Welcome to DU!
The truly grassroots left-of-center political community where regular people, not algorithms, drive the discussions and set the standards.
Join the community:
Create a free account
Support DU (and get rid of ads!):
Become a Star Member
Latest Breaking News
General Discussion
The DU Lounge
All Forums
Issue Forums
Culture Forums
Alliance Forums
Region Forums
Support Forums
Help & Search
DK Article Explains How Daily News Misunderstood Bernie's Statements:
it's actually a long meta-article that criticizes an erroneous post from yesterday that criticized Bernie's remarks
.....
snip
..........in essence it is that the authority to break-up financial institutions does exist under current law, but it has not been utilized. In fact, it has never even been seriously considered by the regulators entrusted with that authority. The regulators are uncertain of the authority they have been given under Dodd-Frank, and absent direction from either Congress or the administration, the assumption seems to be that this is “in case of emergency, break-glass” authority. The argument Sanders is making, and I would make, is that by the time you are ready to break the glass, it is too late.
This realization is exactly why Bernie has repeatedly introduced (since 2009) legislation that would create the authority and require the breakup of SIFIs. The text of the legislation can be found here. It requires:
1.The FSOC draw up a list of institutions deemed Too Big To Fail
2.Secretary of the Treasury would break-up, unwind, or force divestiture of business lines till institutions were no longer TBTF.
3.Instructs the Fed to close the discount window and any other form of financing to institutions deemed TBTF.
4.Prohibits use of insured deposits for various purposes deemed speculative (this is the Glass-Steagal like provision).
It’s a short bill, and I like my financial regulation short and simple. But it demonstrates an understanding of what caused the crisis and how to remedy it at the root.
Back to the interview Bernie gave and my take of what he was saying and how it seems to have been systematically misinterpreted.
Sanders: How you go about doing it is having legislation passed, or giving the authority to the secretary of treasury to determine, under Dodd-Frank, that these banks are a danger to the economy over the problem of too-big-to-fail.
Daily News: But do you think that the Fed, now, has that authority?
Sanders: Well, I don't know if the Fed has it. But I think the administration can have it.
The Fed doesn’t have the ability to mandate liquidation or a break-up of a large financial institution on its own. The Financial Stability Oversight Council has to act in concert with it under Dodd-Frank. It’s chaired by the Treasury Secretary, and has the heads of various regulatory agencies as members (Fed, OCC, CFPB, SEC, FDIC, CFTC, FHFA, NCUA). They are all presidential appointees. So yes, the administration through the heads of regulatory agencies who are appointed by the President can set this in motion. That said, it is unlikely the current composition of the FSOC would take embark on such a quest.
It is not clear the 7/10 votes would be available on the FSOC. Nor is it clear that 4 out of 10 Fed governors would make the required determination that an institution posed a grave risk to the financial system as mandated in section 121. Neither the Fed, nor other regulatory agencies appear to have examined this authority or made any plans to use it.
Why would they? No one has told them they need to use this authority. Electing Bernie Sanders would be a enormous signal that the American electorate expects regulators to use this authority. If this signal is delivered, they will use it. That’s how politics works.
Daily News: How? How does a President turn to JPMorgan Chase, or have the Treasury turn to any of those banks and say, "Now you must do X, Y and Z?"
Sanders: Well, you do have authority under the Dodd-Frank legislation to do that, make that determination.
Daily News: You do, just by Federal Reserve fiat, you do?
Sanders: Yeah. Well, I believe you do.
Once again, it’s the Daily News Editorial board that is confused about this, not Sanders. They’re the ones suggesting the Fed drives a break-up or could force it. As I’ve discussed, the Fed can initiate the process under current law, but there is no requirement for them to do so today. The Fed can also do many other things that would immediately force the unwinding of an financial institution.
The Fed is under no obligation to lend at the discount window to any particular institution, or indeed any institution. If the Fed were to refuse to lend to an institution today, it would guarantee a wind-down of the institution under whatever terms the Fed sets by tomorrow.
In general terms, under a fractional reserve banking system like ours, no large depositor or counterparty will continue to do business with a bank that does not have access to the lender of last resort. The very survival of Goldman Sachs and Morgan Stanley in 2009 hinged on them converting their parent entities into bank-holding companies and thus gaining access to the discount window. That access gave them a theoretically unlimited credit line to draw upon. This signal is what prompted counterparties in the money-markets to begin dealing with these firms again and permitted them to finance their overnight liabilities and complete day to day activity without onerous terms being imposed by the other side.
Daily News: I get that point. I'm just looking at the method because, actions have reactions, right? There are pluses and minuses. So, if you push here, you may get an unintended consequence that you don't understand. So, what I'm asking is, how can we understand? If you look at JPMorgan just as an example, or you can do Citibank, or Bank of America. What would it be? What would that institution be? Would there be a consumer bank? Where would the investing go?
Sanders: I'm not running JPMorgan Chase or Citibank.
Daily News: No. But you'd be breaking it up.
Sanders: That's right. And that is their decision as to what they want to do and how they want to reconfigure themselves. That's not my decision. All I am saying is that I do not want to see this country be in a position where it was in 2008, where we have to bail them out. And, in addition, I oppose that kind of concentration of ownership entirely...
This is entirely reasonable. It is not necessary for the administration, or the President to dictate how a group should be re-organized to reduce its size. That can be left up to the group itself. What the administration would have to do is set the terms under which such a break-up would be mandated. We do not currently have these apart from the vague “grave” financial risk provision which as I noted the regulators have not treated seriously. We do have a 10% concentration limit on institutions which withholds regulatory approval for acquisitions/mergers if the resulting institution would have an excess of 10% of financial sector liabilities.
In the past, various US administrations have also used the powers of the Sherman antitrust act to mandate breakups. The two big examples are AT&T and Standard Oil. The Libor rate-rigging, CDS price-fixing and mortgage underwriting investigations all pointed to forms of price-fixing, collusion, or anti-trust activity. That could also form the basis of a settlement that mandated a breakup. If, that is, the relevant heads of agencies wished to.
These and other laws covering investor disclosure and securities fraud could form the basis for prosecuting individuals. The lack of prosecution of individuals is something I’ve written about before (here and here). What Bernie is getting at with his insistence on prosecuting individuals is the fundamental injustice where senior managers making these decision are effectively let off the hook with light financial penalties and possible impact to their career. The heavy financial penalties are borne by the institutions, i.e. their shareholders and employees. This is most likely insufficient penalty and not a deterrent. It is also fundamentally unfair when we consider the very punitive levels of incarceration for drug-related offenses. Once again, this will not happen till agency heads are given the mandate to do so by an administration.
snip
snip
..........in essence it is that the authority to break-up financial institutions does exist under current law, but it has not been utilized. In fact, it has never even been seriously considered by the regulators entrusted with that authority. The regulators are uncertain of the authority they have been given under Dodd-Frank, and absent direction from either Congress or the administration, the assumption seems to be that this is “in case of emergency, break-glass” authority. The argument Sanders is making, and I would make, is that by the time you are ready to break the glass, it is too late.
This realization is exactly why Bernie has repeatedly introduced (since 2009) legislation that would create the authority and require the breakup of SIFIs. The text of the legislation can be found here. It requires:
1.The FSOC draw up a list of institutions deemed Too Big To Fail
2.Secretary of the Treasury would break-up, unwind, or force divestiture of business lines till institutions were no longer TBTF.
3.Instructs the Fed to close the discount window and any other form of financing to institutions deemed TBTF.
4.Prohibits use of insured deposits for various purposes deemed speculative (this is the Glass-Steagal like provision).
It’s a short bill, and I like my financial regulation short and simple. But it demonstrates an understanding of what caused the crisis and how to remedy it at the root.
Back to the interview Bernie gave and my take of what he was saying and how it seems to have been systematically misinterpreted.
Sanders: How you go about doing it is having legislation passed, or giving the authority to the secretary of treasury to determine, under Dodd-Frank, that these banks are a danger to the economy over the problem of too-big-to-fail.
Daily News: But do you think that the Fed, now, has that authority?
Sanders: Well, I don't know if the Fed has it. But I think the administration can have it.
The Fed doesn’t have the ability to mandate liquidation or a break-up of a large financial institution on its own. The Financial Stability Oversight Council has to act in concert with it under Dodd-Frank. It’s chaired by the Treasury Secretary, and has the heads of various regulatory agencies as members (Fed, OCC, CFPB, SEC, FDIC, CFTC, FHFA, NCUA). They are all presidential appointees. So yes, the administration through the heads of regulatory agencies who are appointed by the President can set this in motion. That said, it is unlikely the current composition of the FSOC would take embark on such a quest.
It is not clear the 7/10 votes would be available on the FSOC. Nor is it clear that 4 out of 10 Fed governors would make the required determination that an institution posed a grave risk to the financial system as mandated in section 121. Neither the Fed, nor other regulatory agencies appear to have examined this authority or made any plans to use it.
Why would they? No one has told them they need to use this authority. Electing Bernie Sanders would be a enormous signal that the American electorate expects regulators to use this authority. If this signal is delivered, they will use it. That’s how politics works.
Daily News: How? How does a President turn to JPMorgan Chase, or have the Treasury turn to any of those banks and say, "Now you must do X, Y and Z?"
Sanders: Well, you do have authority under the Dodd-Frank legislation to do that, make that determination.
Daily News: You do, just by Federal Reserve fiat, you do?
Sanders: Yeah. Well, I believe you do.
Once again, it’s the Daily News Editorial board that is confused about this, not Sanders. They’re the ones suggesting the Fed drives a break-up or could force it. As I’ve discussed, the Fed can initiate the process under current law, but there is no requirement for them to do so today. The Fed can also do many other things that would immediately force the unwinding of an financial institution.
The Fed is under no obligation to lend at the discount window to any particular institution, or indeed any institution. If the Fed were to refuse to lend to an institution today, it would guarantee a wind-down of the institution under whatever terms the Fed sets by tomorrow.
In general terms, under a fractional reserve banking system like ours, no large depositor or counterparty will continue to do business with a bank that does not have access to the lender of last resort. The very survival of Goldman Sachs and Morgan Stanley in 2009 hinged on them converting their parent entities into bank-holding companies and thus gaining access to the discount window. That access gave them a theoretically unlimited credit line to draw upon. This signal is what prompted counterparties in the money-markets to begin dealing with these firms again and permitted them to finance their overnight liabilities and complete day to day activity without onerous terms being imposed by the other side.
Daily News: I get that point. I'm just looking at the method because, actions have reactions, right? There are pluses and minuses. So, if you push here, you may get an unintended consequence that you don't understand. So, what I'm asking is, how can we understand? If you look at JPMorgan just as an example, or you can do Citibank, or Bank of America. What would it be? What would that institution be? Would there be a consumer bank? Where would the investing go?
Sanders: I'm not running JPMorgan Chase or Citibank.
Daily News: No. But you'd be breaking it up.
Sanders: That's right. And that is their decision as to what they want to do and how they want to reconfigure themselves. That's not my decision. All I am saying is that I do not want to see this country be in a position where it was in 2008, where we have to bail them out. And, in addition, I oppose that kind of concentration of ownership entirely...
This is entirely reasonable. It is not necessary for the administration, or the President to dictate how a group should be re-organized to reduce its size. That can be left up to the group itself. What the administration would have to do is set the terms under which such a break-up would be mandated. We do not currently have these apart from the vague “grave” financial risk provision which as I noted the regulators have not treated seriously. We do have a 10% concentration limit on institutions which withholds regulatory approval for acquisitions/mergers if the resulting institution would have an excess of 10% of financial sector liabilities.
In the past, various US administrations have also used the powers of the Sherman antitrust act to mandate breakups. The two big examples are AT&T and Standard Oil. The Libor rate-rigging, CDS price-fixing and mortgage underwriting investigations all pointed to forms of price-fixing, collusion, or anti-trust activity. That could also form the basis of a settlement that mandated a breakup. If, that is, the relevant heads of agencies wished to.
These and other laws covering investor disclosure and securities fraud could form the basis for prosecuting individuals. The lack of prosecution of individuals is something I’ve written about before (here and here). What Bernie is getting at with his insistence on prosecuting individuals is the fundamental injustice where senior managers making these decision are effectively let off the hook with light financial penalties and possible impact to their career. The heavy financial penalties are borne by the institutions, i.e. their shareholders and employees. This is most likely insufficient penalty and not a deterrent. It is also fundamentally unfair when we consider the very punitive levels of incarceration for drug-related offenses. Once again, this will not happen till agency heads are given the mandate to do so by an administration.
snip
http://www.dailykos.com/stories/2016/4/5/1510738/-Diary-slamming-Sanders-betrays-deep-ignorance-of-financial-crises-and-remedies-for-them
2 replies
= new reply since forum marked as read
= new reply since forum marked as read
