The End of Dodd-Frank Part 4: Financing a Democratic Future


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.”

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Bernie Won’t Break The Banks

Bernie Sanders

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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:

(1) limit the ability of the company to merge with, acquire, consolidate with, or otherwise become affiliated with another company;
(2) restrict the ability of the company to offer a financial product or products;
(3) require the company to terminate one or more activities;
(4) impose conditions on the manner in which the company conducts 1 or more activities

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?

Reinstate Glass-Steagall

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.

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The End of Dodd-Frank Part 1: Thus Spoke Volcker

The Volcker Rule, also know as United States Code Section 1851, was the consolation prize for the Glass-Steagall Act failing to get reinstated. It prohibits banking entities from engaging in proprietary trading or acquiring “any equity, partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund.” For Glass-Steagall Act supporters, it was viewed as too little. For those who support continuing the abolition of Glass-Steagall, such as presidential candidate Hillary Clinton, the Volcker Rule is viewed as a go-around. They want to get rid of it because the very same banking connection to proprietary trading, hedge funds, and private equity funds helped bail out these institutions during the recession. And then they, in turn, were bailed out by the federal government and other banks.

The Volcker Rule was made explicitly in recognition of this dynamic: the constituents said no more bailouts, so Congress made it impossible for bailouts to ever happen again, at least in the way they did with Bear Sterns and others. One criticism raised quite fairly is that the Volcker Rule may not actually prevent bailouts. But often it is under the delusional rationale of free-market dogmatism, rather than recognizing that a porous, watered down version of Glass-Steagall will never be a substitute, even in the short term, for the reinstatement of Glass-Steagall. Not to mention that it was only this year that the rule actually took effect, and it won’t be until next summer that we see audits to check for compliance. Until then, the effects  of the rule are at best conjecture. But we do not have time: the last minute sellings of prop desks and CLO’s at least demonstrate continued interests by the banks to engage in activities prohibited by the Volcker Rule.

The most succinct but comprehensive capitalist argument against the Volcker Rule I have found was provided George W. Madison, Gary J. Cohen, William A. Shirley  in the Banking and Financial Services Policy Report, entitled “Reconsidering Three Dodd-Frank Initiatives: The Volcker Rule, Limitations On Federal Reserve Section 13(3) Lending Powers, AND SIFI Threshholds” (34 No. 6 Banking & Fin. Services Pol’y Rep. 1). They divide criticisms of the Volcker Rule into four types: Risk, Liquidity, Complexity, and Competition. While they do not address Competition directly because they claim their criticisms are not concerned with it, their underlying ideology, both express and implicit, centers on competition as regulatory and I will criticize that in turn. However, because I see the questions of liquidity and complexity as being subsumed within the question of risk itself, I will in the interest of time focus solely on the arguments made about risk.

The structure of “Reconsidering…” introduces each criticism with Chairman Volcker’s rejection of similar criticisms. While I doubt the truncated summaries are not necessarily accurate representations, I do agree that Volcker’s justifications often fall short or are simply wrong. In other words, this is not me countering Madison et al’s arguments to defend Volcker’s as much as to assert options outside such a constricted binary.

The financial industry is rather torn about how to handle the criticisms of risk. Risk is far too important to their industry for them to accept changes that significantly lower risks. Let’s give a brief illustration of what risk means to finance. Before the United States’ credit rating was downgraded to AA+, U.S. Treasury bonds in a one year period were practically a risk-free investment: there should be no difference between your expected return and actual return. That looks like this:

risk free


Where is the variance curve? There is none: the actual results will always line up with expected results. Now let’s look at hedge funds, as conveniently set next to the more secure mutual funds:


YTD HF performance_1


And the risk of hedge funds, despite providing unconscionable high returns during the housing bubble and the recession, has steadily been increasing.




And since banks started making these sorts of investments post-Glass-Steagall, their standard deviations have on average increased. A simple, non-causal relation I’m sure.

And that is precisely what is criticized in “Reconsidering…”: “a correlation between the proprietary trading activity and the losses certainly existed, but not a significant causal relationship” (34 No. 6 Banking & Fin. Services Pol’y Rep. 1, 3). Madison et al. instead say that the problem is in “supersenior” collaterized debt obligations (CLO’s). Blaming CLO’s is convenient for industry shills: “supersenior” CLO’s are not stratified into risk tranches, under the mistaken belief that properly construct CLO’s could not completely default. The problem with that belief: (1) quite a few CLO’s were not properly constructed (2) there was risk, and the banks hid it in undercapitalized bond insurers. In both these instances, you have causes of the collapse that are easy to atomize into the fraud or mistakes of a few “bad apples.” So if CLO’s are the main problem, what is Madison et al.’s solution? Capital requirements. In 2004, the S.E.C. allowed the largest broker-dealers to apply for exemptions. Because that exemption is still in place, it gives the more conservative critics of the recession a solid campaign target to obfuscate their agenda to chip away at Dodd-Frank piece by piece. The Financial Crisis Inquiry Commission Report (FCIC) does talk about how thin capital was an important factor:

In the years leading up to the crisis, too many financial institutions, as well as too many households, borrowed to the hilt, leaving them vulnerable to financial distress or ruin if the value of their investments declined even modestly. For example, as of 2007, the five major investment banks—Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley—were operating with extraordinarily thin capital.FCIC Report pg. xix

But here are the problems: first, the bad apple theory finds no correlation between the indisputable direct actors of the crisis and actors subverting capital requirements through the 2004 exemptions. Not only was Bear Stearns, public “bad apple” enemy number one, within the current capital requirements, they also happened to be within the pre-2004 capital requirements as well. It turns out that leverage held by the investment banks was not the fault of the 2004 exemptions at all:

Leverage at the investment banks increased from 2004 to 2007, growth that some critics have blamed on the SEC’s change in the net capital rules…In fact, leverage had been higher at the five investment banks in the late 1990s, then dropped before increasing over the life of the CSE program—a history that suggests that the program was not solely responsible for the changes. –FCIC Report pg. 153-154

The FCIC Report is being generous in saying “not solely responsible.” The capital requirement exemptions were not in anyway a major factor in the recession. They are merely a convenient scapegoat for the ill-informed and the zealots of free-market ideology. Such scapegoating is possible when the inability to see the forest from the trees pervades U.S. understanding of economics, or rather the inability to see the inherent contradictions of capital from the specific manifestations of it in various financial factors and instruments. As David Harvey points out, these contradictions are never actually solved, but rather moved around. His focus, as a geographer, is how this is done geographically, noting the examples of the U.S. to Brazil and the West to Greece. But geography is only one facet of place – financial investments, I would argue, are another. And this is the fundamental nature of capital; Karl Marx in Grundrisse states that-

…[capital] already appears as a moment of production itself. Hence, just as capital has the tendency on one side to create ever more surplus labour, so it has the complementary tendency to create more points of exchange…The tendency to create the world market is directly given in the concept of capital itself. Every limit appears as a barrier to be overcome. –Grundrisse pg. 334

And as finance experiences growth, it creates more points of exchange, which means more trades, in shorter time, with far more risk. Thus, the futility in “solving” the problems which caused the recession by imposing a single regulation that merely attempts to limit, not even growth itself, but the speed of growth. Madison et al.’s claim that short-term exchanges are not at issue is farcical. Bear Stearns demonstrates, about as clearly as one can get, that the singular function of lax capital requirements is not needed to engage in risky growth and, as Marx states in Grundrisse, such haphazard search for more points of exchange is intrinsic to capital itself.

But the Volcker Rule is hardly exempt from this criticism either, though built on slightly stronger foundation. As a Marxist myself I do not believe that there could ever be a set of regulations capable of preventing the uncontrollable swarming of capital. But while “every limit appears as a barrier to be overcome,” some barriers are far easier to overcome than others. The Volcker Rule certainly sets stronger, though not impermeable, limits to the reproduction of the conditions that created the recession than any single capital requirement ever could.

An apt analogy would be three “average people” in a race against one another. One runner is given a track that is simply a one mile line, and not given any restrictions. The second runner is given an identical track, but told “You can only run at 7 mph at any given time. But we will only check your speed once in the race, and will give you 30 seconds to slow down if you’re over the limit.” The last runner is given a labyrinth where the correct path is one-mile long, but allowed to run as quickly as they want. The first runner and second runner will likely have identical times: the average one mile time of a person is 8:18, or about 7.22 mph. That additional 0.22 mph could easily be made up while the referees are not watching. The last runner will likely have the worst time. Unlike the second runner, the last runner has actual limitations to how they can run.

But the Volcker Rule itself contains a number of loopholes, most notably the convoluted (d)(1)(G) exception to certain activities around hedge funds and private equities or the provisions governing activities outside the United States in (d)(1)(H) and (d)(1)(I). The confidence of the banks themselves in the face of the impending implementation of restrictions this coming summer may indicate that they have found, or expect to find, a means of subverting the Volcker Rule. Regardless, the specific naming of proprietary trading, private equity, and hedge funds allows future financial instruments that can be defined outside of these while serving similar functions to be engaged with by banking entities. In other words, the Volcker Rule may not be a labyrinth as much as a fork, one path with a dead end and the other leading to the finish line. How effective it will be is far too dependent on a large number of circumstances for Leftists to be comfortable with it even in the short term, and that is not even counting the 13 proposed pieces of proposed legislation (a political analysis of their viability would take far too long to go into here, but worth noting nonetheless).

Another piece of proposed legislation could alter the Volcker Rule if enacted, and that’s Elizabeth Warren and John McCain’s 21st Century Glass-Steagall Act. While hardly the means of putting an end to any triggering of mass dispossession by recession, the strict separation of banking activities significantly reduces the effect of risky financial actors on commercial banks, as well as ending poor assessments of risk that give undue power to diversification of investments regardless of the kind of investment. Further, for those of us interested in pushing for worker cooperative banking, nationalized banking, public banking, etc., a Glass-Steagall reinstatement would decrease the short-term competitive edge commercial banks have by investments too risky for small, community or municipal public banks to take on. While it only has six co-sponsors and the bill’s prospects are rather grim, the idea has enough popularity to stay in the media, albeit with a far less Leftist lens than I give it.

But we can all act on this issue immediately in two simple ways. The first is to refuse the resignation to commercial banks being above the law and regulation. To refute the rewriting of history to claim that the recession was not caused by a lack of regulation. To state plainly that the banks got bailed out and we got sold out, and that we cannot accept that as business as usual. And the second is to divest. Divest from predatory financial institutions. Divest from the big commercial banks that have profited from investing in those institutions. Stop making investments with the sole goal of profit, and start taking conscious measures to avoid the schemes that hurt people of color, women, and the working class. To do so completely is impossible: there is no ethical consumerism when capital only exists from the surplus value extracted from labor. But to change that larger problem requires rebuilding society in a way that will be made far more difficult if our communities are torn apart by increasingly brief gaps between recessions.

Read Part 2 on Orderly Liquidation Authority here.

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The End of Dodd-Frank

6281762077_bc5ab9a1d5_zMost Leftist groups face a fairly unwieldy task of challenging a whole range of complicated issues with far less funding and time than their conservative counterparts. That is compounded by an overall focus on trying to prevent individual people from suffering which, while a noble endeavor, does not change the conditions that created that suffering.

So I want to start producing more technical legal but no less radical analysis, especially for the purposes of crafting both policy for the near future and setting our sights on some more distant visions of a socialist world. These are obviously the conjectures of a 1L student with a rather transparent agenda, so take that for what it is worth: if anything, this exercise is more to build up my own experience. I welcome any criticisms that readers may have.

I have three series planned so far, on issues with a rather abysmal lack of Leftist insight, at least in the legal realm. The latter two, because I do have many colleagues in friends in the respective field, will be released much later, and those will be on Prison Abolition and Constitutional Crisis. The first, which I will start immediately, is on the Dodd-Frank Act. With a Republican-controlled Congress enacting revisions to the financial regulations, revisions crafted by the lawyers of the banking and finance groups, it seems like a timely subject in need of an injection of truth. Because these lawyers are attempting to rewrite history, somehow re-constructing the recession as the fault of regulation and restriction. Here is what I am planning to cover:

Part 1 – Thus Spoke Volcker: The Volcker Rule, U.S.C. 1851, is essentially the consolation prize for advocates who failed to reinstate the Glass-Steagall Act. It prohibits banking entities from (1) engaging in proprietary trading and (2) having any pecuniary interest in a hedge fund or a private equity fund. The challenges to it are eloquently summed up in Madison, Cohen, and Shirley’s “Reconsidering Three Dodd-Frank Initiatives”: Risk, Liquidity, Complexity, and Competition. I’m going to pick apart how circular the logic of these challenges are, how their claims of wanting to reduce risk ring hollow, and how segregation between the banking industry and such risky financial institutions and instruments is crucial to preventing a virtual replication of the recent recession in a matter of a few years. In fact, that will happen because the Volcker Rule just is not the Glass-Steagall Act. With the recent repudiations of some of the very people who formerly championed the end of the act, the time for its reinstatement could be at hand.

Part 2 – But Who Will Save OLA?: The Orderly Liquid Authority was put in place to allow the government to intervene in financial corporations where normal bankruptcy is not possible. The collapse of Lehman Brothers was, in large part, unstoppable due to the inability of such intervention. The OLA is being challenged on a number of constitutional grounds, namely the First Amendment, the Due Process Clause, and the Takings Clause. I will refute that the OLA is unconstitutional, and further assert that its authority should be extended beyond the current scope of agencies. While it would be delusional to think that such Keynesian measures will stop another crisis of capital from ever occurring, the regulations need to be extended to at least temporarily prevent any further dispossession of wealth from the working class, and especially the Black working class, communities.

Part 3 – The Chilling Effect of Capitalism on Stability in the Congo: Here I will talk about a portion of the Dodd-Frank Act which have been chipped away by stare decisis. The constitutional arguments largely lean on the recent move to extend First Amendment protections to corporations. This trend is dangerous, and may require legislative intervention to really prevent. That is unlikely to happen with the current composition of Congress, so I will explore alternatives to the arguments the S.E.C. and others have failed with.

Part 4 – Financing a Democratic Future: Why should a socialist care about regulating an industry which they find to be inherently oppressive? Here I will explore the pros and cons of fighting for reforms, raising consciousness among the working class about how capital functions, and what role the legal profession can play in pushing for public ownership of the banks and other means of financing cooperatively owned businesses.