Hillary Clinton’s credibility on bank reform depends on a banker turned rule-maker

When I get my hands on those banks…
When I get my hands on those banks…
Image: Reuters/Gary Cameron
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US presidential candidate Bernie Sanders’ stance toward Wall Street has served as a touchstone for the socialist senator’s campaign—and his speech on the topic today (Jan. 5) in New York will offer another point of contrast with his main rival for the Democratic nomination, former US secretary of state Hillary Clinton.

But anyone weighing financial regulation as a deciding factor in the election will need to recognize that both candidates’ most ambitious plans, however divergent, are likely to collapse in the face of Congressional resistance.

What really matters is who gets appointed to posts at the regulatory agencies charged with monitoring the financial industry, and how aggressive they will be in enforcing the rules.

While it’s a little early for either candidate to be talking about specific appointees, their choice of campaign advisers on financial issues perhaps offers a glimpse at what voters can expect.

And on this front, Clinton has worked hard to build credibility with those who otherwise might have been skeptical of her past ties to the industry, whether through campaign donations—Clinton, who formerly represented New York in the Senate, has raised million of dollars from the financial sector in this and past campaigns—or in the hundreds of thousands of dollars she and former US president Bill Clinton have collected in speaking fees for appearances at major banks.

For that, you can thank Gary Gensler. He’s the former Goldman Sachs partner and US Treasury official who became the head of the Commodity Futures Trading Commission (CFTC) during the Obama administration, and now works for Hillary Clinton’s campaign. While initially suspect among progressives, Gensler’s hard-charging pursuit of stricter rules on derivatives trading gave him enormous credibility on the left, while bankers can’t deny his expertise or experience.

He’s a key reason why Clinton’s rollout last week of her own financial regulation plan arrived with the applause of financial reformers: populist senator Sherrod Bown; the retired architect of the Dodd-Frank reform act, Barney Frank; even her rival for the hearts of the Democratic party, senator Elizabeth Warren, had nice things to say.

Hired gun

Gensler was hired by the Clinton campaign as its chief financial officer. Exactly what the position entails, Clinton’s campaign won’t say; nor has it made Gensler available for interviews. But ahead of Sanders’ policy speech, the Clinton campaign circulated a statement from Gensler designed to attack Sanders as too lax in dealing with the financial industry as a whole—while reminding those in the business that Clinton has a sophisticated understanding of the sector:

Any plan to further reform our financial system must include strong provisions to tackle risks in the ‘shadow banking’ sector, which remains a critical source of potential instability in our economy. This includes certain activities of hedge funds, investment banks like the now-defunct Lehman Brothers, and insurance companies like AIG. Unfortunately, Senator Sanders has so far taken a hands-off approach to some of the riskiest institutions and activities in our economy, which were among the biggest culprits during the 2008 crisis. In his speech tomorrow, Senator Sanders should go beyond his existing plans for reforming Wall Street and endorse Hillary Clinton’s tough, comprehensive proposals to rein in risky behavior within the shadow banking sector.

This is a reference to Sanders’ one-size-fits-all regulatory approach, developed with the help of his senate staff, including long-time adviser Warren Gunnels. Sanders wants to make sure the largest banks in the country are smaller and not liable to be bailed out in the event of another crisis, and his main approach to doing that is restoring Glass-Steagall, the law that mandated a separation between federally insured commercial banks and free-wheeling investment banks. (The 1932 law, inspired by the Great Depression, was slowly loosened beginning in the 1960s and was officially repealed while Bill Clinton was president.)

As Gensler notes and most observers agree, while the problems of the financial sector came to rest at the largest banks, they began in lightly regulated investment banks, hedge funds, mortgage brokers, and insurers. Sanders hasn’t discussed how to deal with these institutions in detail, and if he does today, Clinton will happily say he’s merely catching up with her approach.

People problems

The Sanders campaign offers a skeptical read on Clinton’s affiliation with Gensler. “Sen. Sanders won’t be taking advice on how to regulate Wall Street from a former Goldman Sachs partner and a former Treasury Department official who helped Wall Street rig the system,” a campaign spokesperson told the Wall Street Journal.

But where progressives really fear a problem with Clinton’s Wall Street ties is in her association with figures from her husband’s administration, including former Treasury secretaries Robert Rubin and Lawrence Summers.

“I do think secretary Clinton is potentially ill-served by listening to some of the advisers she is listening to,” says Dennis Kelleher, the president of Better Markets, a think tank that urges stronger rules for the financial sector. “Many of them were in the Bill Clinton administration and were part of tearing down Glass-Steagall and deregulating finance. They have a conflict of interest in giving candid, unbiased advice while wanting to defend the correctness of their prior work…the Bob Rubins and Larry Summers of the world have never publicly acknowledged or even seriously reflected on their role in causing the crisis.”

A Clinton spokesperson says that neither Rubin nor Summers has an official role in the campaign. Besides Gensler, the spokesperson named the following advisers on financial regulation: Neera Tanden, a longtime policy hand who worked for Clinton at the State Department; Gene Sperling, who held major policy roles in both the Clinton and Obama administrations; and the economists Alan Blinder and Joseph Stiglitz.

Stiglitz’s mention is particularly interesting because he is a strong proponent of restoring Glass-Steagall; he declined to speak to Quartz about Clinton’s policy agenda.

“I don’t think we do know who she’d appoint,” Kelleher says. “Gary Gensler is one of her senior advisers. He should be a candidate, if anyone is serious about reining in the Wall Street, for any senior policy position.”