Senator Elizabeth Warren and Treasury Secretary Jack Lew go toe-to-toe over whether “too big to fail” banks run the risk of causing another financial meltdown


Story Transcript

JESSICA DESVARIEUX, CAPITOL HILL CORRESPONDENT: At the end of Wednesday’s Senate Banking Committee hearing, it may have looked like all smiles and handshakes between Treasury Secretary Jack Lew and Massachusetts Democratic senator Elizabeth Warren. But Senator Warren had just finished grilling Treasury Secretary Jack Lew about the failure of government regulators to go after so-called “too big to fail banks”.

The nation’s four largest banks JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, which all received tax dollars in 2008, are nearly $2 trillion larger today than they were before the crisis.

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SEN. ELIZABETH WARREN (D-MA): You said yesterday in testimony before the House that we won’t really know whether we solved the too-big-to-fail until there’s a new crisis. I hope that doesn’t mean that nothing will change your mind on the question of addressing the fact the biggest financial institutions in this country are getting bigger by the day and that size intersects with risk. And believing that we are using only one tool, and that is trying to regulate the risk without paying attention to size I think runs some enormous risks. I know I don’t have to remind you we can’t afford another financial meltdown, and these big banks pose a risk to the entire economy.

JACK LEW, TREASURY SECRETARY: Senator, I think that there shouldn’t be a day when we don’t look forward at what the risks of the future are and challenge our assumptions that we’ve come to today with and ask, do we have the tools we need for the future? That’s how I approach every issue. And we have to rethink things. So I don’t have views that are locked in based on the past.

But I do think that, you know, if you look at what we’ve been doing, we’ve been keeping a focus on where we think the risks are the greatest. So we’re keeping a lot of pressure on the regulators to act on shadow banking. We’re keeping a lot of pressure on the international system to meet U.S. capital standards so our exposure is not so great in our complex global financial system. And I look forward to continuing to look at all these issues.

WARREN: I appreciate that, I appreciate your willingness to consider and reconsider the impact of size, and also to continue to take a very hard look: these banks are taking on new forms of risk and that–. I apologize.

LEW: I know that you’re over time and I’m over time, but I actually think size is not necessarily the only issue. Complexity is an issue that may be more important than size.

WARREN: Hence the reason to use two tools and not just one.

LEW: But I don’t think that leads to an arbitrary limit. That would not necessarily deal with that problem.

WARREN: Any ways to deal with size without calling it an arbitrary limit–I will not let him get the last word.

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DESVARIEUX: Treasury Secretary Lew was called before the committee to give an update on the Financial Security Oversight Council’s annual report. This little-known oversight council was created in response to the 2008 financial meltdown. But Lew says the committee’s role is to assess risk and not always to take regulatory action.

LEW: And to be clear, asking questions does not equal regulatory action. Sometimes questions result in the conclusion that the council does not need to act, that it needs to examine the issue further or that it needs to gather more information. The council asks questions with an open mind and without a predetermined outcome.

DESVARIEUX: Former bank regulator Bill Black, who exposed congressional corruption of the savings and loans debacle in ’80s and ’90s, says that this lack of emphasis on regulation shows Congress has failed to apply the most important lessons of the 2008 crash.

BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Dodd-Frank was built on an enormous flawed premise, in that it wasn’t based on what caused the crisis. And because it wasn’t based on what caused the crisis or prior crises, it doesn’t address very well what’s likely to cause the new crises either.

So the big areas that you would have taken, you know, if you were rational, your takeaway would have been, were first the three Ds: deregulation, desupervision, and de facto decriminalization. And there’s very little in all of Dodd-Frank–and if you read the FSOC annual report, which is over 100 pages, it has very little on those things as a whole.

DESVARIEUX: Those on the Financial Security Oversight Council are some financial regulator heavy-hitters, like Federal Reserve Chair Janet Yellen, Chairperson of the Federal Deposit Insurance Corporation Martin Gruenberg, and Chairman of the Securities and Exchange Commission Mary Schapiro. But whose interests does this body of ten voting members actually represent? Former financial regulator Bill Black:

BLACK: It isn’t like these folks are professional regulators that come from an examination or supervision background. In fact, I think absolutely none of them come from any such professional background where they’ve actually been in the trenches of a regulatory agency and fighting hard for regulation.

DESVARIEUX: Bart Chilton was once a regulator and part of the Financial Stability Oversight Council. He is the former commissioner of the Commodity Futures Trading Commission and now works as a senior policy adviser for the global law firm DLA Piper. The Real News sat down with him to get his take on the state of the financial sector.

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DESVARIEUX: Do you feel like we are in a better state now, in terms of regulation and being more financially stable?

BART CHILTON, FORMER COMMISSIONER, CFTC: Somewhat, Jess. I mean, it’s all relative, right? So there were 398 rules that were required under the Wall Street Reform and Consumer Protection Act, otherwise known as Dodd-Frank, 398 rules. Only 24 percent of those rules have been complete. So there’s still work to be done, and there’s still international work to be done.

That said, some of the important work within that 24 percent is pretty important. At the CFTC, when I was there, we completed nearly 90 percent of our rules. Chief among those were rules that would require capital and margin, so that people weren’t overleveraged in these markets.

There is a danger which goes to the heart of your question, and that is that a lot of times people have short memories. So we’ve seen very recently where there’s been some legislation in Congress, which is trying to pull back on some of these regulations, some of the regulations that aren’t even written yet, or there are different provisions of some legislation that’s currently being considered on Capitol Hill that would essentially get regulators wrapped around the axle and slow them down. So whether or not it’s defanging current regulations that are in law as a result of Dodd-Frank, or whether or not it’s defunding regulators, which is another way, defanging or defunding regulators, so they don’t have the ability to implement the regulations or to oversee the regulations or enforce the regulations, all of these things are a concern about what could happen in the future.

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DESVARIEUX: New data shows the American economy shrunk by almost 3 percent since the beginning of this year. So the question remains: is the American economy more stable today than it was before the recession hit?

Treasury Secretary Jack Lew recognized that the economy is still vulnerable, especially the housing finance sector.

LEW: We know that this is an area where, were there another financial crisis, we’re still in a very exposed position, and U.S. taxpayers are still in a very exposed position. I think the elements of housing finance reform that are important are many. One is to make sure that there’s a private market for mortgage lending. Another is to make sure that there’s access to credit that’s fair and widely spread and that helps to even the playing field for those who have trouble getting mortgages now. A third is that any backstop has to be clearly defined and very narrow, and it has to come after a very secure position by private parties who absorb the first risks themselves.

DESVARIEUX: Bill Black says Lew and the Council are not taking the necessary steps to stop the economy from heading towards another crash.

BLACK: These banks that when–not if–when the next one fails, the government is telling us was going to cause a global financial crisis. Now, that’s the one that you actually do hear about, FSOC, and these systemically dangerous institutions. Now, they’re not at all candid, so you’ll never hear the phrase systemically dangerous coming from them; you’ll hear systemically important, like you should have a gold star.

DESVARIEUX: But there are some on Capitol Hill trying to fix too-big-to-fail banks. Ohio Democratic senator Sherrod Brown and Louisiana Republican senator David Vitter collaborated on a bipartisan bill called Terminating Bailouts for Taxpayer Fairness Act. It would require the largest banks to have at least 15 percent capital on their books so that they would be able to absorb losses and not have to depend on taxpayers to bail them out again.

Ohio senator Sherrod Brown raised the issue in the hearing.

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SEN. SHERROD BROWN (D-OH): –clear message that no institution’s immune from failure. And you know that. That’s your responsibility. Your statements have been a little, I think, off of that. But I–.

LEW: Well, I actually don’t think so. I mean, I think we need to do everything we can to reduce the risk. The law has been changed so that we don’t [crosstalk]

BROWN: But implying mission accomplished doesn’t–implying–or saying “mission accomplished” doesn’t get you there.

LEW: I actually didn’t say–I didn’t say “mission accomplished”. I said we have to stay vigilant and keep asking questions and our work isn’t done. You know, I’ve raised issues about shadow banking. I’ve raised issues about international collaboration. I think we have a lot more work to do.

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DESVARIEUX: Former CFTC commissioner Bart Chilton agrees that much work still needs to be done. But there are strong lobbying forces at play that are aiming to defang regulators.

CHILTON: It’s a pretty tough row to hoe. There are currently ten financial service sector lobbyists for every single member of Congress. It’s a tough road for regulators to get this stuff done. And so, uphill battle.

DESVARIEUX: An uphill battle that may soon be getting even steeper as Republicans aim to dismantle Dodd-Frank reform even further on Capitol Hill.

For FSRN and The Real News Network, Jessica Desvarieux, Washington.

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DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


Jessica Desvarieux

Jessica Desvarieux is a multimedia journalist who serves as the Capitol Hill correspondent for the Real News Network. Most recently, Jessica worked as a producer for the ABC Sunday morning program, This Week with Christianne Amanpour. Before moving to Washington DC, Jessica served as the Haiti corespondent for TIME Magazine and TIME.com. Previously, she was as an on-air reporter for New York tri-state cable outlet Regional News Network, where she worked before the 2010 earthquake struck her native country of Haiti. From March 2008 - September 2009, she lived in Egypt, where her work appeared in various media outlets like the Associated Press, Voice of America, and the International Herald Tribune - Daily News Egypt. She graduated from Northwestern University's Medill School of Journalism with a Master of Science degree in journalism. She is proficient in French, Spanish, Haitian Creole, and has a working knowledge of Egyptian Colloquial Arabic. Follow her @Jessica_Reports.