any time soon, and that includes everything from dismantling Dodd-Frank to the imposition of new break-up-the-bank rules.