Elizabeth Warren: ‘That’s the strongest argument for a modern Glass-Steagall’
Elizabeth Warren, who is running for Senate in Massachusetts, thinks JP Morgan Chase CEO Jamie Dimon should resign his seat on the New York Federal Reserve. Beating up on Dimon is, of course, a popular position among politicians right now, but Warren has special credibility on this point: She chaired the congressional oversight panel on TARP from 2008 to 2010, and led the Consumer Financial Protection Bureau from 2010 to 2011. We spoke by phone Monday afternoon. A lightly edited transcript follows.
Ezra Klein: So JP Morgan lost $2 billion. They’re not asking for a bailout. They’re not threatening to capsize either themselves or anyone else in the system. And so they say, and it’s not an entirely unfair question, why is this Elizabeth Warren’s business, or the U.S. Congress’s business? Isn’t making bad investment decisions legal?
Elizabeth Warren: That is what Jamie Dimon has said. He says it’s stupid and sloppy but we’ll fix it. So stay away. But what if the next loss is $20 billion or $200 billion? Is he saying JP Morgan should be entitled to continue to take these bets right up until the day it lands in the taxpayers lap again?
Banks are different than other kinds of companies. We learned that in 2008. They run the risk of bringing down our jobs, our pensions, our economy. The basic deal we made with them is they get to operate banks — the things that take savings and investments and checking accounts and get a federal guarantee — in return for submitting to substantial oversight to make sure their activities are safe.
EK: That gets us to the Volcker rule, which is what would keep banks that get that guarantee from gambling with customer money and a federal backstop. But at this point, I don’t think very many people — even people who follow this stuff quite closely — have a very specific sense of what the difference between a good and bad Volcker rule is. So how do you think about that?
EW: I’m going to reframe it slightly: Who profits from the complexity of the Volcker rule? It’s the largest financial institutions. No financial institutions want a simple Volcker rule. They want layers and layers of complexity because it’s in complexity that there are loopholes. That’s where it’s possible to back up regulators who are not quite certain about the ground they stand on. And it’s a larger problem with our regulatory structure: Complexity favors those who can hire armies of lobbyists and lawyers. The big push I made at the Consumer Financial Protection Bureau was simple rules. Simple mortgage documents. Simple credit card agreements. Because complexity creates too many opportunities for an army of lawyers to turn the rules upside down.
EK: I agree that complexity is where lobbyists and lawyers work their dark magic. But when I talk to people in the industry about this, they say that simple rules sound great, but they’re not really possible. It’s hard to distinguish a hedge from a bet, or a speculative trade from a legitimate one. The world is complex, and that’s why regulators and politicians who don’t like Wall Street and don’t like being browbeaten by lobbyists end up allowing complex rules, too.
EW: Here’s another way to look at what you just described: That’s the strongest argument for a modern Glass-Steagall. Glass-Steagall said in effect that hedge funds should be separated from commercial banking. If a big institution wants to go out and play in the market, that’s fine. But it doesn’t get the backup of the federal government. If it’s too complicated to implement the Volcker rule, do you say we give up and let the largest financial institutions do what they want? Or do you say maybe that’s the reason we need a modern Glass-Steagall?
EK: Do you support a modernized Glass-Steagall law?
EW: Yeah! I’ve talked with Sen. Maria Cantwell from Washington State. She’s been working on that, and I think the debate should be on the table.
EK: What about breaking up the big banks?
EW: You’re approaching risk from two different directions. One is the risk of the activity. That’s the Volcker rule. The other direction is to say risk is an assumption of size. Community banks shouldn’t have to deal with complex regulatory oversight, but the largest institutions should be subject to far more aggressive oversight and have to pay more for the protections they receive from the American taxpayer. Then shareholders may decide to invest in institutions that are not so large.
EK: One of the scarier aftereffects of the crisis is that the biggest banks have become much bigger, right? JP Morgan Chase, if I remember correctly, now has more than $2 trillion in assets, where before the crisis, it was well beneath that.
EW: I was just talking about this this morning. One of the things I remember is when we were writing the reports trying to put some accountability into the system in 2008 we kept talking about how there was too much concentration in the banking industry. I remember this! I was on television talking about it. I talked to reporters about it. And now there’s more concentration than there was then. We moved in exactly the wrong direction.
EK: And the thing that worries me about that, at least when applied to this crisis, is that if you think about the appetite for risk being a contributor to bubbles and blowups, we’re not even five years out from Lehman. Regulators are looking over everyone’s shoulder. You’d expect the appetite for risk to be very low right now. And even in this atmosphere, JP Morgan managed to blow up billions of dollars in insanely complex derivatives.
EW: And when Jamie Dimon is holding himself out as the hero of the day for having been the world’s most prudent banker. All of that is going on at the same time. The moment of once-burned, twice-shy, passed quickly! The bankers have been ready to get right back into playing with matches and firecrackers and every other combustible thing they can find. That’s why I think this is really about the system, not Dimon. If JP Morgan has to admit to taking on risks that would cause a $2 billion loss, what’s happening at the other financial institutions, the ones that haven’t held themselves out as models of prudence? No one knows because there is no effective oversight.
EK: Can Dodd-Frank work if it’s effectively implemented?
EW: I think Dodd-Frank is a strong bill that moves in the right direction. But the market keeps changing. The practices keep changing. The idea that we’ll pass one law and then declare that problem is solved, we’ll be back again in 50 years, just doesn’t work anymore. We had a double problem here: Both deregulation and the failure to adapt to new financial conditions and products and practices. That’s what permitted risk to multiply in the system until it nearly brought the economy to its knees.