Jude
Yesterday, Senator Elizabeth Warren undertook a big act of
financial rabble-rousing, by introducing a bill that would reinstate key
provisions of the 1933 Glass-Steagall Act that were repealed in 1999. The new
bill would essentially force big bank holding companies like Citigroup and Bank
of America to split in half - commercial banking on one side, investment banking
on the other - and hypothetically make the entire banking system safer and less
crisis-prone by (a) shrinking banks, and (b) reducing the amount of risky stuff
that goes on at the commercial banks where normal people keep their savings
accounts. She's calling this bill the "21st Century Glass-Steagall Act" and
promoting it using the slogan "Banking should be boring."
The bill, which Warren has already said won't get support from
the Senate Banking committee, is the second piece of legislation Warren has
sponsored since taking office that has virtually no chance of passing. In May,
she introduced the Student Loan Fairness Act, which for one year would bring
student loan interest rates down to the rates the Federal Reserve charges banks.
That bill was called "embarrassingly bad" by the Brookings Institution, and the
new one isn't faring much better among policy wonks.
So, with two largely symbolic bills in seven months in office,
the question must be asked: What is Elizabeth Warren really doing
here?
One theory, held by most of the Wall Streeters I've spoken with
about Senator Warren, is that she's simply playing for attention. They see her
grandiose bills and made-for-YouTube tirades against financial excess and lax
regulation as shallow populism, designed to garner reelection, solicit
donations, and boost her reputation as a badass. Even one ex-financier I spoke
to recently said he thought Warren was doing "showy stuff," not meant to make it
into actual law.
The second theory, also held by some conservatives and
financial-industry lobbyists I've spoken to, is a variation on the first and
posits that Senator Warren is basically the Steve Stockman of the left - a
principled true-believer whose refusal to abide by the horse-trading, pragmatic
legislative process leaves her with a bunch of unsupportable, silly-sounding
bills. In this theory, getting attention isn't the goal, but it often looks that
way.
But there's a third theory. It's the one that acknowledges that
Senator Warren is, pound-for-pound, one of the smartest and savviest legislators
in Congress, and imputes to her a far more complicated motive than simple
attention-seeking or "gesture politics."
It's the long-game theory.
This theory says that Senator Warren isn't trying to change
individual laws, so much as move the entire political discussion of the
financial sector to a different rhetorical arena and force other legislators to
join her there. In this theory, Warren's anti-bank bills and activism aren't
meant mainly for her constituents in Massachusetts, for the Internet audience,
or even for Wall Street. They're directed to her fellow legislators. And their
message is simple: On issues involving Wall Street, the center isn't where you
think it is.
Wall Street, and finance generally, is one of the issues where
the views of Congress have traditionally differed sharply from the views of the
masses. Most surveys show that a vast majority of Americans support tougher
regulation on banks; yet, because the financial sector's campaign contributions
and lobbyists have an outsize impact on Congress, the debate about how to rein
in Wall Street excess has taken place on the financial sector's turf.
On Main Street, around 60 percent of people think Wall Street
banks are too big and should be broken up. But to find that position in
Washington, you've typically had to look to the leftmost fringes.
Now Senator Warren, along with other pro-regulation legislators
like Sherrod Brown and David Vitter, are shifting the center. The Brown-Vitter
bill, which would have basically broken up banks by imposing tougher capital
requirements on large financial institutions, won a nonbinding 99-0 vote in the
Senate and was taken seriously by legislators in both parties. (Brown-Vitter did
considerably less well when it came to getting actual, binding support.) For her
21st Century Glass-Steagall bill, Senator Warren has brought aboard co-sponsor
Senator John McCain - a truly amazing about-face, given that McCain not only
voted for the original Gramm-Leach-Bliley Act that repealed the original
Glass-Steagal, but hired that bill's lead sponsor, Phil Gramm, as a senior
economic adviser for his 2008 presidential run.
Senator Warren's regulatory push hasn't changed Wall Street yet.
Most financial regulations that take actual effect are written by agencies like
the CFTC and the SEC. And in those agencies, debates about how Wall Street
should be regulated still take place in fairly small windows. (Commissioners
might disagree about how to regulate, say, overseas derivatives trading, but
nobody in the CFTC is proposing outlawing certain kinds of derivatives
entirely.)
But it's entirely possible that Senator Warren is proposing
reforms she knows have no chance of passage, simply to widen the boundaries of
debate. This is a basic tenet of negotiation. If you want a 20 percent raise,
you ask for a 40 percent raise. But this isn't traditionally how the game over
financial regulations has been played. By loudly advocating for policies that
are outside the narrow confines of traditional political acceptability, she's
expanding what political theorists call the Overton window and forcing other
politicians to consider more moderate views that would have seemed fringe
several years ago.
The new Glass-Steagall bill doesn't make a tremendous amount of
sense. As Senator Warren herself told Andrew Ross Sorkin last year, repealing
Glass-Steagall wouldn't have prevented the financial crisis or stopped the $6
billion London Whale trading losses at JPMorgan Chase. Bear Stearns and Lehman
Brothers were both investment banks with no commercial banks attached to them,
and their activities wouldn't have been prevented under the original
Glass-Steagall. Neither would the activities of AIG, Fannie Mae, or Freddie Mac.
And, as Matt Levine notes, the primary drivers of the financial crisis -
mortgage lending and the use of derivatives like credit default swaps - were
both permissible under the old Glass-Steagall regime.
If Senator Warren herself is willing to admit that reinstating
Glass-Steagall's bank-separation provisions wouldn't have prevented the
financial crisis, she must have another motive for introducing it. And I suspect
it's more complicated than grandstanding or staying true to
principles.
The truth is that many senators don't know what capital ratios
or rate swaps are, never mind being able to write legislation around them. And
in the same way that Wall Street's informational advantage gives it an automatic
edge over ordinary investors, Warren's knowledge of the financial markets gives
her automatic authority in Congress. Even if she's a freshman senator, her
knowledge has allowed her to coalition-build like a veteran. And that ability -
not a single bill or years of Internet fame - is what could make her quest to
reform Wall Street successful.
Bankers and their lobbyists shouldn't be worried that Senator
Warren's new Glass-Steagall legislation will pass. It won't. And passing is
largely beside the point. The more interesting achievement is that she's managed
to bring ideas like these into the realm of political acceptability and get
support from both sides of the aisle for them. Warren's "make banking boring"
campaign may look silly to finance-world cynics, but it's entirely possible that
she's engineering a new political consensus that will do much more damage to
Wall Street in the long term than simply breaking up a few banks. ++
“I believe that unarmed truth and unconditional love will have the final
word in reality. That is why right, temporarily defeated, is stronger than evil
triumphant.”
~ The Reverend Martin Luther King
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