Wall Street Reviews What Sanders Plans for Wall Street
The office of Guggenheim Partners (source).
by Gaius Publius
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 SeibergAt 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.
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.
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):
GUGGENHEIMThe 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.
THIS MATERIAL IS MARKET COMMENTARY AND NOT A RESEARCH REPORT
January 6, 2016
Sanders Plan Radically Changes Financial System
Financial Services Policy Bulletin
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.
• 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.
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.)
As we heard the speech, there were 10 planks to it. We discuss those planks below: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.
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.
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.)