Democratic presidential hopeful Hillary Clinton released a plan Thursday to regulate Wall Street institutions by tackling excessive risk-taking and punishing bank executives.
The headline-grabbing proposal was levying a tax on certain aspects of high-speed trading, sometimes called flash trading because it involves buying, selling and canceling orders that happen in fractions of a second. This algorithm-driven trading has led to some high-profile volatility in financial markets, and the growth of this kind of trading adds to the perception that there’s little place in the stock market for ordinary individual investors.
High-frequency trading was the focus of the best-selling book Flash Boys by author Michael Lewis, who alleged that the speed of these traders pushes up the price of stocks and amounts to gaining at the expense of players like pension funds who invest the retirement assets of everyday Americans.
“Every presidential candidate needs to make not just Wall Street reform a priority but ending high-frequency trading a priority,” said Dennis Kelleher, who heads Better Markets, a group that advocates for great regulation of financial markets.
Clinton’s proposal targets the frequent cancellation of buy orders by high-frequency traders, and Bart Chilton, a former Democratic-appointed commissioner of the Commodity Futures Trading Commission, sees that as more nuanced than proposals by her rivals to levy a transaction tax on all stocking trading.
“I think Secretary Clinton has done a service by raising the issue for policy discussion,” said Chilton, who said defining what is “excessive” cancellation of orders, and enforcing it, may ultimately prove difficult.
Clinton would also modify the so-called Volker Rule, which was part of the 2010 revamp of financial regulation. Named after former Federal Reserve Chairman Paul Volker, who advised the Obama administration on the legislation, it aimed to force the largest banks to separate their operations that invest other people’s money from the speculative investment they do with their own. The blurry lines between the two heightened the financial crisis in 2008.
Although the Volker Rule sought to rein in big Wall Street banks, they have been able to win some key exemptions allowing them to keep owning some risky operations directly, and to restructure their operations in a way that allowed some of the riskier trading to avoid being spun off as intended.
Some of the Clinton proposals will be popular albeit ineffective. She would ban executives convicted of financial crimes from working in the industry. But in the aftermath of the 2008 financial crisis, no major executive was convicted, in part because much of the activity that led to the near collapse of markets was legal or made legal by her husband shortly before he left office.
Clinton also proposes toughening fines and giving regulators more powers, both ideas reflecting the views of her campaign finance chief, Gary Gensler. A former Goldman Sachs partner and Treasury official at the end of the Clinton presidency, Gensler headed the Commodity Futures Trading Commission from 2009 until last year and was praised as a regulator who tried to use all the powers available to him after the 2010 revamp.
Clinton’s Wall Street proposal includes a number of measures sought by advocates of tougher regulation and opposed by Republican lawmakers who now control both chambers of Congress.
The proposals stand in stark contrast to several of the Republican presidential candidates who propose undoing much of the 2010 revamp, arguing that tougher restrictions on bank activities and requirements that they keep more cash on hand for potential crises have both made it harder to lend and harder for borrowers to get loans.
“One year ago, who was predicting that all top Democratic candidates would be talking about jailing Wall Street bankers, breaking up Too Big To Fail banks, and picking executive branch appointees who will crack down on Wall Street?” asked Adam Green, co-founder of the Progressive Change Campaign Committee. “Millions of progressives across the nation hope Democratic candidates for president continue this race to the top in Tuesday's debate in Las Vegas, competing with each other to excite primary and general election voters with a bold economic populist message.”
But her plan may not go far enough for some members of the Democratic party, who have been pushing for a law, called Glass-Steagall, that would ban financial institutions from combining their commercial banking operations with riskier investment banking.
Rival Democratic candidate Martin O’Malley said Thursday the Clinton plan resembles much of what he’s already proposed but stops short of restoring a firewall between traditional bank activities and speculative investment by these same banks. It’s a reference to Glass-Steagall that dated to the Great Depression era but was repealed at the end of the Clinton administration.
“Secretary Clinton’s plan falls short on what should be our ultimate goal: preventing reckless Wall Street speculators from backing up their bad bets with taxpayer money,” O’Malley said in a statement. “We need a defined firewall between Wall Street and taxpayers so that we are never again forced to bail out a bank’s reckless behavior.”
Sen. Bernie Sanders, whose campaign is built on standing up against the “billionaire class” said Thursday that any significant reforms must include breaking up of too-big-to-fail banks and restoring the Glass-Steagall Act.
“Given the image of big banks today, it is easy now to take on Wall Street. I was there when it was not so popular,” Sanders said.
Sanders this year introduced legislation to break up too-big-to-fail financial institutions and is a co-sponsor of legislation by Sen. Elizabeth Warren, D-Mass. to reinstate Glass-Steagall.
“The only thing Hillary Clinton is interested in reining in is Bernie Sanders’ momentum,” Republican National Committee spokesman Michael Short said. “Voters don’t trust Hillary Clinton because they see her bashing Wall Street out one side of her mouth while she asks for their money out the other.”
Her campaign did not respond to requests for comment.