Public Citizen’s Bartlett Naylor on Too Big to Fail and Too Big to Jail

In Washington, D.C., Wall Street and the Big Banks have a slew of corporate lobbyists and a ton of money to push their agendas in Congress.

The victims of Wall Street and Big Bank crime have a handful of public advocates.

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There is Dennis Kelleher of Better Markets.

There is Elizabeth Warren, the senior Senator from Massachusetts.

And there is Public Citizen’s Bart Naylor.

Naylor is a veteran of the Wall Street wars. He spent a number of years as an aide to Senator William Proxmire at a time when Proxmire was head of the Senate Banking Committee.

According to Naylor, there are two main issues today in DC concerning Wall Street and the Big Banks — too big to fail and too big to jail.

Naylor says there are four too big to fail banks — Bank of America, Citibank, JP Morgan and Wells Fargo.

And there is a solution — bring back Glass Steagall and impose a hard cap on the size of banks.

During the debate over Dodd-Frank — that proposal, in the form of the Brown-Kaufman legislation — actually came to a vote on the Senate floor in 2010 and garnered 33 yes votes.

“As the sponsors were pulling together co-sponsors for that bill, Senator Chris Dodd (D-Connecticut), at the behest of the American Bankers Association and others, called for a vote before the bill could attract more co-sponsors,” Naylor told Corporate Crime Reporter in an interview last week. “It failed with 33 yes votes, although it did have Senator Richard Shelby (R-Alabama) as one of the Republicans.”

Is there any Republican support now for that bill?

“It hasn’t been talked about since 2010, but yes there is a version that would substantially increase the capital stock equity portion of how a bank funds itself. That’s sponsored by Senator Sherrod Brown and Louisiana Republican David Vitter.”

“It was introduced last year. It didn’t get that many co-sponsors, but it did get favorable discussion by key Senators, including Shelby. Shelby speaks favorably about it.”

Would the Democrats in the Senate support the two pronged Brown-Kaufman approach you spoke about?

“The default position of Democrats as well as Republicans is to favor the Big Banks because they are such a lucrative source of campaign contributions. If you could take that out of the mix, and that of course is assuming the moon, all of this legislation would pass, based on its merits. I don’t know how Glass Steagall would do in a vote today, if for some reason there was open voting on the Senate floor.”

“In the House, the bill introduced by Marcy Kaptur (D-Ohio) received 100 co-sponsors. The bill introduced by Elizabeth Warren (D-Massachusetts), which achieves the same goal generally, wound up getting ten co-sponsors before the session expired, including one and a half Republicans — Senator John McCain (R-Arizona) and Angus King, an independent from Maine.”

What is the Warren bill?

“It’s bring back Glass Steagall, but it also repairs some of the damage done by regulatory fiat by the Controller of the Currency. That’s how banks were first able to dabble in derivatives. The OCC found that the derivatives were similar in form to loan making.”

Why didn’t Warren go for break up the banks with a hard cap on size?

“I don’t know,” Naylor says.

Naylor says that the too big to fail moral hazard “is that it encourages the bankers to be reckless.”

By moral hazard, Naylor means that ”understanding that there will be a bailout invites the bankers to gamble and take excessive risks that they wouldn’t otherwise take if there were no bailout.”

Wasn’t Dodd-Frank going to get rid of too big to fail?

“It intended to,” he says. “It says there will be no more bailouts. It has a number of tools that if properly implemented by the regulators would in fact end it. But those tools as of yet have not been exercised. The clearest one is the so-called living will. A living will is a plan that should the bank fail, it can be dismantled and sold in a bankruptcy. The law provides that the regulators have to find these living wills credible — credible is a statutory word. None of the major banks have had their living wills determined credible. And since none of the banks’ living wills have been found credible, the regulators have the power to order various changes, such as divestitures, such as breaking up the banks. They haven’t gotten to that part, but they could. That would be one way to solve the too big to fail problem — by breaking up the banks. It hasn’t been done yet.”

If there is another 2008 crisis today, do the banks get bailed out?

“Yes,” he says. “As a practical matter, they will get bailed out. To the extent that there are various statutes to prevent the bailout, it would take about a half a day to get frightened Fed and Treasury officials to march up to Congress and tell Congress that you need to change a few things so that we can save the banks and save the world economy.”

So, that’s one problem that hasn’t been fixed — too big to fail.

The other is too big to jail.

“We learned about too big to jail with HSBC,” Naylor says. “A couple of years ago, Senator Charles Grassley (D-Iowa), the ranking member of the Senate Judiciary Committee, challenged Attorney General Eric Holder on the settlement with HSBC. The HSBC settlement seemed timid in the face of HSBC’s massive money laundering and sanctions violations.”

“The Justice Department accused HSBC of laundering $800 million from Mexican drug cartels. The bank only paid a month’s worth of profits, and that was shareholder’s money. No individuals were indicted. The bank wasn’t indicted. In response, Holder confided that there comes a time that some institutions are so large, that to bring a charge against an institution or individuals would lead to financial tsunamis with the collateral damage outweighing the punishment itself.”

“In other words, this bank was too big to jail.”

Didn’t the Credit Suisse and BNP Paribas guilty pleas disprove what Holder was saying?

“In fact, those two guilty pleas, which did result from public and Congressional pressure, showed that Holder’s premise was false,” Naylor says. “You can have a guilty plea. I should add that great care was taken so that the actual business of BNP and Credit Suisse were not impaired. No charters were revoked. No business was shut down. There was some minor business curbed in BNP. Conversations took place with various regulators to make sure the business would go on. And Holder is up front about that. In the Credit Suisse press release, he says — we are being very tough on Credit Suisse and he says — we took care to make sure this business will continue.”

“As for HSBC, the hazard is that if one works for an institution that is large enough, one can violate the law with impunity,” Naylor said. “The bank will not suffer real penalties. Individuals will not spend time in prison. The banks operations will be sustained. That’s an invitation to continue to commit crime. There is a poll that found that something like 45 percent of bankers believed they had to violate the law to remain competitive. In economics it’s known as Gresham’s Law — bad money drives out good. If you are next to another sales person, trying to originate mortgages, and your colleague is originating three mortgages a day, and you can’t seem to find anybody worthy of lending money to. You wander over and notice that he is adding a zero to the income statements of prospective borrowers and you realize — I have a choice — I can quit. Or I can cheat. And those that stay are the ones that cheat. And that is unfortunately the case with too many bankers. And the Big Banks cheat to remain in business.”

The monitor for HSBC put out a 1,000 page report a month or so ago. And the Department of Justice summarized some of his findings to the judge overseeing the case — Judge John Gleeson in Brooklyn.

“There is a chilling phrase in that summary — it says — getting HSBC bankers to believe in compliance is a massive undertaking,” Naylor says. “In other words, they apparently do not believe in compliance. And to get them to believe in compliance is a massive undertaking. That’s a sad observation for one of the world’s largest banks.”

Naylor says that monitor reports should be made public.

Why wasn’t the HSBC report released in full?

“I’m still trying to find out,” Naylor says. “Apparently there is another report that the monitor has written that may be released to the judge. The monitor — Michael Cherkasky – he used to be the Teamsters monitor when I worked there. He wrote 1,000 pages. What Judge Gleeson and the public saw yesterday was a document over the signature of Loretta Lynch, the U.S. Attorney who brought the case.”

“According to news reports, the 1,000 page report has some biting information, including some alleged file stuffing — where the bank improves the file after the fact with documents making the bank look like they do a good job when in fact they did not do a good job. They put new information into the file.”

What is Naylor’s take on the deferred prosecution agreement in HSBC that was cut by Loretta Lynch?

“The bad part of it is that it is a deferred prosecution agreement, as opposed to a guilty plea,” Naylor says.

“The good part of it is the so-called Sword of Damocles. It says that if, in the sole determination of the Department of Justice, HSBC engages in any other violation of the law, then that agreement can be ripped up and HSBC can be prosecuted in court, including for the items they have admitted to. They have to behave or they are back in court.”

“One has to worry that this six page summary that was released yesterday softens the Cherkasy 1,000 page report. Why? Political expediency.

Loretta Lynch is trying to be confirmed as Attorney General. If the 1,000 page report shows that her deferred prosecution agreement isn’t working she might not get the votes.”

On corporate crime issues, Lynch might be worse that Eric Holder. Is Public Citizen opposed to her nomination?

“We don’t have a formal position on Loretta Lynch,” Naylor says. “We are not happy with her HSBC settlement. We pressed members of the Senate Judiciary Committee to ask some tough questions on the settlement. They asked some questions. Both Grassley and Vitter asked follow up questions in writing. The answer to the Grassley questions are evasive and unsatisfactory.”

Last week, we interviewed Sarah Chayes, author of Thieves of State. Chayes argues that we are living in a type of kleptocracy.

“We certainly are living in a society where favorable federal law translates directly into industry profits,” Naylor says. “You have a steady problem of trying to purchase favorable legislation through political spending. Is that a kleptocracy? We are well short of that. But it’s a serious problem that demands reform.”

“Regulatory capture is a serious problem. Some of the exceptions show that the dynamic isn’t as black or white as we might portray. The single best regulator in the financial sector is Gary Gensler and he came from Goldman Sachs.”

What about Gensler’s successor — Tim Massad at CFTC?

“The jury is out on Tim Massad,” Naylor says. “I would give him a C. I wouldn’t say he has reversed Gensler’s fine work. But he has certainly steered off Gensler’s true north course.”

Other than Gensler, who are the shining stars in bank regulation?

Naylor ticks off a list — Sarah Bloom Raskin at Treasury. Dan Tarullo at the Federal Reserve. Sharon Bowen at the CFTC. Kara Stein and Luis Aguilar at the SEC. Martin Gruenberg at the FDIC and Thomas Curry OCC.

“One reason it’s difficult to highlight them is that they have not made blistering speeches,” Naylor says. “I am fully confident that Martin Gruenberg is doing the right thing. But he does not stand up and talk about the need to send more Wall Streeters to jail. Same for Tom Curry.”

Given all that has been written about too big to fail and too big to jail, why isn’t there a political challenge to the Big Banks?

There is a political challenge, Naylor says.

“Elizabeth Warren is being considered a candidate for President,” Naylor says. “She is not going to run. But there is public support for her challenge. The current debate in Washington is how the Big Banks can keep Elizabeth Warren in check.”

[For the complete question/answer format Interview with Bart Naylor, see 29 Corporate Crime Reporter 15(12), April 13, 2015, print edition only.]

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