The race for a 2020 Democratic presidential nominee has drawn forth more than two dozen candidates seeking to unseat Donald Trump and bring about a well-deserved end to his administration. Yet the topic of Wall Street regulation has largely been absent from the discussion—and the financial sector as a whole would like to keep it that way.
In the financial crash of 2008 and the subsequent Great Recession, millions of people lost their jobs, homes, savings, pensions, and retirement funds. Many were never able to get back on their feet.
Meanwhile, the heads of the financial institutions that caused the crash were bailed out when Congress passed the Emergency Economic Stabilization Act of 2008, including the Troubled Asset Relief Program (TARP). Signed into law by President George W. Bush, the banks were bailed out with more than $700 billion supplied by taxpayers, with little-to-no oversight as to how that money could be used.
After the bailouts, public outrage reached a boiling point. The chief executive officers of Morgan Stanley, Wells Fargo, Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs, Bank of New York Mellon, and State Street Corporation were called to testify before Congress, where they deflected responsibility for the crash.
“Human beings committed the misconduct, senior officials oversaw and authorized and directed it. These were not immaculately conceived crimes,” says Bartlett Naylor, former chief of investigations for the U.S. Senate Banking Committee, who now works as a financial policy advocate for the nonprofit group Public Citizen. “These Wall Street bankers crashed the economy and preyed on mortgage borrowers because they were paid to do so. They had financial incentives to sell a subprime loan to someone who qualified for a prime loan or to load up on a borrower who is unable to repay, because they made money doing it, all the way up the chain.”
In 2010, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act. In 2011, the Obama Administration created the Consumer Financial Protection Bureau “to provide a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace.”
Dodd–Frank did not break up the banks. It did not implement definitive limits on risk-taking investments. And it left too much up to regulators’ discretion.
While groups like Public Citizen welcomed the reforms included in Dodd–Frank, Naylor says the bill did not go far enough, leaving Americans “vulnerable to half a dozen mega-banks” that are, as has been said elsewhere, “too big to fail, too big to jail, and too big to regulate.”
Dodd–Frank did not break up the banks. It did not implement definitive limits on risk-taking investments. And it left too much up to regulators’ discretion.
In 1989, the country had been hit by another banking collapse which prompted another multi-billion-dollar bailout. The Lincoln Savings and Loan scandal led to the failure of more than 1,000 of the country’s savings and loans, causing the largest financial crisis, up to that time, since the Great Depression. The S&L crisis was smaller in scope than what occurred years later, but it led to the prosecution and conviction of those responsible.
“In that crisis, the savings and loan regulators made over 30,000 criminal referrals, and this produced over 1,000 felony convictions in cases designated as ‘major’ by the Department of Justice,” said William K. Black, a law professor and white-collar criminologist at the University of Missouri at Kansas City, in a 2013 interview. “We had a 90 percent conviction rate, which is the greatest success against elite white-collar crime (in terms of prosecution) in history.”
By contrast, zero senior bankers and executives were prosecuted, let alone convicted, for their role in the 2008 crash. Says Naylor, “There should have been thousands of bankers to jail.”
The Federal Reserve Statistical Release from March 31, 2019, ranked the top insured U.S. chartered commercial banks based on their assets, and the list includes JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, US Bancorp, PNC Financial Services, TD Bank, and Capital One. All of these (with the exception of TD Bank) received bailouts.
Considering the devastation to the economy and the cost to taxpayers, as well as the new rules implemented after the crash, one would like to think the banks would clean up their act. This hasn’t been the case.
In 2012, Wells Fargo was fined $175 million after settling with the U.S. Department of Justice for lending discrimination against people of color. In 2017, JPMorgan Chase was fined $55 million, also for lending discrimination. In 2014, after an investigation into overdraft fees by the new Consumer Financial Protection Bureau, Bank of America was fined $727 million for selling add-on products to credit cards.
Beginning in 2011, Wells Fargo created more than two million bank and credit accounts without customer knowledge to boost sales figures and extract bogus fees. An investigation by regulators brought the matter into the public spotlight in 2016; as a result, the bank was fined $185 million and more than 5,300 employees lost their jobs. (The company’s consumer banking chief, Carrie Tolstedt, was nudged into retirement, with a goodbye package worth $124 million.)
At Wells Fargo, the creation of fake accounts was motivated by incentive payment systems based on the volume of transactions. Executives received bonuses based on the volume of cross-selling, as it is more profitable to have customers with multiple products. Employees who met these goals were rewarded, while those who didn’t were punished—denied breaks or even threatened with termination. During the Obama Administration, regulators came close to completing a rule to curb this practice, and put an end to paying executives based on these kinds of transactions. The Trump Administration promptly dropped this reform.
After the Wells Fargo scandal grabbed headlines, former employees from other banks (Bank of America, Citizens Bank, PNC, SunTrust, and Fifth Third) came forward, claiming these institutions had engaged in similar practices.
And while the multi-million-dollar penalties imposed on transgressors may sound significant, they are merely a drop in the bucket compared to what these companies take in. Given how the laws are currently written and enforced, they have no reason to change the way they do business. And under Trump, they have even less reason than before.
During the 2016 presidential campaign, then-candidate Donald Trump said he would deregulate the banks and scrap the Dodd–Frank Act. He has kept that promise.
Trump has curtailed several banking regulations established in the wake of the 2008 financial crash, signing a bill that weakened the provisions of Dodd–Frank. Trump said these “crippling” regulations were “crushing community banks and credit unions nationwide.” But critics charged that Trump’s reversal, as The Washington Post put it, “opens the financial system back up to the abuse and risky behavior that crippled the U.S. economy a decade ago—and does so at a time when financial firms are posting record profits.”
“The Trump Administration has been engaged in a pretty comprehensive rollback of financial regulations across a wide variety of areas,” Marcus Stanley, policy director of Americans for Financial Reform, tells The Progressive. “That includes protection of ordinary investors and retirees from being sold bad products that are exploitative and charge excessive fees, or are excessively risky.”
According to Stanley, Trump and Congressional Republicans have eliminated protections against payday lending and mandatory arbitration, a practice in which workers and consumers “are forced to sign away your right to go to court if a bank, lender, or credit card company rips you off.” Payday lenders, who have enjoyed deregulation under the Trump Administration, usually set up shop in low-income neighborhoods to prey on people who do not have the money to cover emergency expenses. Research conducted by the Pew Charitable Trusts in 2016 found that at least twelve million Americans take out payday loans each year.
Back in the 1990s and early 2000s, payday lenders partnered with banks in what are known as “rent-a-bank schemes.” These allow loans to be made at usurious rates not subject to state caps by using banks as their cover. While regulators shut down these schemes in the early 2000s, they are making a major comeback.
“In the last few years, it started to creep back. Especially in the last year or two, the rent-a-bank relationships have been brazen about evading state law in the high-cost loan space,” says Lauren Saunders, associate director of the National Consumer Law Center, a nonprofit with offices in Boston and Washington, D.C. “Because banks are not subject to state interest rate limits, these high-cost predatory lenders have entered into arrangements with banks that basically launder their loans through the bank. It can look like a bank loan, so they can claim that interest limits don’t apply and make horrible usury loans in states where those are illegal.”
Last year, the California legislature passed a law prohibiting interest rates above 36 percent (a standard comparable to other states with interest caps) for loans of $2,500 to $10,000. Before the law went into effect on January 1, 2020, three of the state’s biggest publicly traded payday lenders (Speedy Cash, NetCredit, and Rise) told investors they will use rent-a-bank schemes to evade the new law.
Toeing the Trump Administration’s line on deregulation, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency, in November, proposed rules that would make it easier for high-cost lenders, including online-lenders, to offer loans at interest rates otherwise prohibited under state law. FDIC chair Jelena McWilliams said in a statement, “Overall, the banking industry reported strong loan growth, and the number of ‘problem banks’ remained low.”
Responds Naylor, “It’s troubling that regulators of the FDIC might view profits as a proxy for health and economic soundness, which they may not be.”
Indeed, regulators and lawmakers were offering similar rosy predictions before the 2008 crash. Wall Street reported massive profits (built upon fraudulent mortgages), encouraging people to get a piece of the action with their investments.
“I don’t think we’re on the edge of another financial crisis,” Stanley says, “but it’s definitely the case that the protections have been pulled back and can have a devastating long-term impact.”
A survey conducted by the National Association for Business Economics found that 72 percent of 226 members surveyed predict there will be another recession within the next two years. These respondents were split on whether the downturn will occur in 2020 or 2021.
The topic of banking reform has barely come up during the televised Democratic presidential debates, and moderators have ignored the topic altogether. Potential voters were not allowed to hear, even in broad strokes, how the candidates plan to prevent the financial sector from bringing about another financial crisis.
“We worry that candidates in general, including Democrats, take money from Wall Street, and on that issue take the wrong position because of money,” Naylor says. And while Public Citizen has found that the majority of business contributions tend to go to Republicans, “bankers need to be friendly to everybody since they are so beholden to Washington regulators.”
Among the top recipients of campaign contributions from the securities and investment industry during the 2020 election cycle, according to the Center for Responsive Politics, are former South Bend, Indiana, Mayor Pete Buttigieg, former Vice President Joe Biden, and New Jersey Senator Cory Booker and California Senator Kamala Harris, both now out of the race.
In January 2019, several Democratic candidates met with Wall Street executives while assessing their potential bids for the presidency, including Senators Harris and Kirsten Gillibrand of New York. Before dropping out of the presidential race in December, Harris had talked up her reputation as being tough on banks during her six-year stint as California’s attorney general. In June, she joined Congresswoman Katie Porter, Democrat of California, in announcing the Accountability for Wall Street Executives Act of 2019, which would allow state attorneys general “to issue subpoenas during the course of investigations regarding compliance with state law by national banks.”
But Harris’s record fell a bit short of her rhetoric. The Mortgage Fraud Strike Force she introduced when she became California’s attorney general in 2011 processed only ten cases of foreclosure consultant fraud within the next three years. In 2012, she refused to prosecute OneWest Bank or its then-chief executive officer Steven Mnuchin, now Trump’s Secretary of the Treasury, for “widespread misconduct” despite recommendations from the California Department of Justice. (According to a department memo, the investigators were “hampered by our inability to subpoena.”) Harris later voted against Mnuchin’s confirmation as Treasury Secretary.
As stated on the U.S. Department of Treasury website, Mnuchin “has played a pivotal role in advancing the Administration’s economic agenda, including the passage and implementation of its key legislative achievement, the Tax Cuts and Jobs Act.” This bill helped boost the profits of banks by $28 billion in 2018.
Buttigieg, meanwhile, has vowed on his campaign website to seek “strong consumer protections that don’t allow banks to rip off or discriminate against their customers.” But his pledge to “take money out of politics” does not apply to billionaires and major corporations from whom he has accepted contributions, including members of the financial sector. In July 2019, he hired former Goldman Sachs vice president Sonal Shah as his national policy director.
By the end of 2019, Buttigieg’s critics were tagging him “Wall Street Pete.” Soon the #RefundPete movement started trending, calling on his campaign to refund contributions to donors who felt misled by the candidate’s progressive rhetoric.
The 2016 presidential campaign of Hillary Clinton is an example of how cozying up to Wall Street results in big campaign contributions, but not support at the ballot box. Her six-figure income from speaking fees for audiences such as Goldman Sachs executives did not reflect well on how she would regulate (or not regulate) the banking industry if she won. Naylor, citing Clinton’s speeches to bankers as one of her biggest problems during her campaign, says, “I’m sure she was not paid $500,000 for those speeches because they were really good speeches.”
At one rally, Clinton offered this non sequitur to a gathering of supporters: “If we broke up the big banks tomorrow, would that end racism? Would that end sexism?” It would not, of course, but such statements miss the big picture. Ignoring the concerns of those who have been impacted by the crash, and are still suffering from the impact, has not, and will not, boost voter turnout on election day.
“By wide margins, voters want to see tough oversight of Wall Street banks, financial service providers, payday and mortgage lenders, and debt collectors.”
A 2017 poll conducted by Lake Research Partners and Chesapeake Beach Consulting found: “By wide margins, voters want to see tough oversight of Wall Street banks, financial service providers, payday and mortgage lenders, and debt collectors.” These sentiments cross party lines: While Democratic voters feel the strongest about financial regulation (81 percent of those surveyed), majorities of independent voters (75 percent) and Republicans (58 percent) also say financial regulation is important.
Senators Elizabeth Warren, Democrat of Massachusetts, Bernie Sanders, Independent of Vermont, and Representative Tulsi Gabbard, Democrat of Hawaii, have set themselves apart by being the most vocal critics of financial institutions in the Democratic field, and have outlined the most progressive policy proposals as planks in their presidential platforms. In Congress, Warren, Sanders, and Gabbard have joined with other Democrats in introducing bills that would keep the powers on Wall Street in check:
The Stop Wall Street Looting Act (co-introduced by Warren) would help protect communities from the plunder of private equity firms.
The Inclusive Prosperity Act (co-introduced by Sanders) would add a tax of “a fraction of a percent” on the trade of stocks, bonds, and derivatives.
The Wall Street Banker Accountability for Misconduct Act (co-introduced by Gabbard) would defer a portion of senior executives’ pay into a fund for ten years that would be used if the bank is found guilty of misconduct.
These bills are a start. But much more could be done.
“Any President, Democrat or Republican, could do a lot of reform just through the regulatory agencies, just through the people they appoint to run the agencies will have a lot of power to re-regulate Wall Street,” Stanley says. “This is really something you can act on during day one.”
What’s critical, he says, “is to have a President who will stand up to Wall Street, who is not going to appoint people who are looking for a revolving door ticket to a big money job on Wall Street.”
And he offers this note of caution: “If a presidential candidate hasn’t said publicly they will take on Wall Street, they’re not going to do it once they’re elected.”