Why Sanders is right on financial reform
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Before Sen. Bernie SandersBernie SandersObama book excerpt: 'Hard to deny my overconfidence' during early health care discussions Americans have a choice: Socialized medicine or health care freedom Ocasio-Cortez says Democrats must focus on winning White House for Biden MORE's (I-Vt.) major policy speech on Wall Street reform last week, I'd concocted a sort of fantasy speech that I'd hoped he might give. As it happened, the senator preempted me; the speech that he actually gave was magnificent. I offer my fantasy version nevertheless, however, inasmuch as I think both (a) that it complements his, and (b) is a speech I can imagine his giving.

Here goes:  

My fellow Americans, the next president of the United States will have to recognize that our financial system, while in some respects undeniably safer and fairer than it was prior to our most recent crisis, is in other respects more dangerous and unfair than before. It is a primary cause of our worsening inequality problem, and might already be preparing our next crisis — which will be worse than the last.


To see where we are and where we must go, let's first remind ourselves where we have been and how we got here. In the years that culminated in 2008's crash, we allowed large Wall Street gambling firms — nowadays called "shadow banks" — to affiliate both directly and indirectly with ordinary Main Street banks, thereby gaining access to ordinary bank deposits like yours and mine. We also allowed these firms access to the mortgage and higher education finance markets, where most ordinary Americans had for many decades safely financed the acquisition of by far their most important assets — their homes and their educations.

The result of allowing Wall Street shadow gamblers into our banks, our homes and our schools was predictable. They converted these once-hallowed American institutions, on which our great middle class both had grown and had always depended, into crime-ridden casinos. A rapid succession of gigantic financial asset price bubbles followed. As these then inevitably burst, the middle class lost homes and jobs literally in the millions, and were left under crushing loads of "underwater" mortgage and education debt. That was the source of our subsequent recession, from which we have still barely "recovered" today.

Did the Wall Street gambling firms suffer any of these consequences — consequences that they themselves caused? Of course not; they profited. How? First off, we bailed them out; the taxpayers kept them afloat because they were "too big to fail." We did so, moreover, on the condition that after the crisis, they'd "downsize." Yet now virtually every successfully bailed-out Wall Street gambling house — every shadow bank — is bigger than it was before the crisis.

One upshot of this remarkable state of affairs is that our financial system is now more concentrated than ever into just a few hands. A mere six financial institutions hold assets of nearly $10 trillion, equal to more than half of our entire economy's annual output. They handle more than two-thirds of all credit card purchases, write over one-third of all mortgages, and control — through the post-Glass-Steagall shadow affiliations mentioned above — nearly half of all bank deposits in this country.

If any of these institutions were to fail again — and make no mistake, they are already gambling again with our money — taxpayers would be on the hook for another bailout, probably much larger than the last.

At least as bad as all this is that the big Wall Street firms' political power has grown along with their financial power, driven by the legalized corruption of campaign cash and the revolving door between government and Wall Street. This makes it very difficult to regulate these firms effectively to prevent yet more concentration of wealth and power, more gambling, and more devastating crises that might wipe out America's middle class and its wealth once and for all.

What then to do? Some, including former Secretary of State Hillary Clinton, my rival for the Democratic nomination, say we just need to tinker around the edges of Wall Street and impose a few more marginal fees and safety rules on the financial "services" industry. I strongly disagree. I voted for Dodd-Frank, but let us not fool ourselves: It was a very modest piece of legislation. Wall Street's largest institutions are still huge, still growing and still out of control.

In today's weak regulatory environment, the financial conglomerates have paid more than $175 billion in fines and settlements for fraudulent and unscrupulous activities, much of which took place after they were bailed out. Yet they continue to do what they've done now for decades, treating their slap-on-the-wrist fines as mere "business expenses." Fraud is, in other words, a business on Wall Street. So is political bribery: Wall Street firms spent more than $5 billion in lobbying and campaign contributions over the 10-year period leading up to banking deregulation and the repeal of Glass-Steagall in 1999.

It is high time to bring an end to the era of gambling, fraud and bribery as business models, especially when it is middle-class America's homes, educations and hard-earned savings we're talking about. Now is the time to make banking work for the productive economy and for all Americans, not just a handful of wealthy speculators. The solution cannot be confined to the edges; it must go to the core — it must be systemic and structural. Here then is what I will do.

First, I will reinstate an updated, 21st-century version of Glass-Steagall that clearly separates Main Street commercial and mortgage banking from Wall Street shadow banking. Wall Street shadow banks will no longer have any — any — access to Main Street bank or money market fund deposits. They will gamble with their own money alone or not at all.

Second, I will impose size and complexity limitations on Wall Street financial institutions themselves when such size, complexity or interconnectedness with other firms poses a threat to the broader banking or financial systems. I will also put in place a system of criminal penalties, including personal fines and jail time, for individuals who commit or knowingly participate in financial fraud. No institution, trader, or executive will ever again be too big to fail or too big to jail under a Sanders administration.

Third, I will close the revolving door between Wall Street and Washington, through which financial regulators find lucrative jobs at gambling shadow-bank firms after leaving their government posts. The prospect of such work naturally leads some regulators to tread lightly on those they are meant to regulate, and enables others either to gain access to regulators for regulated firms or develop rule-evading strategies on behalf of the same. To prevent this, I will prohibit high-level federal employees from going to financial firms within seven years of working as regulators. I will also improve the pay for our regulators, so as to more closely to level the playing field between those who protect the public and those who imperil it.

There are additional measures that I will take to modernize our finance-regulatory system, including with respect to the governance, structure and financing of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Housing Finance Agency (FHFA) and others among our large — perhaps too large — set of financial regulators. But we should be honest: The primary cause of the financial abuses of the past 15 to 20 years has not been the regulators. It has been the size and structure of the regulated, together with an enforcement regime that effectively imposes no real penalties on defrauding others or recklessly gambling with their money. This combination is a recipe for financial — and thus economic — disaster. That is why real reform in the Sanders administration will address the very foundations of, and the lack of real law enforcement in, our financial sector as a whole.

For far too long, our financial "services" sector has served only itself and a few ultra-wealthy clients who evade taxes and hide their gambling winnings in places like the Cayman Islands. It does little to nothing for ordinary Americans or small business, which has always been the engine of our growing and dynamic economy. And as we have seen, it also causes actual harm — catastrophic harm — by gambling away our hard-earned money, leaving us under mountains of debt and sucking our wealth to the top of an ever-more lopsided pyramid.

Republican "reform" proposals will worsen this already calamitous situation, and Secretary Clinton's will simply allow it to worsen more slowly. Only deep, fundamental reform of our financial system will avert more inequality and disaster ahead. And only a Sanders administration will work that reform.

This piece has been corrected to remove an editorial error in which the Options Clearing Corporation was mentioned. The reference now correctly refers to the Office of the Comptroller of the Currency.

Hockett is Edward Cornell Professor of Law at Cornell University, a fellow at the Century Foundation and senior counsel at Westwood Capital Holdings, LLC.