William K. Black

February 23, 2016 Bloomington, MN

In an unintentionally hilarious piece evincing exceptional moral blindness, Mr. Womack, a journalist, writes to Bernie.

Senator, you are forming a mob of angry, misinformed people and then turning it on the likely Democratic nominee. That, Senator, is a dangerous and destructive game. Does your campaign honestly wonder why it has become synonymous with nasty online invective?

Gosh, I would have thought that “nasty online invective” might call tens of millions of Americans “a mob of angry, misinformed people” who were “dangerous” because they were backing a candidate for the nomination who is not “the likely Democratic nominee.” The idea that in an electoral nomination contest one is not allowed to criticize the current leader in delegates is, to be gentle, novel. It is certainly not the approach that either then Senator Sanders or then Senator Clinton took when they trailed each other at various points eight years ago.

The journalist’s libel of progressive voters is similar to President Obama’s infamous slander of the American people when he was talking to the Nation’s most powerful banksters. “My administration is the only thing between you and the pitchforks.” That was a slander because the American people wanted justice, not a mob lynching. Womack uses the same mob meme to slander people who make up the Democratic wing of the Democratic Party.

The journalist thinks Wall Street, the Fed, and the systemically dangerous institutions (SDIs) are working great because there are “stress tests.” The implication is that this means the SDIs will not fail. Here is a partial list of SDIs that passed stress tests – often weeks before they collapsed.

Fannie

Freddie

Lehman

Bear Stearns

AIG

The three giant Icelandic banks

The biggest and worst Irish banks

WaMu

IndyMac

As the journalist says, he has no expertise in economics, banking, regulation, or white-collar crime. He also is plainly deliberately selective and deceptive. For example, he makes a big deal of the fact that Bernie’s plan begins by identifying the SDIs, because we are already in the process of creating such a list. Bernie’s plan calls for getting rid of the SDIs because the way you make that list (which is currently euphemistically called “systemically important”) is because when (not “if”) the next one fails the experts believe it is likely it will cause a global financial crisis. Womack simply ignores that substantive point and tries to make it sound bizarre that Bernie’s plan calls for the completion of identifying the SDIs.

The journalist is an unconstructed Wall Street/”New Democrat” even at this juncture – fearful that the Fed will lose its “independence” if subjected to a full audit the way other agencies are typically audited. This is after he saw Alan Greenspan and Ben Bernanke (reappointed in both cases by Democratic Presidents, Clinton and Obama, respectively) destroy effective financial regulation and refuse to act against the most destructive fraud epidemics in history. The Fed is not “independent.” It is a dependency of the Wall Street. The Fed is anti-democratic and faces few of the normal controls designed to prevent abuse. But the journalist is determined to fight against any reform of the Fed.

But here is the journalist’s prime argument.

But none of this holds a candle to the bizarre narrative you have consistently pushed around Glass-Steagall, your primary point of distinction from Secretary Clinton on finance. You have repeatedly insinuated, implied and said flat-out that the Gramm-Leach-Bliley Act, which you tend to call a repeal of Glass-Steagall, caused the financial crisis. Senator Sanders, that simply isn’t true. That is a lie invented for a slimy attack ad during the 2008 campaign. There is an overwhelming consensus–not from Wall Street, but from watchdogs and academics — that the repeal of Glass-Steagall did not cause the financial crisis. Fact checker after fact checker after fact checker after fact checker has found the claim to be, at best, an enormous stretch. They were doing so, from all parts of the political spectrum, years before you launched a presidential campaign. The law had little if anything to do with the practices leading up to the crisis. It aimed, as you well know, to separate commercial from investment banking.

First, the premise is wrong. The “primary point[s] of distinction” of Bernie’s plans for finance versus Hillary Clinton’s are the treatment of the SDIs, which I just explained and the promise to restore the rule of law to Wall Street. As I have explained, in a context where she was trying to display her new found toughness versus Wall Street in a debate with Bernie the best she could come up with was that she gave a speech in which she told Wall Street to end its “shenanigans” (childish pranks). That is pathetic, but in fact the speech is available and she didn’t day it.

Second, Bernie is correct that the effective repeal of Glass-Steagall by Bill Clinton was unprincipled, dangerous, and harmful. No one claims that repeal was the sole cause of the crisis. Glass-Steagall worked brilliantly for over 50 years, which is why Alan Greenspan set out to destroy it as part of his general unholy war on regulation. Greenspan introduced so many loopholes that banks were able to begin to run securities firms shortly before Glass-Steagall was effectively destroyed by legislation pushed by Clinton and Greenspan that became law in 1999.

We did not have to wait for the 2008 financial crisis to see that the regulatory and legislative gutting of Glass-Steagall caused immense risk, repeated scandals, and severe losses. Those losses and scandals began immediately. By the time the 1999 act was becoming law Bankers Trust, one of the largest banks in America, the one that went most aggressively into trading derivatives, was involved in almost continual scandals in which in ripped off its customers. The losses and risk positions were so large that Bankers Trust could not survive as an independent bank. It was acquired by one of the largest investment banks in the world, Deutsche Bank. Deutsche Bank found that acquisition to be a mistake. The world’s largest banks are reducing their investment banking activities because they have produced recurrent scandals, excessive risk, and severe losses.

FleetBoston was the other massive bank that went ultra-aggressively into securities trading. It too instantly fell into scandal and severe losses for defrauding customers. The losses and the damages to reputation were so severe that FleetBoston was unable to survive as an independent bank and was acquired by was is now called Bank of America.

During the most recent crisis, Citigroup’s securities arm also suffered such large losses, which it fraudulently failed to report, that they would have led to Citigroup’s failure but for the public bailout. Yes, Lehman triggered the acute phase of the crisis, but if Lehman had not done so Citigroup would have done so. Citigroup was vastly larger than Lehman and if it had been the sole (initial) failure that failure would have likely triggered a global financial crisis. The Financial Crisis Inquiry Commission (FCIC) found:

“Citigroup’s investment bank, which paid traders on its CDO desk for generating the deals without regard to later losses: ‘There is a potential conflict of interest in pricing the liquidity put cheep [sic] so that more CDO equities can be sold and more structuring fee to be generated.’” The result would be losses so severe that they would help bring the huge financial conglomerate to the brink of failure” (FCIC 2011: 139).

The journalist’s vaunted fact checkers missed a whole lot of facts. The journalist does talk about Citi, and he assures the reader that while it “nearly” “died” this had nothing to do with “losses imposed on [it] by related investment banks.” So reread the excerpt above from FCIC and realize that the journalist is a Wall Street apologist regurgitating their propaganda.

Second, but the entire phrasing of the question by the journalist is illogical. As Hillary said in the same debate where she claimed to have told Wall Street to knock off its childish antics, you can’t focus solely on winning the last war. What we know is that investment banking is much riskier than commercial banking. Three of the big 5 U.S. investment banks failed – a 60% failure rate – and the other two, and virtually every large European investment bank would have failed but for massive bailouts. Indeed, if we add Bankers Trust, FleetBoston, and Citigroup to the list of failures, the failure rate (even ignoring the bailouts of Goldman Sachs and Morgan Stanley) would be six out of eight ( 75%) So, why does Hillary want to continue to put the Treasury on the hook to insure investment banking? She has not even attempted to make the case for why that is sensible. It is insane. Bernie’s plan stops the insanity.

The journalist, recognizes the central problem with the failure of the investment banks, and solves it by inventing facts. He asserts that “their problems certainly did not stem from conventional investment banking activities.” The use of the word “certainly” removes any need for citation or supporting facts. The use of the word “conventional” is the equivalent of the illusionist saying “watch my left hand.” Who cares whether they were “conventional” investment banking activities? They were investment banking activities, they were common investment banking activities, and they would not be permitted by federally insured firms under Bernie’s plan restoring the protections of the Glass-Stegall Act.

The journalist then tries to make the 60-75% failure rate of the largest U.S. investment banks a superb reason to provide a federal subsidy through deposit insurance so that we can bail out future SDIs. Better yet, we should do so because the Great Recession worked out so well for the U.S.

Glass-Steagall is an especially ridiculous boogeyman. In fact, there is good reason to believe that Glass-Steagall would have made the crisis worse. The kind of combined institutions the law aimed to prevent weathered the financial crisis far better than the kind of independent investment firms it aimed to mandate. The U.S. overall fared the global disaster relatively well, which itself blows a huge hole in any story seeking to blame it on a single US law.

If you know anything about finance and financial regulation you have figured out that the journalist is repeating Wall Street’s myths right from their cheat sheets they feed to journalists. There is no evidence that investment banking activities at the largest U.S. banks made them safer institutions. There is evidence, from FCIC, that the opposite is true. There is evidence from every major European and U.S. investment banking operation – at precisely the time the journalist reheated this Wall Street propaganda – that they are shedding investment banking operations not because of regulations but because these activities are seen as high risk, high loss, and heavily associated with recurrent fraud and scandal. The financial markets are pulverizing banks with large investment banking operations.

But notice the “ridiculous boogeyman” comparison that the journalist foists on his readers. The largest U.S. commercial banks with relatively small investment banking arms “weathered the financial crisis far better than the kind of independent investment firms [Glass-Steagall aimed to mandate.” The little things often are the most revealing. This sentence was carefully crafted to deceive the reader. First, Glass-Steagall did not “aim” to mandate the structure of investment banks. It aimed to limit the structure of commercial banks that received deposit insurance.

Second, under the status quo, which Hillary wishes to continue, investment banks effectively get deposit insurance. For the reasons the journalist inadvertently explained, that’s insane. We are all on the hook for the next disaster unless we bring back Glass-Steagall’s prohibitions on providing deposit insurance to investment banking. His argument that those who took only a tiny dose of cyanide did “far better” than those like Bear, Lehman, and Merrill Lynch that took a full lethal dose, or Citigroup that took a just barely lethal dose leads him to conclude that we should allow FDIC-insured banks to take a full dose of cyanide. His “logic” is illogical.

But we get the full Wall Street propaganda in the clause that claims that the “U.S. overall fared the global disaster relatively well.” “March madness” brought to finance under the meme that the Great Recession is really a “no harm, no foul” call. It is important to understand that Wall Street and its journalistic apologists actually say things just this astonishing – and get outraged when they get called on their propaganda.

The best estimate by economists of lost U.S. GDP over the course of the Great Recession and the recovery is $24.3 trillion (Table 2, p. 42). A trillion is a thousand-billions. Roughly 9.3 million Americans lost their jobs. Roughly 5 million jobs that would normally have been created were not created. Millions more dropped out of the labor force. There were millions of foreclosures in excess of the norm. The St. Louis Fed found particularly horrific results among blacks and Hispanics.

White and Asian college-headed families generally fared much better than their less-educated counterparts. The typical Hispanic and black college-headed family, on the other hand, lost much more wealth than its less-educated counterpart. Median wealth declined by about 72 percent among Hispanic college-grad families versus a decline of only 41 percent among Hispanic families without a college degree. Among blacks, the declines were 60 percent versus 37 percent.

Among the Wall Street crowd that fed the journalist these myths, the Great Recession was no big deal. For the American people, the Great Recession was a disaster. For blacks and Hispanics it was a financial catastrophe, particularly for college-grads.