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Clinton Vs. Sanders on Big Banks ( William K Black )
Posted on April 17, 2016 by Devin Smith | Leave a comment
Bill Black, adviser to Bernie Sanders, and Hillary Clinton supporter Paul Hodes appear on The Real News and discuss whether the Dodd-Frank legislation is effective at preventing systemic risk from Wall Street monopolies. You can view the video below or on The Real News‘ site with a transcript.
biography
William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics. Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement. Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.
Paul Hodes is a native of New York City, Hon. Paul W. Hodes served two terms as a United States Congressman from New Hampshire's second congressional district, (2007-11). He has combined professional careers in entertainment, law, and politics from an early age. Hodes studied theater, dance, and music at Dartmouth College, and worked as an actor, playwright, film producer, and musical director for multiple theater and film productions in New York following college. In 1975, Hodes moved to Boston to attend Boston College Law School, where he continued to act and perform music. After graduation in 1978, Hodes moved to New Hampshire to begin his legal career. He served as Assistant Attorney General and Special Prosecutor for the State of New Hampshire before pursuing private practice as a trial and entertainment lawyer. Hodes was elected to Congress in 2006 and was chosen as the president of the historic 2006 freshman class. In Congress, he was a member of the Arts Caucus, testified on artists' rights, and served on the Financial Services Committee and the House Committee on Oversight and Government Reform. Throughout his career, Hodes has devoted substantial time to advancing the arts in New Hampshire. He and his wife Peggo (a singer) have toured with their band Peggosus and as "Peggo and Paul," earning two Parents' Choice Awards for their groundbreaking family music. Hodes also founded an independent record label, Big Round Records, and wrote the book and lyrics for The People's House in 2000, and the libretto for Oscar Wilde in 2004 with composer Thomas Oboe Lee. Hodes served as a New Hampshire State Councilor for the Arts, and has been a board member of several arts, economic, and political organizations.
transcript
Clinton Vs. Sanders on Big BanksPAUL JAY: Welcome to The Real News Network. I'm Paul Jay in Baltimore.
On Thursday night, Secretary Clinton and Senator Sanders went at it. It was a bit of a dust up compared to the rather more polite times they have spent together. Now joining us to discuss this debate and focus on the issue of the financial side of these things- Wall Street to be specific- first of all joining us from Kansas City Missouri is Bill Black. Bill's on the right side of your screen. Bill's an associate professor of economics and law at the University of Missouri, Kansas City. He's a white collar criminologist, a former financial regulator. He's also a regular guest on The Real News and he's the author of the book The Best Way to Rob a Bank is to Own One. And Mr. Black is an adviser to the Bernie Sanders campaign. And on the left of your screen, joining us from Concord, New Hampshire, is Paul Hodes. Paul has been on The Real News before. He's a former U.S. Congressman. He was one of the national co-chairs of the Obama campaign in 2008. Mr. Hodes voted against the Emergency Economic Stabilization Act of 2008, which established the Troubled Asset Relief program known as TARP. He is a supporter of Secretary Clinton.
PAUL HODES AND BILL BLACK: Thank you. Good to be with you.
JAY: Paul, I want to start, before we get into the debate, I just always want- I've asked you in an interview before, but it bugs me so I want to ask you again. You voted against TARP, which was the big bailout of the big banks. At the time, Senator Clinton voted for it, yet you are a Clinton supporter. When it comes to this question of judgment and all that, your judgment certainly differed from hers. Why is this not more of a significant issue for you that prevents you from supporting her now?
HODES: Well Paul, I'm a former prosecutor in New Hampshire. I was an assistant attorney general and I handled what was at the time, the most significant white-collar fraud case in the state and successfully prosecuted numbers of people. I served on the financial services committee at the time that TARP came up for a vote. And for me, the issues had nothing to do with Senator Clinton, the way she voted or didn't vote. For me, the issues were about the way the Treasury Department and Federal Reserve had informed Congress, what they had informed us of, the time- the short time period that we had to make to make a decision between the time that we held a caucus wide meeting and the time in about a week that this emergency legislation came forward to fund the banks at a huge level. My recollection was 750 odd billion dollars. I don't remember the exact amount of money that the banks- that was going to be added to the banks balance sheet. And at the time, my concern was number 1, the money was- the plan was, we got a 2 page memo about the plan and the plan was basically give all this money to the banks and there's not going to be any accountability for how they spend it, we just need to prop up the banks. That concerned me. I thought that the taxpayers deserved to have accountability as to how the money was going to be used by the recipients. And I was concerned that there hadn't been any real investigation into alternatives to simply propping up the banks. Looking back for example to other examples in history where the federal government had set up it's own system or bank to help homeowners in previous emergency situations. So there hadn't been an adequate investigation in my judgment. And I was also concerned that no provisions effective, were serious previsions were being made to help homeowners who were going to lose their homes in the collapse and that I thought that it would create political issues, it would create pain, that a recession would ensue which would be a deeper and wider and longer without providing for homeowners. So for all those reasons, I objected to the way of the legislation came forward. I understood there was an emergency. I understood that something needed to be done, but I felt, at the time, that more investigation and better provisions for homeowners ought to be included.
JAY: But my question is...
HODES: I didn't vote for it.
JAY: I understand that, but my question is that then Senator Clinton has access to all the same information you did. I'm not suggesting she led the charge on this legislation. It was done during the Bush administration. But her judgment was significantly different that yours. She voted for it. And the reason I think it's important is that it's a reflection of a whole view of the world and how you see government relating to Wall Street. And so the fact that she had voted contrary to the way you did and didn't agree with everything you just said, why doesn't that cause you to question more how she'll deal with Wall Street now?
HODES: Well because I've listened to what she's said. I've listened to what Senator Sanders has said. I've got some idea of the way she's approaching this issue. And I'm not a one-issue supporter. And I look at- I look at an entire package when I think about who to support, especially for president of the United States. I was a very early supporter of President Obama. And I can't say that I supported all his positions then. And I can't say I support all his positions, as he's been president. But I still appreciate his tenure as president and believe that my support for him was the right support. Similarly for Senator Clinton, I've listened carefully to what she's said and I think that her approach is a good one. And I also think that Senator Sanders is conflating certain issues when he talks about breaking up the big banks. I think she has a better understanding of the nuances of what is involved in regulating the financial industry. And I have to tell you, when I arrived in congress as somewhat as a neophyte in 2006, I was impressed, amazed, and shocked at what I considered approach to financial regulation in which various- there were too many regulators and they weren't talking to each other. And I think that the causes of the collapse were myriad and that Senator Clinton has the smarts, intellect, interest, and ability to wend her way through a complex field and approach regulation of the financial industry in an appropriate way.
JAY: Bill, first of all, how significant do you think it was that Senator Clinton voted for TARP and lets go on from there, which is her basic position on Dodd-Frank. Quickly on TARP, then actually we'll play a piece of Secretary Clinton talking about Dodd-Frank. What do you think of that vote?
BLACK: I'm sorry you're not talking about Dodd Frank though
JAY: Right now we're talking about her vote on TARP.
BLACK: There are two votes on TARP, as the Congressman has just explained. The first bill was incredible. It literally was two and one-half pages, so there was no plan. And among those things in those two and one-half pages was, no court, no administrative agency- nobody- can inquire in to what we're doing with all this money. So I would have voted again with the Congressman, against the first bill. And a very large block of Democrats voted against the first bill particularly overwhelmingly what's called the Blue Dog Caucus. This is the New Democrats. Relatively more from the South and the boarder states which is the Clinton's, what they originally led. But after that first vote, the stock market tanked. And things were in a crisis state. So frankly, reasonable people could have voted either way on the second bill. I don't criticize people for which way they voted on the TARP legislation the second time around. Again I agree strongly with the Congressman that the first piece of legislation was an atrocity.
JAY: Alright. Well we won't get into the specifics of the second vote, though it seems to me that there- what the Congressman raised on the second vote as well- that there was so little control over the money even though there was sort of a desperate situation. There could have been some support for the banks that was done quite differently. And again I get to this- what is your attitude towards Wall Street? Do you simply give them everything they want or not. And it seems to me the second vote and the bill that was finally passed, gave the money as the Congressman says, without really any control at all.
BLACK: Well, so the second bill was still, you're correct, could have been greatly improved, but it was different. They got rid of the no review sections. There were more details by the second bill. So it wasn't exactly the same vote.
JAY: Okay, well lets move on. The centerpiece of the fight really between Sanders and Clinton is about what to do now. Senator Sanders talks about breaking up the big banks. And Secretary Clinton says Dodd-Frank is sufficient and needs to be implemented with one caveat, which she'll add and you'll hear right now in the clip. So here's what she said at the debate Thursday night.
SECRETARY CLINTON: You know, let me tell you why. You may not like the answer, but I'll tell you why. President Obama had a Super PAC when he ran. President Obama took tens of millions of dollars when it came to contributors. And President Obama was not at all influenced when he made the decision to pass and sign Dodd-Frank, the toughest regulation. This is what I've been saying for the past year, no bank is too big to fail. No executive is too powerful to jail. I believe, and I will appoint regulators who are tough enough and ready enough to break up any bank that fails the test under Dodd-Frank. There are two sections there and if they fail either one, that there is systemic risk, a grave risk to our economy, or if they fail the other, that their living wills, which is what your referring to, are inadequate. But I go further because I want the law to extend to those who are part of the shadow banking industry, the insurance companies, the hedge funds. Something that I have been arguing for--.
JAY: Okay Bill- so is Dodd-Frank sufficient legislation other than adding the shadow banks to it? And really the issue is just using it to control and regulate the banks?
BLACK: No, and indeed she made the point, through internal contradictions that she doesn't recognize. So we are now many years past this crisis and not a single one of the systemically dangerous institutions has been broken up under- despite the passage of Dodd-Frank. Not a single one of those executives has in fact been prosecuted much less been jailed. So obviously there is a very strong impact of the Wall Street lobby. Dodd-Frank was something that never sought a fundamental change of the kind that the New Deal legislation did. It didn't even go back as strong as the New Deal. In other words it didn't bring back Glass-Steagall for example. There's an enormous internal confusion in Secretary Clintons on this whole concept on this systemically dangerous institutions. She says, If they pose a systemic risk, well by definition, they pose a systemic risk. Right? And we're talking about roughly the 25 largest institutions. Now Dodd- she's also confused- Dodd-Frank already applies to places like insurance companies. That's what the Met-Life designation is all about. And her analysis is a little subtle, is very dangerous in a litigation sense because it tracks the error that the district court judge just made in ruling against Met-life being designated as a systemically dangerous institution. He said, Well its not enough that their failure would cause a systemic risk. You have to prove basically that they already are doing something awful that will cause their failure, at least has some significant probability.That's not the test in the statute. That'd be ridiculous, right? So we have 25 institutions that the administration is telling us are systemically dangerous. That when, not if, the next one fails, it will cause a global financial crisis or will require a bailout. Not a single one has been dealt with and these institutions are being treated as too big to prosecute. Not only the institution, but even the officers, which is preposterous. So again, we are seeing the effect of those massive contributions and that this industry has been able to get away with a strategic plan of fraud that has made incredibly wealthy the officers and the only people paying a price occasionally are the share holders through these fines. So no, its a complete failure in terms of this topic because not a single one has been broken up--. And in Hilary's analysis, no one will be broken up.
JAY: Paul, this is the centerpiece of Secretary Clintons position on how to deal with Wall Street. What do you make of what Bill said?
HODES: I don't think Dodd-Frank is perfect but I do not believe or agree that we can track the effect of contributions on the whatever perceived failure there may be on the part of regulators, prosecutors, the Justice Department, the SEC, from perusing either cases for prosecution or perusing these banks. I mean, to the extent that this is now in the hands of regulators as opposed to members of Congress or Senators or even the President at the current time, and historically since the implantation of Dodd-Frank, and by the way the regulators were pretty slow to get their act together, and the causes of the financial collapse are myriad. I don't think its fair to try to connect contributions to the failure to prosecute. These would be in my judgment, enormously difficult cases given the way that the derivatives and the department that dealt with these derivatives that caused so much harm were constructed and where they were and how they operated and what folks knew and didn't know, they certainly looked the other way when it came to great profits that were coming in from these very, very risky and dangerous instruments. And the credit rating agencies played a great role in this, the failure of the Federal Reserve to crack down on mortgages. There were a lot of contributors. So I'm not supporting Hilary Clinton just because I think Dodd-Frank is perfect. I do think that Senator Sanders has conflated issues in terms of breaking up the big banks because I'm not sure and I guess I don't agree that size alone creates systemic risk.
JAY: Well Paul, we're going to get to the Sanders proposal, but I just want to get Bill's response first of all on Dodd-Frank. I'm not- Paul, just to be clear do you think Dodd-Frank is essentially an effective piece of legislation and more, is it needed? Because I'm kind of hearing its not working as a regulatory level, from what you're saying.
HODES: Well look, Congress passes laws and the regulators implement them. I think Dodd-Frank was an important step and it contains significant provisions giving regulators the power if they choose to exercise it to take the banks to task and take them apart if necessary. So I'm not sure that its the law thats at fault. And we may have to look more closely at the regulators- who are the regulators and what they are doing in terms of implementing the powers that have been given them to oversee the financial institutions.
JAY: Ok, Bill, whats your response to that?
BLACK: So lets put the two things together. Power and will. The Congressman is quite correct that the Fed refused to act even though it had data that showed that 90% of liars loans were fraudulent. They refused to use their authority under the statue which existed since 1994, and which included the shadow sector. The Ban All Liars Loan. Right? Why? Well, because the President of the United States, a Democrat, appointed Alan Greenspan, an Ayn Rand disciple, to run the Federal Reserve. Of course that was President Clinton that did that. It was President Clinton who cut the FDIC staff by more than three quarters. It was President Clinton who cut the Office of Thrift Supervisions staff by more than half. It was President Clinton who left the Republican leadership in charge of the OTS for, as an acting person for 4 and one-half years doing absolutely nothing. All of the appointees that the Congressman is talking about to have failed to implement vigorously these regulations are appointees of President Obama. So if it isn't the massive contributions, what the heck is it? Right? We've just gone through the biggest crisis in 75 years. We've just figured out that we had gotten it right previously, with things like Glass-Steagall, and we still have broken up 0 and we have prosecuted 0. And I know w whole lot, as does the Congressman, about prosecutions, because we got over 1,000 felony convictions in much tougher cases. Much tougher cases than these would be. In the savings and loan debacle, against the best criminal defense lawyers in the world, where they were representing CEO's and will spend a corporations money like water to keep the guy out of jail. And we got a 90% conviction rate with hyper prioritized cases against the absolute most elite defendants.
JAY: Bill, just for the people- what year was that, Bill? What period are we talking about?
BLACK: We're talking about through 1990, end of 1993.
JAY: Okay. Paul, whats your response?
HODES: Well, what Bill says is absolutely correct. I agree, and the public perception is, and part of the fuel for I think the fire that Senator Sanders has been able to ignite with his what I think is a simplistic approach to financial regulation, comes because the perception the bankers got away with it and they shouldn't have, because they brought down our economy- threatened the world economy. So, I agree with that. And by the way, I've also said in the past that I think Glass-Steagall, which I understand and Bill you can correct me if my understanding is wrong, I understand essentially disconnects or restricts the ability of the banks who are investing to use the depositors money for investments, which would be a protection for depositors in what have grown to be these giant financial institutions. I'm not opposed to brining back Glass-Steagall. I think it would be a good idea. But I also hear from Hillary Clinton, a very strong position about going after and prosecuting people, financiers, CEOs who've committed crimes. So I think
JAY: But Paul, Bill makes the point that the regulators that you're critiquing on the whole were appointed by President Obama. We certainly don't hear a word from Hillary Clinton critiquing President Obama about his choices of regulators, why would one think there'd be any difference?
HODES: Presidents have the option of appointing who they want when they're elected. So its hard to know who a new President Clinton, President Hillary Clinton, would appoint. The problem with the regulators may not be the connection that Bill makes between contributions and the failure of regulators to act. The problem may be one of revolving doors and who is regulating and what their priorities are. I agree that those are important issues to deal with and I mean, I cannot predict- frankly I can't predict under a President Clinton or a President Sanders in terms of the priorities and dealing with those regulators and who they are. Cause you also have to look at the Justice Department and lots of different agencies when it comes to thinking about a financial crime at the top levels.
JAY: All right Bill, final word on this part.
BLACK: Right, and so we could look at the history when the Clinton administration came in, it shut down the prosecutions of savings loans. And you can look at Hillarys economic advisors who are the same old folks who are the ones that destroyed Glass-Steagall, who are the ones that created the regulatory black hole that the Congressman was talking about in those financial derivatives, the commodities modernization act in 2000. So, and you can look at who Bernie Sanders picks in terms of his advisers on regulatory matters.
JAY: Which is, one of them is you.
BLACK: Which one of them is me.
JAY: In part 2 of this interview- we're going to stop and there'll be a part 2- we’re going to look at Bernie Sanders proposals to break up the big banks. Some people say- Paul Hodes says its simplistic, some people say its unrealistic. And we will dig into it. So please join us for part 2 of our exploration of financial regulation and the debate within the leadership or the presidential campaign of the Democratic Party. Thanks for joining us on The Real News Network.
Part 2
PAUL JAY: Welcome back to The Real News Network. I'm Paul Jay in Baltimore. We're continuing our dissection of the Democratic Party debate. Took place Thursday Night. We're focusing on the issue of financial regulation and Wall Street and what to do about the big banks. On part one, I'm hoping you watched part one, we talked about Hillary Clinton and her support for and considering Dodd-Frank, the piece of legislation that is supposed to regulate and control too big to fail. Now in part 2, we're going to focus on Senator Sanders proposal to break up the big banks and heres a clip of what he had to say in the debate Thursday night.
DEBATE MODERATOR: Senator Sanders, you were recently- Senator Sanders, you were recently asked what you would replace the big Wall Street banks with if you could break them up. You said, Thats their decision. Why would you trust the banks to restructure themselves- when you say their whole business model is fraudulent?
SENATOR SANDERS: Thats right. So lets start off with the basic premise. Few days ago Goldman Sachs formally reach a settlement with the United States Government for 5 billion dollars. What Goldman Sachs acknowledged was essentially that they were selling fraudulent packages of subprime mortgage loans. Goldman Sachs was not the only bank. Other banks of course did the same. Now I don't need-Dodd Frank now to tell me that we have got to break up these banks, A, because they're based on fraudulent principles, and B, because when you have six financial institutions that have assets equivalent to 58% of the GDP of this country, they are just to big, too much concentration of wealth and power. Point is, we have got to break them up so that they do not pose a systemic risk and so that we have a vibrant economy with a competitive financial system.
MODERATOR: But Senator, you didn't answer the specific question, which is not just about breaking up the banks but why allow the banks to do it themselves?
SANDERS: Because I'm not sure that- what the government should say is, You are too big to fail, you've got to be a certain size. And then the banks themselves figure out what to sell off. I don't know that it's appropriate for the Department of the Treasury to be making those decisions. What we need is to make sure that they are safe.
JAY: So let's start with Bill. I'm sorry; I don’t think I've introduced you guys yet. So, now, I will introduce you. Joining us once again, first of all, from Kanas City, Missouri and on the right side of the screen is Bill Black. Bill's an associate professor of economics and law at the University of Missouri, Kansas City, white collar criminologist, former financial regulator and the author of The Best Way to Rob a Bank is to Own One. He's an adviser to the Bernie Sanders campaign. On the left side of your screen, and I'm not suggesting anything political in terms of ideological gravitation here- in terms of who's on the right and who's on the left side of the screen- joining us from Concord New Hampshire is Paul Hodes. He's a former U.S. Congressman, Former national Co-Chair of the Obama campaign in 2008 and Mr. Hodes, as we talked about in part one, voted against TARP. Excuse me. So Bill, let me start with you, as you're advising the Sanders campaign. I thought that was a pretty good question that came from the CNN journalist. I'm not always a fan of their questions, but I thought this one was particularly good. Why would you let the banks decide how to break themselves up, not only from the point of view given that their based on fraudulent principles, as Sanders says, but if they break themselves up in a way that's conducive to their fraudulent principles then why don't they just get smaller but in a way, the same pools of capital control them anyway. And how does just breaking them up really going to change anything? We saw the telephone companies change- broken up. In the end we wound up with a few other big monopolies with enormous concentration of ownership. So how do you answer that question?
BILL BLACK: Okay, so I thought it was a good question as well, by the way. And I thought that the key, which he started to answer, was to break it up into the critical elements that you needed to talk about. So you can't just break up a fraudulent institution. You have to get rid of the fraudulent leadership. And I thought that.s where he was going with the discussion of Goldman Sachs. One of the terrible things, we've talked about the fact that nobody gets prosecuted, but on top of that, there has been one, and exactly one, fairly senior executive, who has actually had to pay money out of their own pocket in a civil suit brought by the government. And of course it's a woman from Bank of America, Alright? So all the other executives have gotten off with, and made wealthy by the fraud proceeds and the bonuses and such. And they haven't lost their jobs. So it's far worse a failure than simply the failure to prosecute. And even very conservative people, like the president of the New York Fed, are now talking routinely about the corrupt culture of Wall Street. So you're absolutely right that we have to start with the fraud. You have to get rid of the leadership. And we have the tools in the Justice Department but also at the regulatory agencies to do exactly that through removal and prohibition actions. In addition to those thousands of successful felony prosecutions, we had well over 4,000 successful enforcement actions. Indeed, I was one of the enforcement heads in all of this. So you're right, you've got to get rid of the fraudulent people who are running these places, and you've got to get honest people in. Second step is break up- even if they're honest; you simply cannot have institutions of the size that when they fail- and again they will fail, it's just a matter of time for any individual bank until it will fail over a broad historical spectrum. And when you're dealing with 25 of them the probability of when the next one will fail within the next decade or so is really very high. You cannot have that. We have seen why you cannot have that. And we've seen that they're treated as too big to jail. And we've seen the enormous political power that arises from this. And we've seen that these places are too big to manage. So it's a win, win, win for efficiency, for honesty, for the restoration of an effective democracy to break them up. When you do that with honest leadership, then Bernie is quite correct. You tell them, You've got 5 years to shrink. You're the experts in running the place, you figure out how to shrink. That's how I'd do it, how we in fact did do it as regulators, and that's certainly been my advice to Bernie.
JAY: Paul?
PAUL HODES: Um, you know I- there's a lot I agree with in terms of what Bill says and I understand what his advice to Bernie has been. Busting the trusts harkens back a long time in American History. Teddy Roosevelt was famous for it. There's been lots of industries that have been forced to change, often with little or no impact as far as I can tell on either the institutions, their practices, and what it really means for the American public. I- recently the New York Daily News had an interview with Senator Sanders that I thought was striking for his inability to discuss in the kind of detail that Bill just did the basic tenets of his plan and his thinking about banks, because really what we're talking about is that, because the banks are large, in and of themselves, because part of the investment bank practice turned out to be fraudulent- and let's just agree that it spread across huge numbers of sectors of the banks, the regulatory agencies the failures were multiple, the credit rating industry. Multiple failures across the financial system, in and of itself, he says, that the size of the banks that's the problem. And in fact since the financial collapse, there's a good argument of- it would be hard to argue with the- that's there's been consolidation within the banking industry, which may not be helpful. So what I really find problematic is what I- is Senator Sanders conflating the issue of monopolies and size with the issues of what to happen on the regulatory front. And I also am thinking about the fact that there are things that Wall Street does for the American Economy which need doing. The new 21st century innovation economy is fueled by an enormous flow of capital, and we can argue whether that's healthy or not healthy, but it requires an enormous flow of capital for innovation and startup activities. And the same Goldman Sachs, which by the way just paid a rather large fine in connection with the activities of theirs that were fraudulent, also provides that flow of capital as do many other banks. It could happen if they were smaller I'm sure. And it could happen if there were more institutions. But in and of itself, breaking up the big banks is a nice rallying cry. It feeds into the justifiable anger the public has about what happened and what the consequences have been, but in and of itself, it is not a prescription for curing the illegal penchant that Wall Street or financiers may have irrespective of their size. If you take a look at the size of the units at the financial institutions which created these crazy derivative instruments- the physical size and number of people in those units- they were disproportionally small to the huge profits that were being generated- we don't have to argue about whether they were good, bad or indifferent. They were bad stuff. It was illegal activity. But it happened in relatively small parts of the bank. So simply breaking up a bank- you could break a Goldman Sachs into 12 different pieces, you could still have similar activity. They're different issues. I think Senator Sanders, with all due respect, conflates the issues and doesn't have- I'm glad he has people like Bill advising him. Because if he is the president, Bill will have a good and outside influence. And Bill sounds like he knows what he's talking about.
JAY: Bill, I don't assume you'll disagree with the final sentence, what do you think of the rest?
BLACK: No and nor do I, you know I'm a banker in part by background so I certainly see honest bankers as being a very useful function. But the dishonest bankers, the best from economists is that the- through the course of the Great Recession, we will lose 24.3 billion dollars in GDP. We lost 9.3 million American jobs and 5 million that were not created. Latino college-educated households lost over 70% median of their wealth. Black households with head of household with a college degree or beyond lost over 60% of their net worth on again a median figure. So there are staggering loses because of all this and in economic terms, the banks systemically misallocated capital. Which is the opposite of what they're supposed to do. And you know that because that's what creates bubbles. And while it is true that small units can create lots of problems, it's only because they work for big units. In other words, the Merrill Lynch folks that created so many of the financial derivatives that blew up- well yes, that subsection may have had only 600 employees, but the only reason they were able to function is because they were part of Merrill Lynch. Otherwise they couldn't have done any of those deals. And by the way, they sold overwhelmingly to Merrill Lynch as well. We call it eating your own cooking. So I think that Senator Sanders actually has a pretty sophisticated understanding of these things. He's gone to advisors to build on it. I would say the New York Daily News, which thought after all that he was the Mayor of Vermont, was more confused and by the way was wrong, when Senator Sanders gave his statements about the role of the treasury and the Fed on breaking up these institutions. He was correct and the New York Daily News was incorrect. So again, these are things that nobody has to scream, nobody's screaming during any of this. There are better ways to do all of these things. And the sad thing is, President Obama had a unique political opportunity like FDR had. And as I said, not a single one of these institutions has been broken up, not a single one of the executives has been prosecuted. If you don't think it's a corrupting influence of money and power, what do you think it is?
HODES: I don't think however that simply breaking up the big banks as a rallying cry- it's a good rallying cry- but I don't think that anything given our regulated market economy, now I don't think that anything will ever stop greed, corruption and damage from occurring. It is a simple fact of life in American and in a Capitalistic economy. And Senator Sanders as a social Democrat may have real problems with the fundamental nature of a regulated market economy, which produces greed and illegality on a regular basis. But not to say that all the other systems around the world don't have their own share of greed and illegality. There is no one thing that can stop it. As.
JAY: Paul I think you've raise- this is really the nub or critical part of all this, after listening to both of you, if you put the argument together, I think you both agree that you- if you just break up big banks it's not enough. And Bill makes the point that you have to deal with the culture of fraud and corruption and such. Paul makes the point that this regulated market economy, you know, almost spontaneously almost engenders fraud and corruption. It's kind of inherent in how it works. On the other hand we're also saying that regulation really isn't working because of the power of money. I know I've talked to Bart Chilten who was at the Commodity Future Trading Commission, I think it's called, when they were trying to pass this new regulation on position limits, he was being lobbied something like 1,000 to 1, literally, there were like 1,000 lobbyists who were for less regulation for 1 who was fighting for more. So you put all of that together, you don't get to any change Just hang a sec, Dodd Frank isn't really effective because so much is in the realm of regulation at the level of regulation, the lobbyists have such enormous power. This idea that you could just regulate away the fraud or prosecute away the fraud and then break up the banks- where I'm heading here is kind of what Paul was raising as the question. Is there not some need of some form of public banking that hopefully one would have more control of as a- if you go back to the healthcare debate- like a public option. But something on the scale that can deal with these massive flows of capital, not simply having some consumer banking at a post office, which is not a bad idea that Sanders has supported, but it doesn't deal wit the big structural problems.
HODES: You know, Paul, way back when, when I was contemplating TARP, and I have to tell you, Let me admit that I came to the issues of our financial system as a relative neophyte, not completely, I'm not a total dummy and I wasn't completely uneducated about it, but I got a rapid education serving on the financial services committee with the help of very smart people on my staff and had a crash course during the crash in financial regulation. But at the time I took a look, I think it was a the Federal Home Loan Bank, and Bill you can correct me if I'm wrong, I think that was the 40s maybe? When the Federal Home Loan Bank came in and I wondered why don't we take a look at a model like that? Where like the public option, folks have a real option for financing outside the private banking system. And then you get into arguments about well, is the Federal Government really equipped to do that kind of business. And Paul, you're talking about a fundamental tension in our democracy. Between a representative democracy and a capitalist economy. Our market cares about profit. The government cares about people. And there is a built in tension between a representative democracy and a capitalist economy, which only cares about profit and really doesn't care about its effect on people.
JAY: And let me add, I appreciate you voted against TARP, but eventually it passed. You have this private banking sector, completely dependent on public bailouts to carry on this kind of activity.
HODES: Well, you know the idea, at least the idea behind Dodd Frank was to provide a regulatory framework to prevent that from ever happening again. And I would say that both Democratic candidates, whether or not we agree or disagree with their overall philosophies and the specific elements of their approach, both democratic candidates are talking about financial regulation with at least a view towards preventing or trying to prevent the kind of damage that we experienced. When you look at the other side of the aisle and think about what it would mean for a billionaire like Donald Trump or a Satanist like Ted Cruz to be in charge of our country and it's economy, lets just remember which side of this aisle we need to be on.
JAY: Ok Bill, let me pose the same question to you. I understand the need for stronger regulation and prosecution and so on, but in terms of this structural problem, don't you need something like a robust public option?
BLACK: Alright, so first you- the Congressman and you are both correct. When we talk all breakup, were talking about a necessary but not sufficient condition. And to briefly put a different hat I wear on, the Bank Whistle Blowers United, a non-partisan group, has detailed proposals on how to change a lot of things that would be very useful and certainly people like me give broader advice to Senator Sanders as well. Second thing that the Congressman and you are bringing up is the incentive structures. And first, we should be so lucky that the banks are trying to make profits. Banks can't do anything. People do things. And the officers are the ones trying to make money. And often the best way, setting aside morality and law, for the officer to get a sure thing is to do things that hurt not just consumers in the nation, but hurt the bank as well by causing them to make or purchase enormous amounts of bad loans. So how have we gotten into a system that has these perverse incentive structures? This is something that, by the way, there's broad agreement in the academy on from folks, from very conservative spectrum as well, that we have changed things institutionally. Like changing true partnerships, which had joint and several liability. Where we have adopted a compensation system, not just for senior executives but throughout the ranks, that creates these perverse incentives. That allows senior officers to create what's called aggressions dynamics, in which bad ethics drives good ethics out of the market place of profession. And the specific example the Congressman has brought up twice correctly, is at credit rating agencies. Well how do you do that? You don't give your business to the credit rating agencies if they're honest. You only do it if they're willing to give preposterously inflated ratings in which literally toxic waste as we use that term in finance and have used it for 25 years, this stuff that had been called toxic waste for 25 years was suddenly triple A, which is the highest rating.
JAY: Just very quickly, for people who aren't following this so closely, Bill's talking about a massive amount of loans for houses that mortgages that everyone knew that people would never be able to pay, and they were packaged, and then the rating agencies called them triple A even though anyone that looked at them knew that even half the documents hadn't even been signed properly.
BLACK: Right, but this happens for reasons. It's not inherent in capitalism. It's because we have changed the structure and the incentives systems by moving away from true partnerships, by moving to these compensation systems that act functionally as bribes. So, do I think there's a role for the public sector in banking? Absolutely. I think a very large public bank for consumers, for regular people, that doesn't do you all the nasty things that regular banks do, is a very good thing. And the postal service is the right way to do that. It’s been used for centuries in some places. But I urge you not to think that having a public bank solves the problems that we're talking about more generally. Because you can look all around the world at public banks and see that they are frequently corrupted by their local or national politicians. And Brazil and Malaysia, its not a bank formally but runs like a bank, its a massive investment fund, show you that you shouldn't be putting all your eggs in that basket either.
HODES: You know, Bill raises a very interesting point. If you think about the current state of the investment banks including their size and the fact that they're listed on the public exchanges and you can buy and sell their stock and that the folks running those huge institutions are now responsible to their shareholders for their operations in showing profits, and you think back to at least the time, and I'm old now, but the time when I was a kid, the quiet partnerships that were investment banks on Wall Street represented a very different breed. There were partnerships of long standing. The partners were responsible to each other. There was joint and several liability as opposed to having the shield of the corporation. In terms of liability for bad acts and that migration or progression of the banks from the smaller investment organizations which provided funding for business to the mega-corporations we have now and the huge amounts of money that are floating around is an interesting, an interesting history in the context of the collapse that we've experienced and the arguments of what to do.
JAY: Paul this is a big conversation and it's an excellent one. And we should pick this up again another time. Just to wind it up now, and I really do want to pick this up again, Bill just in a word, a sentence or two, given the complexity of this whole thing, given the enormous power of such concentrated wealth on Wall Street and the power it has over Congress and the White House and the regulatory agencies, why do you think Sanders is more likely to take this on in a way that's better for people in a way, than Secretary Clinton?
BLACK: Ok, so my wife's colleagues very conservative and has just written a book on this subject and the title summarizes the answer. It's entitled Better Bankers, Better Banks. And it gets at these incentive structures that we've just been talking about. Senator Sanders is taking his advice from people who are pushing for precisely the kind of institutional changes that the Congressman and you and I hope myself have all been explaining. And I endorse entirely the Congressmans point- look at the other side of the debate. The Republicans are all about how their- they're promising to destroy regulation.
JAY: Ok Paul, same question to you. In a final analysis, why do you think Secretary Clinton is a better choice in terms of battling such political, financial power?
HODES: First of all let me just say, now that I know that Senator Sanders is getting his advice from a smart guy like Bill Black, it almost gives me pause, but not quite. I think that Madam Secretary Clinton has a more sophisticated understanding and simply better equipped to deal with the complexities of this issue than Senator Sanders, whose underlying motives I appreciate and agree with. I think I'm not a one-issue candidate. I still think that Hillary has a, the right approach and a better approach to use and build on the existing legislation to prevent the systemic risks and we need to look at the regulators, the implementation, the prosecutions. And I trust that Secretary Clinton means what she says, No banker too big to jail, and no institution and I trust her on that
JAY: Okay gentlemen, thank you very much and I hope we will pick this up again soon. And thank you for joining us on The Real News Network.
End
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