WASHINGTON — Hillary Clinton’s campaign spent much of this week waging a dishonest attack on Sen. Bernie Sanders (I-Vt.) and his campaign’s Wall Street reform platform. The risky attempt to make inroads with progressives on one of her weakest issues is damaging the credibility of some of her top lieutenants.
Listen to HuffPost’s analysis of the Democratic Party’s Wall Street flap in this week’s “So, That Happened” podcast.
Clinton’s attack on Sanders is as simple as it is untrue: Unlike Sanders, Clinton has argued, she is willing to take on “shadow banking” — a broad term for various financial activities that aren’t regulated as strictly as conventional lending.
Sanders has in fact proposed attacking shadow banking in two principal ways: by breaking up big financial firms that engage in shadow banking, and by severing federal financial support for shadow banking activities by reinstating Glass-Steagall.
These would be substantive changes. A lot of shadow banking takes place at firms with traditional banking charters, like JPMorgan Chase and Bank of America. Some of it takes place at specialized hedge funds, or at major investment banks like Goldman Sachs. Breaking them up would not eliminate the risk shadow banking poses to the economy, but it would limit it. Risky shadow banking activities cannot bring down institutions that are too-big-to-fail if there are no too-big-to-fail institutions.
Yet the Clinton campaign has repeatedly said Sanders is wholly ignoring shadow banking, accusing Sanders of taking a “hands-off” approach to it that would not apply to firms like Lehman Brothers and AIG. This barrage has come from Clinton’s press aides, campaign CFO Gary Gensler, and Clinton surrogate Barney Frank.
In a bizarre appearance on Chris Hayes’ MSNBC show, Frank claimed that splitting up Morgan Stanley or Bank of America “is not going to do anything, literally not anything to restrain shadow banking.” He even said that since Lehman Brothers was “very small” when it failed, Sanders’ break-up-the-banks plan would be unworkably broad and apply to too many firms.
It’s hard to see these comments as anything but dishonest. Lehman Brothers was not “very small” when it failed. At $639 billion in assets, it was the single-biggest bankruptcy filing in American history. Only six U.S. banks are now larger than Lehman was, and the next-largest institutions are almost half Lehman’s size. AIG — then the world’s largest insurer — was even bigger.
Breaking up major institutions and forcing banks that accept insured deposits out of the shadow banking system are not the only conceivable tactics for mitigating risks posed by shadow banking. Clinton’s plan includes some vague but sensible proposals to take a harder look at the sector, require more transparency, and impose new leverage limits on some players. Her approach eschews a focus on the threat posed by large institutions in favor of monitoring risks across the financial system (she has repeatedly rejected calls to break up the biggest banks). The Clinton team could easily make a case for her approach without saying strange and false things about Sanders’ plan.
And indeed, the Clinton camp’s relentless references to Lehman and AIG undercut her own regulatory approach. If bank size were truly irrelevant to the shadow banking problem, then there would be no need to consistently highlight two too-big-to-fail institutions, one of which wreaked havoc on the economy by failing, and another of which was bailed out to avoid further havoc.
Jaret Seiberg, a regulatory specialist at Guggenheim Partners — and one of the most astute finance-friendly observers of American politics — issued a note to clients this week saying that key elements of Sanders’ platform have bipartisan appeal and political viability that will put pressure on other candidates to present more aggressive anti-Wall Street messaging.
“This is not just about breaking up the biggest banks,” Seiberg wrote. “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 [and] CEOs would be criminally liable if employees defraud customers.
“Sanders appears to argue that he could implement much of this agenda on his own even without the need for legislation,” Seiberg continued. “We caution against dismissing this view. There is much that the White House, Treasury, or the financial regulators could do by executive order …. 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.”
Focusing on Wall Street could easily backfire on Clinton. Aside from giving opponents more opportunities to highlight speaking fees she accepted from Goldman Sachs and other banks, it risks demoralizing progressive voters. Financial reform is a major issue with the Democratic Party’s progressive base. Sen. Elizabeth Warren (D-Mass.) has become one of the most popular figures within the party, built on her almost single-minded focus on Wall Street accountability. Too-big-to-fail and Glass-Steagall are major causes among Warren’s supporters, many of whom have flocked to Sanders, but would be perfectly happy to vote for Clinton over a Republican in November.
Unless Clinton needlessly alienates them. Turning out an enthusiastic base has increasingly become essential for both parties over the past decade. With Clinton up more than 15 percentage points in Iowa polls and ahead by even wider margins nationally, it’s hard to see the upside in her campaign’s current assault on Sanders.
Making things up in order to criticize Sanders proposals that Democrats actually like only damages Clinton’s credibility with Democratic voters.
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