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Preventing the next financial blowout: A conversation with Dennis Kelleher

We've made some progress in regulating financial markets. But the job is far from over, making this election's outcome even more important than you thought.

(Mark Lennihan/Associated Press)
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I recently sat down for lunch with Dennis Kelleher, the president and chief executive of Better Markets, which Kelleher describes as “an independent, nonpartisan, nonprofit that fights for the economic security and prosperity of the American people by advocating for a strong, stable and balanced financial system.” He has worthy insights regarding the current state of financial market oversight, the implementation of Dodd-Frank and how these critical issues are playing out in the election. So I thought I’d share them with my PostEverything peeps!

JB: You and I share the serious concern that under-regulated financial markets could once again blow up the economy. In that regard, you’ve argued that Hillary Clinton’s Wall Street oversight agenda had a lot to recommend it. Let’s hear more about that. What are some of her best ideas?

DK: First and most importantly, she is focusing on Wall Street’s biggest too-big-to-fail firms and their most predatory, dangerous, high-risk and profitable activities.  For example, just four of the biggest U.S. banks (JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America) control more than 90 percent of the more than $200 trillion U.S. derivatives markets, which before the 2008 crash were unregulated. The 2010 Dodd-Frank financial reform law did regulate those markets, but she is calling for strengthening those regulations to prevent bailouts and protect taxpayers by restoring the “swaps push out rule.”  Another example is the “Volcker Rule” ban on the biggest banks’ high-risk trading for their own accounts, often with taxpayer backed deposits (called “proprietary trading”), which she is going to strengthen by closing risky loopholes.  But she also knows that regulation without enforcement means nothing, so she is also proposing to fully fund the regulatory cops on the Wall Street beat at the CFTC [U.S. Commodity Futures Trading Commission] and the SEC [U.S. Securities and Exchange Commission].

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JB: So you don’t worry about her alleged ties to Wall Street?

DK: We should all worry about any candidate with ties to the biggest, most politically powerful financial firms, which pose a unique threat to the financial system, the economy and the standard of living of all Americans. But we also have to look at what the candidates say and do.  Here, Secretary Clinton has proposed a robust plan to comprehensively regulate the entire universe of finance, banks and non-banks alike. In particular, she is, as stated above, advocating for policies that are directly against the interests and priorities of those firms. She’s also taken specific actions over the last year, which go directly against the interests and priorities of the banks with the closest ties to her. For example, she strongly supported the Department of Labor fiduciary duty rule, which requires all those giving retirement advice to put their clients’ interests first. This is going to cost some of the biggest financial firms in the country tens of billions of dollars, and they spent tens of millions of dollars over five years to defeat that rule. The same is true for the Consumer Financial Protection Bureau [CFPB], which many well-connected financial firms have spared no effort to kill because it has returned more than $12 billion to more than 27 million Americans from financial firms who ripped them off. Here again, Clinton fully supports the CFPB.

JB: How would you rate Donald Trump in this space? He’s made some claims about going after Wall Street but it’s always hard to pin down what he’s really getting at.

DK: Actually, it’s not that hard: His policies would almost certainly lead to another financial crash, more bailouts for Wall Street and another deep recession. He wants to repeal the Dodd-Frank financial reform law, which is really all that protects Main Street from the high risks and often reckless activities of Wall Street’s biggest firms. It’s that type of deregulation that led to the 2008 crash and caused the economic catastrophe from which we’re still trying to recover.

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JB: Where would you say we’re at right now in terms of adequate oversight of markets? Are some of the Dodd-Frank provisions working?

DK: Financial regulation is much better today than it has been in decades.  However, there is still a long way to go before the unique risks from this handful of very dangerous too-big-to-fail firms are either eliminated or reduced to the lowest levels possible.  No question a number of key Dodd-Frank provisions are working, but many still have to be finalized, implemented and, importantly, enforced.  It is a comprehensive, integrated law and it all must be enacted to effectively rein in Wall Street’s riskiest activities. … It is essential to focus on the biggest risks at the biggest firms and markets, not just parts of the financial system.

JB: Is the CFPB working?

DK: If the CFPB was an Olympic competitor, it would be Michael Phelps with dozens of gold medals, only better. Phelps has been at it for more than 20 years. The CFPB had to be started from scratch just five years ago but has already made consumer protection a priority in our financial markets, as proved by an impressive record of returning more than $10 billion to 27 million ripped off American consumers. One of the key accelerants of the 2008 crash was widespread predatory, illegal and, too often, criminal conduct where consumers were routinely ripped off and fraud was a frequently a business model. That was due to very little consumer protection pre-crash, which was also highly fragmented and mostly ineffective. The CFPB was a solution to that gaping regulatory hole and it is proving itself to be an invaluable protector of financial consumers across the country.

JB: You recently said that when it comes to certain aspects of financial reform, it’s as if Al Capone is setting the budget for the Chicago police force. That sounds terrible! Explain your concern.

DK: Even the best financial laws and rules are irrelevant unless they are effectively and consistently enforced evenhandedly among all market participants. The regulators are the front-line cops on the Wall Street beat who are supposed to enforce the rules. Wall Street’s biggest firms know this and have used their economic power to buy political power, and their political allies have grossly and irresponsibly underfunded regulatory institutions like the SEC and the CFTC. As a result, these regulators struggle to enforce the law against those very financial firms. For example, the CFTC budget for an entire year is $250 million to police derivatives and commodities markets of more than $300 trillion. It’s a job intentionally made impossible by Wall Street’s derivatives dealers and their allies who want to keep it that way.

JB: Finally, suppose — and I fear this is a likely outcome — Congress doesn’t want to implement any of the ideas you referenced in your first answer above. What could a President Clinton do on her own to regulate finance?

DK: Great question.  You are probably right, but the good news is that existing laws, including in particular the Dodd-Frank law, already have all the powers and authorities needed to end too-big-to-fail, properly police our financial markets and protect investors and consumers. Sure, it would be great if Congress passed laws to restore the swaps push out, close loopholes in the Volcker Rule, and impose fees on wholesale funding and predatory high frequency trading. But, even if they don’t, political will, leadership, and strong appointees can get the job done. This is just another way of saying “people are policy.”

The next president must appoint the strongest people possible to all the agencies and departments and ensure that they are committed and willing to fully and effectively implement and enforce Dodd-Frank specifically and financial reform generally. One important name to keep in mind here is Gary Gensler, who chaired the CFTC from 2009 to 2014, and who is currently associated with the Clinton campaign. Even under a ferocious industry lobbying assault and with a very small budget, Gensler enacted the most sweeping regulation of the U.S. derivatives markets in the country’s history. That proves the right people in the right positions can get the job done and protect the American people.