WASHINGTON, DC – Financial reform in the United States and worldwide hangs in the balance. The problems that brought us the terrible crisis of 2007-08 have not been fixed. Some underlying weaknesses are actually worse than they were a decade ago, including the problem of “too big to fail” global megabanks.
Europe is backtracking on financial reform issues; its policymakers are too preoccupied with holding the eurozone together. In the US, there will be no new legislation under the current Congress – and probably not for a long while to come. The Dodd-Frank Act of 2010 may turn out to be a framework for effective regulation, or it might become another set of empty promises. So far, implementation has been slow.
Implementation depends on regulators – some of whom are very good, while others remain in thrall to the big Wall Street banks. The issues are detailed and technical, and the financial lobby has deployed a small army of highly paid experts on a mission of delay, dilution, and diversion. The process is still subject to political supervision, but many politicians are easily bamboozled when the conversation really gets into the weeds.
This is why newly elected Senator Elizabeth Warren of Massachusetts is already proving so effective. Warren has worked hard on financial-sector issues over many years. She had the key ideas that led to the creation of the Consumer Financial Protection Bureau, and she helped get that agency on its feet. But she has also been engaged with all of the other practical details of financial reform for as long as anyone – in part due to her experience as chair of the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP).
Warren is now bringing this expertise to bear where it is needed most – directly on senior regulators. In her most high-profile intervention to date, she castigated leading officials at a Senate Banking Committee hearing on February 14, beginning with a simple question: When was the last time you took a big bank to trial?
All relevant regulators were present: Mary Miller, Under Secretary for Domestic Finance at the Treasury Department; Dan Tarullo, Governor of the Federal Reserve System; Marty Gruenberg, Chairman of the Federal Deposit Insurance Corporation (FDIC); Tom Curry, Comptroller of the Currency; Richard Cordray, Director of the Consumer Financial Protection Bureau; Elisse Walter, Chairman of the Securities and Exchange Commission; and Gary Gensler, Chairman of the Commodity Futures Trading Commission. Their answers ranged from unimpressive to downright evasive. (The Fed, the Treasury, and the Office of the Comptroller of the Currency bear most responsibility, together with the Department of Justice, which was not at the hearing.)
Then Warren hit them where it hurt. “There are district attorneys and United States attorneys out there every day squeezing ordinary citizens on sometimes very thin grounds and taking them to trial in order to make an example, as they put it. I’m really concerned that ‘too big to fail’ has become ‘too big for trial.’” After the video of Warren’s statement went viral, more than 13,000 people signed a petition demanding real accountability.
The conventional narrative – comforting to the big banks and their friends in the Obama administration – is that the Treasury has done everything within its power to reform the system. In this account, anyone now complaining about, for example, the lack of legal charges against the banks is some form of dangerous demagogue.
But 12 Federal Reserve Bank presidents are pushing for more progress on money market reform. The Special Inspector General for TARP, based within the Treasury, continues to express reservations about the consequences of unconditional bailouts. Credible figures, such as Richard Fisher (Dallas Fed president), Tom Hoenig (FDIC), and Jeremiah Norton (FDIC) speak publically about the continuing problems posed by “too big to fail.” Jeremy Stein, a relatively new appointment to the Board of Governors of the Federal Reserve, recently gave a speech explaining why dangerous incentive problems within large financial institutions will not be fixed by regulation.
Yet a senior Department of Justice official recently said that criminal charges could not be brought against big financial institutions, because experts tell him that to do so would damage the economy. In other words, equality before the law – a fundamental principle of American justice – has vanished.
The political power of global megabanks is out of control. They aim to run Washington just as effectively as they did in the run-up to the 2007-2008 crisis.
Sensible officials resist this, but they need political cover – elected representatives who will support them on Capitol Hill. The group of core senators pushing for financial reform is already strong, including Sherrod Brown, Jeff Merkley, Carl Levin, and Jack Reed. And now Elizabeth Warren is working hard with her Senate colleagues – Democrat and Republican – to bring responsible, well-informed pressure to bear on regulators and prosecutors.
As Christy Romero, TARP’s current Special Inspector General, put it in written testimony submitted for the February 14 hearing, our largest financial institutions “…continue to be dangerously interconnected. And, in fact, they have only gotten bigger in the past four years.”
A broad coalition of reformers is hammering home this point at every opportunity. The political narrative is changing – and Warren is leading the way.