Back around the time when I first started this blog, I predicted that the next president following Obama would sign into law a repeal of most, if not all, of the Dodd-Frank Act. And sure enough, with little fanfare as the media is largely focused on Russian phantoms or (more understandably) the destruction of what little public healthcare exists, the end of most of Dodd-Frank is proceeding down the legislative pipeline. Any hopes that the “populism” of a real estate mogul president would lead to tougher bank regulations is fading fast.
As if the Western media did not have enough reasons to rally behind the right wing terrorists of the Venezuelan opposition protests, a great outcry arose from the powers that be when Venezuelan Minister of the Economy Ramon Lobo and the unions seized control of a General Motors factory to ensure that production halts are not used to further harm the already fragile economy. GM of course was not please about this development and ran to their imperialist US government for help – after all, these political friends tend to give them far more deference. Unfortunately for the auto manufacturer giant, Venezuela does not take kindly to such interventionist appeals, so GM’s assets were frozen. It should be noted that this was not some impulsive move solely stemming from the recent unrest: GM owes more than $665 million in damages to a local car dealership that is over 16 years delinquent. The Western media will of course ignore this fact despite that such an egregious violation of the law would probably even elicit an injunction from the capitalist courts of the US. Instead the focus is on nationalization, a word that conservatives and liberals alike have tried to make into a slur, especially in response to any attempts to condition the recent bailouts of the auto industry and banks on even lukewarm reforms.
The Rebellious Lawyering Conference (RebLaw) began yesterday at Yale Law School, bringing together law students, lawyers, and community organizers to discuss a plethora of social justice issues. The author attended two of the sessions, which were amazing and yielded interesting legal perspectives and strategies worth elaborating on (and of course there were many simultaneous sessions which you can check out here). And tomorrow I’ll give a similar summary of the sessions I attend today.
Things are looking worse and worse for the liberal advocates of legalism and reform as direct action continues to win over and over and over again while doing things through the proper channels continues to fail. The latest blow is the resignation of Federal Reserve Board Governor Daniel K. Tarullo. Mr. Tarullo’s term was supposed to continue until 2022 but, for undisclosed reasons, he has left prior to that expiration. Know for his rigorous (or haphazard, at least according to the bankers) stress tests that he conducted against the banks to test how they would weather various economic emergencies, Mr. Tarullo was the closest thing to a public advocate on the Fed. Admittedly not a high bar, but nevertheless with his departure things will likely get worse for the working class.
Secured transactions are transactions where payments, typically on a loan of some kind, are secured by certain goods, called collateral, being subject to seizure upon failure to make payment. Mortgages, pawnshop loans, and money judgments from a lawsuit are all examples of secured transactions. Like most kinds of financial accumulation, they are speculative – they do not have the capital and may not get the capital depending on the circumstances. That risk however is mitigated by the ability to foreclose on the collateral to the loan and subsequently liquidating or reselling it to recover some, all, or even a surplus of the money owed.
Such transactions are ones that modern orthodox economists like to point to as too complicated or too attenuated from the labor theory of value for Marxist economics to explain. This reasoning comes from a misunderstanding of the labor theory of value – Marx never asserted that capital accumulation only comes from the immediate exploitation of wage labor. But even in these transactions, the value realized can always be traced back to its creation by labor. Loans are a paradigm of the neoclassical fiction of economics: the debtor benefits from having more capital in the short term to spend and the creditor benefits from making a profit, either on the interest or on foreclosing on the collateral and reselling it (admittedly this is a gross oversimplification, but nonetheless is the core of the profit motive). It seems to be win-win. And that is certainly how these transactions are marketed to consumers:
Last night I finished Michael Roberts’s new book The Long Depression, an epic defense of Marx’s law of political economy that the tendency of the average rate of profit of capital was to fall and an argument that the world is in a long depression, the third economic depression since the rise of capitalism. Readers may recognize the author as I have often cited to the prolific work he has done on his blog, as well as recommending him to all of those who want a solidly Marxist perspective on economics. The book provides an exhaustive computation of the effect of Marx’s law, as well as refutations of a number of alternative explanations (Keynesian, neoclassical, Austrian school, monetarist, Ricardian, etc.) for the economic history of the world from 1873 until the present day. It is a fantastic book not only for Marxists eager to learn more about economics but for Marxists to share with STEM-oriented friends who are more receptive to Roberts’s quantitative focus than to the more sociological arguments for Marxism.
I knew I had to write something promoting this book but I’m at best an amateur economist, so my judgment of Roberts’s argument is not particularly useful. However, I can highlight the arguments of the book by putting forth my own supplement on how the U.S. law correlates to the economic phenomenons that Roberts describes. As the proposal to reinstate the Glass-Steagall Act emerges from the shadows it has lingered in for over a decade, it is crucial to understand how a capitalist economy works and what effect the laws have on them.
The man pictured above nervously staring down the truth that Karl Marx wrote more than 121 years ago is Lloyd Blankfein. Mr. Blankfein is the Chairman and CEO (a duality typical of modern finance) of Goldman Sachs. Despite his grim look in this picture, Mr. Blankfein has a sunny disposition nowadays despite having had “600 hours of chemo” to eradicate the cancer growing out of his lymph nodes. Supposedly he’s been cured, which I’m sure was a big relief to Democratic presidential nominee Hillary Clinton. Clinton is close to Blankfein, and to Goldman Sachs in general. While mainstream media likes to frame Gary Gensler as a “Wall Street cop,” the campaign of Bernie Sanders responded to his hiring as Chief Financial Officer of Clinton’s campaign by saying that they “won’t be taking advice on how to regulate Wall Street from a former Goldman Sachs partner [at the age of 30] and a former Treasury Department official who helped Wall Street rig the system.”
People hate that I love Senator Elizabeth Warren. Which at first glance may seem surprising: after all, Warren is beloved by a large portion of the Left and even some people outside of it. But it isn’t her that’s the problem: it’s me. My liberal friends hate that I share her videos yet constantly chide and push them to be far more radical than the views she expresses. My radical friends hate that I defend her decision to not endorse Bernie Sanders, her decision to not run for president, and even her decision to be a Senator. Her sharp style of argumentation and rational, no-nonsense demeanor makes her an ideal populist candidate for a country fed up with big finance. But her and I both know that, at least at this point, she does more good as a Senator.
Fox News, depicting another kind of orderly liquidation of a bank.
Who Should Break Up The Banks?
As I mentioned in a blog post outside of this series, the presidential campaign of Bernie Sanders has given this topic a lot of media coverage. Some of that has been good: it has reignited public interest in bringing back the Glass-Steagall Act, and despite what opponent Hillary Clinton says, the Dodd-Frank Act’s Volcker Rule is no replacement for that act. But other parts have not been so great: after all, the Dodd-Frank Act is a complicated piece of legislation that became an even more complicated mess of regulatory rules from multiple government agencies and conflicting case law by various different district courts. The one major success the finance industry had with it was to force compromises that had even more strength in the confusion they add than the actual loopholes they create. And as I talked about in that blog post, Bernie Sanders’s campaign has stated that it wants to use the Mitigation of risks to financial stability provision, 12 U.S.C. § 5331, to break up the “too big to fail” banks in his first year. As I mentioned, that is pretty much politically impossible given the legislative requirements and just how many banks qualify as “too big to fail.”
This post is going to look at another provision: Orderly Liquidation Authority (OLA) as laid out in Subchapter II, Chapter 53 of Title 12 of the U.S.C. Interestingly, Hillary Clinton in the debates has hinted that she would use this authority, specifically to go after disreputable or insolvent financial institutions. While I certainly am aware of how friendly Clinton is with the captains of finance, it is a fairly risky move on her part: OLA is largely despised by even the more liberal economists. The usual “doom and gloom” narratives (funny how they’re never about the things that actually cause recessions) have been put forth by orthodox economists of all stripes. Stephen J. Lubben, Seton Hall University School of Law corporate apologist and neo-colonialist, wrote in his piece for the New York Times “The Flaws in the New Liquidation Authority” that OLA “…is apt to destroy going concern value and result in greater market disruption…There are no easy solutions, and probably failure avoidance is a better aim than any of the proposed resolution mechanisms.” In other words, Lubben wants the market to be allowed to “self-regulate” (shocking I know). As Lubben mentions, others like the Hoover Institute want to utilize some form of bankruptcy proceeding instead of OLA. But before we delve into the alternatives, let’s look at a basic outline of what OLA is.
Previously, when a financial institution was on its way to failing, it would be handled in a fairly similar way to any company failing: through a bankruptcy proceeding. But the government, in a rare moment of clarity that only a major economic downturn can bring, realized that institutions like Lehman Brothers would not conduct themselves properly and that, rather than file for bankruptcy in a timely manner, would postpone it through accounting fraud, misinformation, and perjury. So, Congress decided to create the OLA provision of Dodd-Frank to ensure that major financial institutions would not be allowed to put themselves in the same kind of situation that Lehman Brothers was in. The process was taken out of the Bankruptcy Courts, modified to take away power from financial institutions, and handed over to the Federal Deposit Insurance Corporation (FDIC), an independent agency of the government whose whole purpose is to insure the deposits that people make at the banks they govern (I am going to stay out of the broker-dealer provisions, which are governed by the Securities Investor Protection Corporation). This change of venue is already upsetting to the finance industry: the priorities of a Bankruptcy Court have increasingly been to garner whatever capital possible for financial institutions, whereas the FDIC is looking out for the consumers (note: for many reasons, this is not the same as looking out for communities or the public, but it is an interest often in opposition with that of the major finance companies).
The FDIC’s Ten Step Programme
An orderly liquidation is a 10-step process:
- The Secretary of the Treasury, after an investigation, finds that a financial institution is at risk and contacts the FDIC and the financial institution to request that the FDIC be appointed the receiver of the institution. The institution has two options: accept, which takes it to step 4, or oppose.
- If the financial institution opposes the request, the Secretary petitions a federal district court to force the financial institution to accept the receivership of the FDIC. There is a closed, confidential hearing where the court evaluates whether or not the Secretary’s determination of the institution as at or dangerously close to default is “arbitrary or capricious.” Capricious means prone to sudden changes in mood or behavior.
- The court has 24 hours to deliberate. If it fails to make a determination, the FDIC will automatically be granted receivership. Otherwise, however the court rules, it can be appealed by either the Secretary or the financial institution to first the Court of Appeals for the DC Circuit and after the Supreme Court.
- If the financial institution accepts the initial request for receivership, the court fails to make a decision within 24 hours, or the court and any further appeals rule in favor of the Secretary , then the FDIC is granted receivership of the financial institution for three years, with two possible extensions of an additional year each.
- The FDIC as receiver now has six major responsibilities: (1) to prioritize the stability of US financial markets over the continuance of the financial institution (2) ensure that shareholders of the institution are the very last to get paid (3) ensure that unsecured creditors bear some of the losses (4) ensure that the management responsible for the condition of the institution are removed (5) ensure that members of the board of directors who contributed to the condition of the institution are removed (6) not take any equity interest in the institution.
- If you could not guess from that list, the FDIC now has near-complete control of the financial institution, and may conduct it in anyway that the normal management lawfully would.
- But unlike the normal management, the FDIC will be focused mostly on the complete liquidation of the financial institution by selling off some of its assets and transferring others to a “bridge company.”
- A “bridge company” would be an entity created by the FDIC through their receivership. It would be created in a similar manner and operate in a similar way as any corporation, with the Board of Directors being appointed by the FDIC.
- Once enough of the assets have been sold or transferred to bridge companies to avoid applicable antitrust law, the FDIC may choose to merge the rest of the institution with another financial institution upon that institution’s consent.
- However it may be partitioned out, the assets will be completely liquidated within 3 – 5 years without any costs being borne by the taxpayer. Think of it like leftovers that are about to spoil in a house of four people: you might eat some, give some to your roommates, reincorporate it into a new dish (leftover rice and beans always winds up becoming a burrito for me), and probably throw some of it away.
So What Does It All Mean?
If you think this is complicated, this is actually a major simplification of the enormity of particular limitations and additional regulations, judicial and other agency oversight of the process from beginning to end, and rules for handling outstanding lawsuits and other obligations against the financial institution.
But it does not require that comprehensive of an understanding to see that OLA actually has a fair amount of power within it. So does this makes Hillary Clinton’s preference for it more radical, or at least realistic, than Bernie Sanders’s congressional-led bank dissolution? Not necessarily. While the 24 hour default on judicial judgment is one of the strongest regulations in the sector, there are two major stumbling blocks to the process: prior to receivership, the evaluation of risk, and during receivership, the creation of bridge companies.
Risk Is The Game
As I have stated before, risk is the foundation of the finance industry. Capitalism is full of contradictions, or perhaps seventeen major ones as David Harvey divides it, and as Harvey writes one of the clever schemes of capitalism is the ability to utilize these very contradictions for the purpose of capital accumulation. A government beholden to capitalism, as ours is, will always have two interests: to mitigate risk to forestall or manipulate recession and to allow and facilitate a certain amount of risk in the markets. One of the beauties of OLA is that it provides a window for how the government views the relation between the risks of individual corporations and the systemic risk of the finance market.
This is reflected in 12 U.S.C. § 5383, which stipulates the following factors for systemic risk evaluation:
Picture from washingtontimes.com
Bernie Sanders got 2016 started by a speech in NYC on one of his favorite issues: the regulation of the banking and finance industry. As one of the defenders of Glass-Steagall back when it was being chipped away at in 1999, Sanders is able to position himself as a “Cassandra of Troy” figure to liberals who might otherwise be reluctant about instituting serious financial regulations beyond the Dodd-Frank Act. Along with income inequality, it is an issue which he has a tactical advantage over any of the other presidential candidates as the only one to admit in anyway that the financial industry is what it is:
Greed, fraud, dishonesty and arrogance, these are the words that best describe the reality of Wall Street today.
While I might disagree on fraud, only because most things normal people consider fraud is perfectly legal in the context of mass financial capital accumulation, it is the most honest description of the captains of capitalism by a major presidential candidate since Eugene V. Debs. But the question is what policies will, and more importantly can, Bernie enact as president? Let’s break down the ones he talked about during his speech:
Breaking Up The Too Big To Fail Banks
First, we have his proposal that he will break up the “too big to fail” banks under Section 121 of the Dodd-Frank Act. Legislators tend to refer to laws based on how they were passed in Congress, but this can be somewhat misleading at times: what we really want to look at is the corresponding section of the United States Code, 12 U.S.C. sec. 5331. This provision does indeed set up a system to “break up” the banks, but it is sufficiently complicated as to put into doubt whether a President Sanders could break up even one, let alone all, of the “too big to fail” banks in his first year.
Banks that are governed by this section must hold $50 billion in assets. That sounds like a lot of money, but not in the banking world: the top 38 banks in this country all hold over $50 billion in assets, and to redistribute the assets of giants like the over $1 trillion top four banks would likely push a lot of the other banks into the over $50 billion range. Which isn’t to say that breaking up these banks is impossible: I just want to give a scope of what a large project it is. It is also worth noting that there is a major limit to what the U.S. government can do at all since, as Forbes reports in 2014, not a single U.S. bank is in the top five banks of the world for asset holdings.
Then there needs to be a 2/3 vote of Congress approving the Federal Reserve taking action. With every. Single. Bank. Let’s all keep in mind how much Congress has gotten accomplished in the past ten years. Even after that, the Board of Governors is required to run through alternative solutions before breaking up the bank, particularly:
These provisions tell us an interesting story about the priorities of capitalists. The howling over the free market is contextualized here by what “freedoms” they’re willing to give up before they give up capital accumulation and growth. The Federal Reserve literally telling them what to offer or not offer, and how to offer it, are more palatable than disrupting the notion that the banks should be able to keep the assets they’ve leeched off the work of others. The bank is also provided a hearing before the Board of Governors where they can argue for why no provision should be enforced upon them or why a certain provision would be sufficient.
If none of the alternatives work, the Board of Governors will break up the bank. Now, after going through that whole process in a much shortened form, do we really think it is possible for a President Sanders to use this law in his first year of the presidency, rallying 2/3 of Congress every time, to break up all 38 of these “too big to fail” banks?
President Sanders also wants to reinstate the Glass-Steagall Act, particularly through the bill being pushed for by Elizabeth Warren and John McCain. I talked about how this would be a significant improvement, but with difficulties, towards the end of my post on the Volcker Rule. It is pleasant to see that Sanders shares my view that the attempt by Hillary Clinton and others beholden to big finance to blame this on a few bad apples outside of commercial banking is wrong if not outright deceitful. Sanders states:
And, let’s not kid ourselves. The Federal Reserve and the Treasury Department didn’t just bail out shadow banks [Sanders’s term for noncommercial banks]. As a result of an amendment that I offered to audit the emergency lending activities of the Federal Reserve during the financial crisis, we learned that the Fed provided more than $16 trillion in short-term, low-interest loans to every major financial institution in the country including Citigroup, JP Morgan Chase, Bank of America, Wells Fargo, not to mention large corporations, foreign banks, and foreign central banks throughout the world.
Too Big To Jail
Sanders also wants to go after the bank and finance industry with the criminal law. I am not necessarily opposed to this, but the question is how much will it help and what sort of broader foundation belief does it rest on? Sanders and other progressives are fond of saying that no one or few have been prosecuted for the 2009 recession:
But when it comes to Wall Street executives, some of the wealthiest and most powerful people in this country, whose illegal behavior caused pain and suffering for millions – somehow nothing happens to them. No police record. No jail time. No justice.
This is a bit hyperbolic. Meet U.S. Attorney Preet Bharara, personal pain-in-the-ass to big finance and disliked by many for his “aggressive” tactic of actual prosecuting white collar crimes. He has an 85-1 conviction rate for insider trading alone. He also won the first conviction holding a major commercial bank responsible for causing the financial crisis. The point being that there have been many prosecutions and even some criminal convictions. The question is, has that improved the situation? I would say that is doubtful. The whole purpose of a corporation is to centralize liability outside of an individual’s conduct. While we on the Left love to say that corporations are not people, for the purposes of the law they very much are, except that a corporation cannot be put in prison. And deterrence by criminal prosecution is generally empirically suspect.
Sanders also states that he will reign in Wall Street by making appointments of people not beholden to the interests of the banks and financial institutions. But who does the President appoint in the finance world?
-The Board of Governors is appointed by the President, but appointments are locked in for a term of 14 years and cannot be changed for policy reasons. Not a single Governor’s term expires during the first term of whoever wins the U.S. Presidency. President Obama has requested appointments for the two Board vacancies – unless these are blocked by the Senate, which in the current Senate is certainly possible, there will be no new Board of Governors under the first term of a Sanders presidency.
-The Secretary of the Treasury is appointed by the President and is the most powerful economic position in the executive branch. Notably, Secretary under FDR William H. Woodin was a big force behind the FDIC and Glass-Steagall Act. But President FDR had a far more cooperative Congress than a President Sanders will. Woodin was aided in his work by the fact that he was an industrialist himself, and other capitalists trusted him. Since that time, while proposals have ranged in popularity, Secretaries have almost always been insiders like Donald Regan, Lloyd Bentsten, Larry Summers, Henry Paulson, and Timothy Geithner. Sanders would be under a lot of pressure to also appoint an insider, and not by the Republicans but by fellow Democrats who see it as the only way to gain economic policy victories for their party.
President Sanders Won’t Break The Banks
If Sanders goes on to win the presidency, which is doubtful, his ability to effect change will be limited at best. As powerful as the president is, he is only the head of one of the three branches of government, and the other two have clearly defined themselves as pro-Wall Street. The Carter presidency in particular shows the limits: the economic crisis was triggered by OPEC, an entity outside of U.S. governmental regulation, and Congress’s refusal to cooperate stymied any hopes of Carter implementing the measures needed to cut short the crisis and save his own reputation.
But there is certainly upsides to Sanders discussing these issues during his campaign. There seem to be two major positions on the Left when it comes to this issue: on the more conservative side, the trusting of the process and nominal reforms, and on the more radical side, a disinterest in engaging with or understanding the financial system. While dogmatic reformism will always be insufficient, an outright rejection of any strategy but the complete immediate dissolution of the financial system is the sort of inane self-righteous postulating that Lenin denounced in his “Left-Wing Communism: An Infantile Disorder.” However, the position of endorsement of Sanders’s campaign by Leftists such as Socialist Alternative represents the other side where pragmatism ends and opportunism begins.
In between, we find a different strategy: to use but not depend on the government to regulate or weaken the banks and financial institutions, and to build radical alternatives like credit unions and worker cooperatives as well as imagining and advocating for a future economy that is democratic and socialist. To juggle these is difficult, and those who do will often be derided as riding the fence or being too moderate for some and too radical for others. But this ideology more than any other focuses on the grassroots movement building that has always been the vehicle for the working class to gain power.