By David Dayen, a lapsed blogger. Follow him on Twitter @ddayen
On Saturday night the Democrats held a successful debate – and by successful I mean that the party
successfully hid it from public view,
getting half the rating of the weekday version. Ceding all kinds of
eyeballs to Republicans in a bid to protect your front-runner seems to
me like the opposite of a political party’s job, but I guess that’s why
they pay Debbie Wasserman-Schultz the big bucks.
That front-runner, Hillary Clinton, is taking some heat for oddly
deciding to relate her campaign donations from Wall Street to aiding
Lower Manhattan after 9/11. Depressingly, the crowd cheered, clearly
conditioned to react to any invocation of September 11 like trained
seals (obviously the overlay of the Paris attacks played a role). Only
when mentioned by a Twitter user later in the debate did the full
recognition of the strangeness of that comment shine through. Here’s
some commentary by the establishment organ
The Economist:
Mrs Clinton’s reply combined indignation, an irrelevant
appeal to feminist pride, and a bizarre riff about the September 11th
attacks, by which she seemed to imply that taking money from big banks
was her way of making sure that the terrorists behind that 2001 atrocity
did not win… Readers with furrowed brows may be assured that it made no
more sense when Mrs Clinton said it.
More from
Politico and
WaPo, and a fairly blistering
NYT editorial board.
This seems to be what the Gang of 500 has decided on as a gaffe, and
it definitely has that odor. But I actually think Clinton said something
even more egregious and revealing Saturday night. The problem is that
the commentariat has deemed it some brilliant insight.
In both debates and numerous interviews, Clinton uses as part of her
rejection of breaking up the big banks, as well as proof that her plan
for financial regulation is more superior and comprehension, versions of
this quote:
Look at what happened in ’08, AIG a big insurance
company, Lehman Brothers, an investment bank helped to bring our economy
down. So I wanna look at the whole problem. And that’s why my proposal
is much more comprehensive than anything else that’s been put forth.
This is the kind of thing smart people say when they want to dupe the
ignorant by sounding informed. But upon any reasonable inspection, the
statement becomes completely absurd.
Let us first be so intemperate as to point out that, in the eyes of the federal government, AIG was a
bank.
They bought a small savings & loan in Wilton, Connecticut,
explicitly so they could choose the Office of Thrift Supervision as
their regulator. OTS’ oversight was so laughable that they were the only
federal agency eliminated by Dodd-Frank.
Guess what? Lehman had a thrift too, Aurora Bank, which was ALSO regulated by OTS!
I should also note that AIG couldn’t be regulated as an insurance
holding company at the federal level because Gramm-Leach-Bliley
expressly prohibited it.
That facilitated AIG shopping around for the worst possible regulator,
one that wouldn’t delve deeply into its credit default swap and
securities-lending activities.
(The Volcker rule actually forced AIG to sell this thrift,
incidentally, and they do have increased regulatory oversight at the
federal level through being labeled a nonbank SIFI, which unlike some
other firms they
don’t appear to be so concerned about.)
So even on Clinton’s terms, she’s dissembling. But the real problem
here is that just stating that AIG and Lehman weren’t banks tells you
absolutely nothing about the role of money center banks in the crisis.
It was their entry into the mortgage securitization business that drove
everything that happened. Big banks – universal investment/commercial
hybrids – funded the non-bank mortgage originators with warehouse lines
of credit. Big banks lumped that steady stream of home mortgages into
the securities they issued. Big banks served as trustees to facilitate
those mortgage-backed securities. Big banks funded the investment banks,
like Lehman, with repurchase agreements and lines of credit and other
forms of short-term funding. Big banks created an entire business line
in credit default swaps for asset-backed securities; without them, AIG
would have had nothing to insure. Big banks issued CDOs to repackage
unsold MBS, generating a secondary market to the secondary mortgage
market. And every CDO issuer bought everyone else’s CDOs, converting
them into CDO-squared, derivatives off the derivatives, and so on,
leading to both the interconnection and exponential layering of risk
that were essential elements of the crisis. Big banks also had
subsidiaries that were the biggest mortgage servicers, by the way, just
to add on another malicious actor.
So pulling out two firms, Lehman and AIG, without acknowledging their
funders and counter-parties, is the epitome of a half-truth. Lehman’s
largest creditors in the bankruptcy were global banks from Germany and
Switzerland. AIG’s largest counter-party was Goldman Sachs. Singling
them out of a hopelessly interconnected financial system is a
meaningless argument, especially when you consider that the largest
recipient of federal government support was a universal bank called
Citigroup, which only didn’t end up failing after having their pockets
stuffed with trillions from the Treasury and Federal Reserve.
Any serious analysis of the central drivers of the crisis necessarily
lead you to the largest banks as the focal point for the
interconnection and risk buildup. The Lehman/AIG postulate is totally
disingenuous. But it’s more than that. It’s a distraction maneuver,
designed to cast a sympathetic eye on the same mega-banks going forward.
Because if they weren’t responsible, how could more stringent
regulation on them make sense? Why should they be broken up, if they
aren’t the sole source of the trouble? Why should their political power
and influence represent a threat? This is a clear case of the dictum
that if everyone’s responsible, nobody’s responsible.
Shadow banking is absolutely a threat, and one Bernie Sanders,
Elizabeth Warren, Sherrod Brown and the leading financial reformers
should talk about more. I’d love to see more attention on collateralized
loan obligations and fintech and all sorts of credit vehicles. But it’s
beyond clear what Clinton is up to with this silly tactic, one that
falls apart upon the slightest scrutiny.
