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Regulations? We don't need no stinking regulations!

When the dust settled after the Great Financial Crisis, we learned that the big banks had behaved in overtly criminal ways. Yet none of their executives would be held criminally accountable.

And while legislation was passed in the aftermath to place restrictions on the 'Too Big To Jail/Fail' banks, it was heavily watered down and has been under attack by financial system lobbyists ever since.

To talk with us today about the perpetual legislative warfare pitting citizens on one side and lobbyists (and many lawmakers) on the other, is Bartlett Naylor. Naylor is a veteran of the Wall Street wars. He spent a number of years as an aid to Senator William Proxmire at a time when Proxmire was head of the Senate Banking Committee. Naylor himself served as that committee's Chief of Investigations.

Sadly, Naylor sees the banks winning out here. More and more of the prudent restraints placed on the banking system are being dismantled, as further evidenced by the recent bill President Trump just signed:

The President signed S2155 last week. This bill has 40 or so provisions in it. The most troubling one reduces what's known as enhanced supervision for a class of banks that are between $50 billion and $250 billion in assets.

Enhanced supervision means tighter capital controls. Capital is assets minus liabilities -- the amount of net worth, if you will, of the particular bank. You think of banks of being very solid; but in fact, they're in hock. They are highly leveraged. 95% of their assets are financed by debt. They really don't own that much. They mostly owe things.

Stress tests will be reduced. A stress test is to say, "All right bank. Let's look at your portfolio and decide that of things are going to go bad in the economy-defaults will rise, unemployment will rise -- what's going to happen to your portfolio? And based on that, we will decide how much capital you should have." In other words, that gap between assets and liabilities, and how much dividends you can pay out, or in fact, executive bonuses, etc. Let's say you fail. What will happen to all of your assets? Is there a way that this particular part of your bank can be sold to somebody?

So for example, with the failure of Lehman Brothers, they couldn't sell it. They couldn't resolve it quickly enough when it was failing. They tried to find buyers for all or parts of the bank. They came close with Mitsubishi, with Barclays, but in the end, there wasn't a game plan to see how we could break up this bank and avoid a bankruptcy.

Living wills are supposed to help that. A living will exercise is reduced for this class of banks. That's problematic, because this class of banks would have included Countrywide. Countrywide is now a division of Bank of America. It actually is even a larger class of banks than IndyMac, which was the biggest hit on the Deposit and Insurance Fund. That was only about a $30 billion bank.

Collectively, these are two dozen banks. So you've got 25 or the 38 largest banks took about $50 billion in TARP money. They're not the Boy Scout banks either. We're talking about all the misconduct at JP Morgan. About half of them have misconduct charges against them just in the last half decade. That's the most troubling provision.

It also turns back the Volcker Rule. That's the restriction on gambling within the bank, a general restriction. The regulators are expected to reduce those rules in a proposal due out tomorrow, on May 30th, I think. This new bill says that if you've only got $10 billion in assets, you're free to gamble. We won't restrict that other than it has to be about 5% of assets.

Again, I worked in the Senate Banking Committee during the savings and loan crisis where what seemed to be small tweaks in savings and loan law, essentially allowing developers to run banks, run savings and loans and loan to themselves, regardless of the promise of the particular project, leading to the inflation of real estate prices and so forth. So in other words, while the smaller banks (less than $10 billion) may not be gambling now, this could usher in a new class of banks. They'll just say, "Hey, let's use that deposit insurance money and gamble and start ourselves a $500 million hedge fund." And since capital is only 5% of a bank's net worth, a good year can be profitable and a bad year can lead to the failure of the bank.

There are also a dozen or more consumer protection rollbacks. Redlining, which is where banks drew a line around a neighborhood, such as a neighborhood of color and basically said, "Make no loans there". The Home Mortgage Disclosure Act provided information to see if banks are making loans generally in their market area, including within those red lines.

We learned from the financial crash in 2008 that banks had a different kind of redlining. They were going into some neighborhoods and making predatory loans, high-cost loans even to people who could afford a prime loan. The new HMDA, Home Mortgage Disclosure Data, is supposed to ferret that out. This bill eliminates that new data for pretty much 85% of banks. And there are other anti-consumer provisions in this.

The question is: Will this make America greater again? It's not clear. We think it's certainly a step in the wrong direction. I also think that the promise of the bill's authors, that it's going to facilitate economic growth, is going to be hard to defend. The banks already have robust loan portfolios and are making record or near record profits. And that's at all sectors, not just the big banks, but the little banks, too. So this bill was an answer in search of a problem, and again, we think raises the question of whether it will make America greater again.

Click the play button below to listen to Chris' interview with Bartlett Naylor (55m:53s).

TRANSCRIPT

Chris Martenson: Welcome, everyone to this Peak Prosperity podcast. It is May 29, 2018. I am your host, Chris Martenson. In 2008, financially, things went awry. Now, that's putting it mildly, of course. When the dust settled we learned a few things. Namely, that the big banks had behaved in overtly criminal ways, and that none of them would be held criminally accountable. Sure, there were a few fines, but nobody went to jail. Some weak legislation was passed in the aftermath to partially resurrect the Glass-Steagall Act, but it was watered down and has been under bank lobby attack ever since.

To talk with us today about the perpetual legislative warfare with citizens on one side and lobbyists, and for the most part, lawmakers on the other, is Bartlett Naylor. Naylor is a veteran of the Wall Street wars. He spent a number of years as an aid to Senator William Proxmire at a time when Proxmire was head of the Senate Banking Committee. That's a huge position.

According to Naylor, there are two main issues today in Washington DC concerning Wall Street and the big banks. And those issues are they're too big to fail and they're too big to jail. Thank you, Eric Holder, for that one. Naylor says there are four too big to fail banks - Bank of America (NYSE:BAC), Citi Bank (NYSE:C), JPMorgan (NYSE:JPM), and Wells Fargo (NYSE:WFC).

Bartlett, let's start here. Hey, tell us how you got started in all of this before we dive into the gory details. Did you wake up one day as an eight-year-old thinking you wanted to become a consumer advocate?

Bartlett Naylor: I think I backed into it. I was in Washington writing about banking in part because it was more competitive to become a sports writer. And Senator Proxmire recruited me to become chief of investigation for the banking committee, which in my interview he persuaded me. He said, thanks for joining us, and there wasn't really a kind of an interview.

I think before then I had viewed the world as having multiple sides, but there wasn't necessarily a correct side. And I think working as an aide to a progressive senator, I began to believe while there might be multiple sides, there is a right side. When you weigh the evidence, there is a direction to go. And banking, I became more aware, is the pivot upon which so many other issues turn. Not simply the extension of credit - the intermediation between the savers and users - but other issues from racism. My boss helped champion the anti-redlining bills and the Community Reinvestment Act. But even other issues, such as global warming. Because the financing of any business invariably involves a bank. And when that credit is available or not available, it either fuels or stifles that particular issue.

You're seeing it play out a little bit now with some of the controversy over gun violence control. A couple of the banks - Bank of America and Citi - have established policies of reducing their exposure, leading to some conservatives in the Senate and the House, for example, complaining that they're messing around with the Second Amendment. That said, banking - no matter what position they take - is taking a position, explicitly or implicitly.

And my advocacy continued after I left the Senate, working both with pension funds, Teamsters, for example, and as a consultant for people interested in the intersection of corporations and policy. And I joined Public Citizen seven or eight years ago, just as the financial crash was winding up, and Congress was passing the law you made reference to, in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Chris Martenson: Now, let's start there. So 2008 happens, and 2009, and of course, we saw lots and lots of failures of smaller firms, all the way and up to something as large as Lehman Brothers. We saw just massive things go down all across the entire mortgage industry, everything related and touched close to it. But we also saw some really astonishing things happen, including Hank Paulson marching in with a three-page memo saying, I need TARP funds. I need three-quarters of a trillion dollars. Just give it to me and don't ask any questions.

And when that happened, of course, people were very afraid. There was this idea of systemic risk. There was a lot of fear. But what happened during that turbulence, if I can put it that way - so AIG (NYSE:AIG) has a whole bunch of these collateralized debt obligations. They were insuring them. It was a bet guaranteed to go wrong. Goldman Sachs - to pick on one of the players in this - had sold them a bunch of them CDO products. And then was made whole, getting a $13.9 billion payout from TARP funds - if I have the flow correct - which made them whole. 100 cents on the dollars for having first created and then sold products that were destined to go bad.

Out here in cheap seats, Bartlett, as somebody who never gets made whole when one of my trades goes bad or my 401(k) goes down instead of up, I looked at that and said, this feels deeply and structurally unfair. And it seems like a continuation of the pattern that Greenspan had put forward in 1998 by bailing out all the participants in long-term capital management. It's that infamous Wall Street "Heads, we win. Tails, you lose." That's how it felt out here. Is that an unfair way to characterize this?

Bartlett Naylor: I think that's fair. In the AIG case, AIG was writing in effect bond insurance. The first rule of insurance is that you have to own the property that's being insured. In other words, you can't buy fire insurance on my house and other people can't buy it. So this credit default insurance, in the case, as you mentioned, the collateralized debt obligation going bad was purchased by people who didn't actually own the bonds or even the credit default obligation. In fact, the amount of credit default insurance was something like $70 trillion leading into 2008, even though there were only $10 trillion worth of underlying bonds. In other words, lots of people bought fire insurance on the same house. So when that house went down, when those credit default, I'm sorry, those collateralized debt obligations faulted, then the insurance payments were overwhelming.

Who was writing this insurance? That was AIG. Who was collecting the payments? It was the likes of Goldman Sachs.

Contrasted with that, homeowners who had been lured in with easy predatory loans to buy houses they couldn't afford - to make mortgage payments they couldn't possibly meet to feed the securitization machines - there was very little forbearance. IndyMac sold to Steve Mnuchin through some - Treasury Secretary - through some hundred thousand people out of their homes, for reasons we can go into. But it was more profitable to do that for the bank - in this case, IndyMac - than it was to go through forbearance and keep these people in their homes.

Chris Martenson: And so this is a - you just reference Steve Mnuchin, who was at Goldman Sachs at that particular point in time. Is that correct?

Bartlett Naylor: Yes.

Chris Martenson: And so the "heads we win, tails you lose" aspect of this story is that - how would I put this? So Charlie Munger, Buffet's right-hand man, once said, "Show me the incentive and I'll show you the outcome." Now, big banks make huge profits and don't face any serious consequences for behaving recklessly, illegally, and immorally. And guess what? We see that behaving recklessly, illegally, and immorally. This is just common sense to me out here and to my listeners, I think.

Why don't lawmakers understand this?

Bartlett Naylor: Yes. And just to dive a little deeper into what you're saying and what Mr. Munger is talking about, the securitization machine, which is the machinery that led to the inflation of the housing bubble, starts with making loans.

The prevailing homeownership rate in America has been about 65%. Well, they made the loans easier to get - eventually driving the homeownership rate up to 69%. A lot of the loans were subprime. That is to say they were more expensive at higher interest rates. Why so many subprime loans?

Well, in some cases, it was because the borrower was unable - had poorer credit than average. In some cases, they did. But the mortgage broker gets more money selling a subprime loan than a conventional loan. Then that gets packaged up, more fees are paid in the underwriting of the securities. That generates fees with the trading of the securities, the mortgage-backed securities. That's more revenue. And all the way up to the senior executives, who are paid based largely on stock price.

If you look at the failure of Bear Sterns and Lehman Brothers and the top five executives, what they got paid in the decade or partial decade leading to the 2008 crash, it was basically $1 billion-$100 million or more per person. We know the top five, because it's listed under the Securities and Exchange Commission rules. So we can see what happened. So from their perspective, from a financial perspective, there are titans that ran firms into the ground. But their financial message is, let's do that again. Yes, financial incentives, compensation incentives were very much at the core of this problem and begged for reform. Dodd-Frank provides that.

This is one of the glaring failures of implementation. That even though a particular pay reform rule was required to be implemented in May of 2011, it's now May of 2018 and it is still not implemented.

Chris Martenson: And why is that still not implemented?

Bartlett Naylor: The simple reason is that it's a five-agency rule. The real reason I think is that the agencies are under so much pressure from the banking industry. There's some 3,000 lobbyists. They meet with them all the time, and they haven't been able to come up with a solid rule.

We think if there's one thing that is dear to Wall Street, and that's how much they get paid. So we've struggled mightily to get the rule proposed, in fact, reproposed. But even then, the proposal is quite weak. In other words, Congress can pass a statute and this particular section, 956, is not very long. It's maybe 200 words long. Then the agencies, in this case, the Securities and Exchange Commission, the Fed, the OCC, the FDIC, et cetera turn that into specific rules for how compensation takes place. In other words, so Congress can say, drive safely. And then a local highway they say, well, around this curve it's 30 miles an hour. That would be what the agencies are doing. And they simply have not taken this to final rule.

We're caught - we, as a progressive organization and I'd share the Americans for Financial Reform Task Force on executive compensation - are somewhat torn. Because there's a thing called the Congressional Review Act, which means that if agencies approve a rule, Congress can overturn it within 60 legislative days. That law, Congressional Review Act, didn't mean so much when Obama was president, even with a Republican-controlled Congress because the President wasn't going to sign anything to overturn these rules. Now we have both House, Senate, and the White House controlled by Republicans, and they've been overturning many of the Obama-approved rules. And should the agencies miraculously come up with a good final rule on banker pay, we assume that it would be CRA-Congressional Review Act.

Chris Martenson: Bartlett, one statistic I read a while back - I'm not sure how true it is this year - but that the Wall Street bonuses, just the Wall Street bonuses alone amounting at that time closing in on almost $30 billion. Was roughly the same number as all the hours worked by everybody earning minimum wage. So Wall Street alone, and the few thousand bankers that are getting their bonuses - few thousands, tens of thousands, it's a very small number - effectively took home as much as everybody who is struggling to make it on minimum wage. Is that roughly accurate?

Bartlett Naylor: Yes, that's right. Some of these statistics that you're mentioning come out of the S2 for Policy Studies. The New York City Controller also annually releases a survey of Wall Street bonuses and trader pay, and it's important to New York's economy, needless to say. Roughly 5% of the greater New York area works in what you could call a Wall Street job. They make 40% of the income of all New Yorkers.

Chris Martenson: So New York doesn't want to clearly - I don't know - shake that apple cart too strongly, I assume. But to back up, talking about the incentives, and outcomes, and how all of this works. As I've been tracking this, I actually stopped tracking after a while because it became - I would have to go on blood pressure medication. I'm not on any, but I would have to. Because, Bartlett, I was watching things where HSBC (NYSE:HSBC) got caught money laundering, and you'd see JPMorgan get caught, and Citi. And don't even get me started on Wells Fargo, who seems to get caught every week on something. And watching all of that, I never saw or even heard about a criminal action being filed, any sort of indictments, or anything like that even though it seemed completely obvious to me.

So to take one example. Bank of America gets caught in this robo signing scandal. Pays a pretty decent fine. I don't know what that fine represents compared to the money they actually made, whether it was all or part of what they actually made. But this seems easy to me, because the substance of robo signing is putting a signature in a box that has underneath it a federal violation statute written in, which calls it a felony. And this would have constituted, A, the felony of signing fraudulently, wire fraud, interstate - you name it. Who knows how wide of an indictment. Find me the person who inappropriately signed that box, and we'll work up the chain. That's how prosecutions typically work.

That hasn't happened. Why is that? And how close are we to maybe getting back to real incentives and aligning with the consequences and the actions?

Bartlett Naylor: That's right. It hasn't happened. The same week that Bank of America settled that robo signing, essentially government document forgery admission when nobody was sent to jail. We happen to see this with any criminal prosecutions of anybody forging a document. And we happen to find a woman I think in Louisiana who was sentenced to a number of months in jail because she had failed to disclose on a request for Welfare benefits that she had done something like that before. In other words, the harm was several hundred dollars to the government or the harm was nothing, other than she had failed to fill out the form properly. But she signed it saying that this is true, and she spent jail time. Whereas, Bank of America, other banks that were involved in robo signing, which is sending thousands of people into foreclosure and eviction, and yet not one person went to jail.

Bank of America had this scheme where they would take the mortgages and package them into a mortgage-backed security. But for the benefit for the investors they had a due diligence procedure where they would double-check the loans to make sure that they were in fact good loans. At Bank of America, which had purchased Countrywide, it was called the "high speed swim lane" or "hustle," because they were only allowing a few seconds per mortgage.

Now, if somebody handed you a mortgage and said, make sure the person has a job, the income is accurate, that would take you quite a while to verify that, even if you were spot-checking. Well, in this particular case, they named the person who was responsible, Rebecca Mairone, at Bank of America. Well, where is Rebecca Mairone now? Well, she got a job promotion at JP Morgan. So even the few times that the government has identified people that were involved in the misconduct, nothing has happened.

Now to your question. Why hasn't it happened? There are many theories. One of them then Attorney General Eric Holder advanced at the time in response to a question from Senator Grassley is that there's some institutions that are so big and interconnected that to bring a criminal charge would undermine the system. It would generate systemic tsunamis. Well, I think that reality has proven him incorrect, because we actually have had a few criminal convictions against firms, largely from money laundering, and it has not sent financial tsunamis through the system.

What about indicting individuals? Well, I think the response when Bernie Madoff, who had hands-on investment with hundreds of people, was sent to jail, how did the people that were scammed view that? I think they welcomed that. So in other words, I don't think there would be a problem with a criminal conviction of a firm or an individual.

So why is it? Is it an old boy network, where the same bankers when to law school with the prosecutors? Is it that it's too complicated, the financial issues are too difficult to a jury? That's one of the explanations for Bear Sterns, where the government did bring a case, but the jury sided with the defendant.

There is a cost-benefit theory. The way these misconduct scenarios have played out is that the misconduct is turned over to the bank itself. The government asks them to do an assessment, and then come up with a fine. That's pretty efficient for the government. They get a press release that says billion dollar fine. They have to do relatively little work contrasted with actually going to trial. It can take a long time, a lot of resources, and they may not win. Jed Rakoff advances this theory.

I don't know which one is true. When I worked for the Senate Banking Committee, it was in the middle of the savings and loan crisis, and there were roughly 1,000 bankers that were sent to jail. There too were somewhat complex, but somehow the government was able to muscle through that.

A book by Jessie Eisinger, called The Chicken Club - there's a more colorful term - well, he says there's many reasons. But in brief, in book title length, that there is a lack of will. And I think that's true, even if you look at the interviews that Eisinger did with prosecutors. You can see that some that have the stomach for this and there are some that are risk-averse.

Again, I don't know what the reason is-old boy, a lack of will, an actual conspiracy. There's even another theory that Obama, or the banks knew that they had done wrong massively and went to every candidate running for election, leading up to 2008, and became generous contributors. But there was the sotto voce note that it will be bad for the system if you bring a lot of criminal trials. The faith in the financial sector will be even worse. I don't know if that took place, but it is true that Wall Street was very generous, as it always is with candidates for Congress.

Chris Martenson: True. And let's be clear, that's bi-partisan generosity. It goes all sorts of different directions there it seems. Money is power, and that power doesn't seem to care which party you belong to. So personally, I think it transcends the party politics by far.

And you mentioned Eric Holder. Now, he came from, rejoined Covington & Burling. Now that's a white shoe corporate defense firm if ever there was one, and he wrote that infamous memo where he talked about this collateral damage - as a "collateral consequence," I think the term was he used - when government officials could consider that when deciding whether to bring criminal charges against corporations. A little time passes and that became the too big to jail line of practice at the Justice Department. So here, Bartlett, this seems like such a key point. That if there are no consequences and you get bailed out every time if the consequences get big enough, but meanwhile you collect record bonuses, I don't see anything that's going to put a stop to this behavior.

So let's talk now about Wells Fargo. Everybody listening to this, I'm sure, it seems like every week they've been doing something. Talk about some of the things Wells Fargo has done. I consider them quite maddening in just how callous they are, if not immoral.

Bartlett Naylor: Yes, and it's systemic in Wells Fargo. Until about two years ago, I think America or those of us who follow banking, considered Wells Fargo, if you will, the "good bank," unlike JPMorgan or Goldman Sachs. They didn't seem to be involved in speculative trading as much. They were more of a mortgage and a business loan maker.

The fake account scandal in which millions of accounts were created made it clear that there was a problem and that it was widespread. Some 5,000 or more people had been terminated by Wells Fargo itself for generating these fake accounts. Wells Fargo did this because they were trying to show that they could grow, absorb other banks - they absorbed Wachovia during the crisis - and yet continue to grow the number of accounts. Eight is great. Stumpf then, the chair, that we want to have our average customer having eight points of contact with the bank. Yes, a checking account. Yes, a credit card. Yes, a mortgage. Yes, an equity - you almost have to wonder. Eight separate ways, that's quite a lot.

We then - Public Citizen did an analysis and showed that this didn't just start three or four years before the Consent Order in 2016. It had been going on for a long time, and it had been going on a long time with the help of lots and lots of senior executives. And yet even in the OCC - the Controller of the Currency and the Consumer Financial Protection Bureau orders - there were no individuals named other than a few senior people-Carrie Tolstedt and John Stumpf. Now, it's true that they have to make criminal referrals, and presumably they did. But here it is several years later, and we are still not hearing too much. Although, ideally it will happen, that there will be criminal proceedings against some of these senior executives. That's' one.

There's also allegations of systemic overcharging of clients in investment accounts, forced place insurance. If you get a car loan, the bank wants to make sure you have the car insured. Well, even if you have it insured they would sell some 800,000 car loan customers insurance, even though they didn't really need it. Then when they didn't make payments on that car insurance that they didn't need, in many cases, they would repossess the car. Those are just three or four. As you mentioned, every week or so we learn of another arena where there is misconduct at Wells Fargo. And yet still, under the Jeff Sessions DOJ, we continue the legacy of the Eric Holder DOJ of identifying and prosecuting no individuals.

Chris Martenson: So there is indeed a systemic failure going on here, but it's at the Department of Justice it sounds like.

Bartlett Naylor: I think that's right. I would have to blame the Department of Justice, OCC. The other bank agencies can make a criminal referral. That is private. We don't know about that. Richard Cordray all but said they'd made criminal referrals and congressional testimony. He cited the law that when they find misconduct of a criminal nature, they refer it. And he said, "and we have obliged that law." So that's stopping short of saying we did it. But I would choose to interpret that as meaning they did make a criminal referral.

Chris Martenson: So if we look at the systemic thing - and again, thank you so much for fighting this fight on behalf of everybody. Where I'm sitting, I watch piece after piece just fall, and I get a little bit jaded, if not cynical about the whole thing.

I'll tell you, back in - I'm trying to remember when this was. I'm sure you would know. There's a bill that was passed, the swamp's Regulatory Improvement Act. I call it the "Citi Act," where Citi Bank inserted some lines. Which if I was interpreting it correctly basically said, hey, look, banks can engage in derivatives bets with each other. That's cool. And oh, by the way, that becomes wrapped in as part of their overall operating structure so that should they get in trouble, those bets will still be paid off. Those are typically from bank to bank or financial institution to financial institution. So these are just side bets that they make with each other - whether interest rates are going to go up or down or whatever is going to happen.

And yet, in that, if I'm interpreting it correctly, we discovered that should a bank go into a bailout or fall into the new bail in provisions, what we would discover that there's a seniority ladder there that says who gets paid first - the bank's assets are impaired, but not totally impaired. There's fifty cents on the dollar left in this institution. How do we get whole, and there's a laundry list of creditors in there - senior debt, junior, subordinated, all that. But you find that derivatives were way higher on the ladder than depositors. So in that I found that depositors are once again exposed and the banks are protected. Did I understand that correctly?

Bartlett Naylor: Yeah, I think that's right. Two things are going on here. I think you're also making reference to what I call the " Swaps Push Out Rule." A swap, which is a bet - it's a shorter word for derivative, which is itself a prim, Victorian term for gambling - are supposed to take place outside of the bank's funding that is made cheap and abundant by FDIC insurance.

And to step back, when you walk into a bank as opposed to loaning money to your distant cousin, you don't care at the bank if it's able to pay you back. It's got taxpayer-backed insurance. Now, with your distant cousin you want to see what his business plan is make sure that he's not going to skip town, and has a drinking habit, or something like that before you loan him money.

With that, originally, when the FDIC was created there was a strict division between what banks could do with that. They were to make loans to build a new factory, add to the economy, mortgages, small business loans, small consumer loans, but they weren't supposed to gamble. In the terminology of the industry, that's investment bank-making bets, taking companies public, trying to sell stock. That's riskier. And while the profits can be higher, the losses can come more quickly.

Derivatives really flourished in the '80s, and '90, and 2000s when making bets just was what banking was and doing that with deposit-backed insurance was a problem. It supercharged it. So Dodd-Frank in 1992 said the derivatives had to be pushed out of the bank and done in a separately capitalized part of the financial institution. They couldn't use, if you will, FDIC money. That was overturned in language - you call it "Citi" because Citi group lobbyists wrote the actual language. It was going to be snuck - it was snuck through in a must-pass spending bill. A lawmaker, such as Elizabeth Warren, drew attention to it.

Second, derivatives, unfortunately, as you rightly mention, don't get stayed in bankruptcy. So you and I have a bet. You're a bank, I'm a bet, and at any given time one of us is the winner. So let's say I bet the Caps will win the Stanley Cup and you bet Vegas will. And at the end, we're going to exchange $5.00. Well, if somehow, I went bankrupt right now, you could take my $5.00, because the Caps are down one game to Vegas. In a normal bankruptcy, we'd have to wait until all of the creditors line up and we put them in order. The bondholders are ahead of shareholders, and the bondholders and me would get paid off before any shareholder in me. Derivatives, however, aren't part of that. And that legislative history is glaringly absent of any kind of conversation.

There were some pious comments about how we need to fuel the ability of people to engage in derivatives, which are sometimes through hedging. But one could argue that that's the case for anyone. We want a healthy stock market. Why not put stocks ahead in the line or bondholders? But anyway, derivatives somehow prevailed, largely because of a lack of discussion on the subject. And that has happened over several years, and it happened most recently four or five years ago. And knowing that you can make a bet with a bank, and even if it goes bust you're going to get paid first, is one of the things that supercharges this derivatives trading, which I think is largely counterproductive. I'm sure hedging is fine. But what the derivatives traders are mostly doing is trying to make money.

Chris Martenson: Well, sure, and they're trying to make money. And I think Greenspan - I put a lot of this under Greenspan at the Fed, where he somehow thought that derivatives made the world almost like a risk-free place. Like that we could just take risk and shoot it into outer space and it's gone. In fact, I believe in almost in the second law of thermodynamics and the first law, which basically says, energy is neither created nor destroyed and everything tends towards disorder. Risk, you can't create or destroy it. It's just there. It's part of the game. And derivatives sort of mask it and hold it.

What's untested in this, of course, Bartlett, is what happened if we do have a big financial movement or accident and those bets really have to start getting paid off. I guess that's what we worry about, the systemic affect. If Deutsch Bank goes down the ringer, and then French banks do down, and the Italian banks goes down, and then US banks go down, and then the whole world goes down, that's sort of the argument I've heard put forward. Is this idea that it's not just that JP Morgan, for example, is too big to fail, it's that the system has gotten so interconnected, and so giant, and so large it can't fail or really bad things will happen.

Now, from my perspective, Bartlett, I think it's a bad idea to build a system that either has to have free run or the whole world ends. It feels like there's got to be a middle ground. I come from a long line of family bankers. Still, there's a bank in my family's past, a small regional bank in Upstate New York where an uncle serves on the board and all that. The world that I grew up knowing about in terms of banking, where it's just an intermediary between savers and borrowers, has become this giant speculative casino where it looks like it either thrives or collapses with very little middle ground.

From your perspective, is that fair at all or unfair? And does anybody in the legislative arena understand how risky that is if you agree with that view?

Bartlett Naylor: You're asking the trillion or the quadrillion dollar question. Part of the architecture behind Dodd-Frank was to add transparency to these problems. For example, on derivatives, it was bets between two banks, but other banks and other observers, even regulators, couldn't really detect the scope, the scale of it. So the basic reform in Dodd-Frank is to try to add transparency through clearing houses. That even if the two banks are making a bet against one another, they would bring it to a public forum to show the world, including regulators, what that bet is. They would have capital called margin requirement. So you and me, with our Caps-Vegas bet is $5.00, but we're going to give to a third person either all of that money or some of that money, such that if things are going bad and I don't really - there's money to pay. So those are some of the reforms.

The industry doesn't like it. They like opacity, because they don't like another customer to see what the price of a derivative is. The markups on derivatives are high. They're complex. Wall Street is, I think, scamming Main Street quite a bit, because the price of these derivatives is opaque. You can go into a grocery store and you can see the prices right there on the items, and you can see how this particular product is similar to that. That it's cheaper in terms of unit value. It might even be better quality. You can't really see that. And you couldn't see that. And you still can't see it perfectly with derivatives. So those are some of their forms.

Have we fixed it? Well, again, the industry is very - they don't like capital. They don't like margin. They don't like transparency and they're resisting. They've put a former industry person to chair the Commodity Futures Trading Commission named Chris Giancarlo. He is trying to rollback some of the reforms that took place under the previous chairs. How successful he'll be is unclear. He does have a statute to work with, but the Trump regulators there and generally have made it pretty clear they're trying to rollback by regulation Dodd-Frank, established by statute.

Chris Martenson: Well, let's talk about that for a second, because I did hear for a while some sort of an OTC clearing house for derivatives, which would basically be like a brokerage, I guess, the middle person who is operating an exchange almost, as it were, with derivatives listed on it. You're saying that, of course, banks, they don't like the transparency. They don't like the capital, and they don't like any of that.

So close are we to having any sort of transparency in that derivatives market right now? Did anything get done? Or is that just talk?

Bartlett Naylor: It's more than talk, but facilities such as Swap Execution are not as robust as they should be. One of the problems is that we don't know what we don't know. In other words, there may be transactions taking place that we and the regulators simply are unaware of. Or there may be some transactions that the regulators know of that the rest of us don't.

Ideally, as in a stock market with trading, we all know what the price of any particular security is and the collective wisdom is essentially reflected in that stock price. That's just not the case with derivatives, where collective wisdom is being stifled.

So I can't answer your question. Regulators might be able to do a better job. It's not in their interest to stream fire in a movie theater. You often see regulators overly cautious in their statements if for no other reason than they don't want to generate fear, if they can avoid it.

Chris Martenson: Well, I thought Sheila Bair did a fantastic job of actually mumbling, if not yelling, the word fire. I think she did a really good job of pointing out some of these difficulties, even while she was in her job, not just after she left.

Bartlett Naylor: Yes, she did. I think her complaints are most notable about bailouts. She had a long multiyear contest with then Treasury Secretary Geithner about the nature of who is going to be helped and who is going to be allowed to be harmed.

She did pick over some banks, such as IndyMac, when then Treasury Secretary Geithner would have gone for more of a bailout. But I think neither of them disagreed that IndyMac was in big trouble, ditto Washington Mutual.

Chris Martenson: So the summary then, because I want to get to where we are today. We had Glass-Steagall. It gets repealed. Some obvious things happen. Because guess what? If you show me the incentives, I will show you the outcomes. And so we got the outcome. Dodd-Frank comes along, attempts to partially resurrect Glass-Steagall, plus put some other things in play. You've just told me that some of that went. Some of it still didn't quite get implemented all the way and is being resisted.

Where are we today? I know there's a new piece of legislation working its way through DC right now. What is it? And what can we expect from it, do you think?

Bartlett Naylor: The President signed S2155 last week. This bill has 40 or so provisions in it. The most troubling one reduces what's known as enhanced supervision for a class of banks that are between $50 billion and $250 billion in assets.

Enhanced supervision means tighter capital controls. Capital is assets minus liabilities. The amount of net worth, if you will, of the particular bank. You think of banks of being very solid. But in fact, they are in hock. They are highly leveraged. The 95% of their assets are financed by debt. They really don't own that much. They mostly owe things.

Stress tests will be reduced. Stress test is to say, all right bank, let's look at your portfolio and decide that of things are going to go bad in the economy - defaults will rise, unemployment will decline. What's going to happen to your portfolio? And based on that, we will decide how much capital you should have. In other words, that gap between assets and liabilities, and how much dividends you can pay out, or in fact, executive bonuses, living wills. Let's say you fail. What will happen to all of your assets? Is there a way that this particular part of your bank can be sold to somebody?

So for example, with the failure of Lehman Brothers, they couldn't sell it. They couldn't resolve it quickly enough when it was failing. They tried to find buyers for all or parts of the bank. They came close with Mitsubishi, with Barclays, but in the end, there wasn't a game plan to see how we could break up this bank and avoid a bankruptcy.

Living wills are supposed to help that. A living will exercise is reduced for this class of banks. That's problematic, because this class of banks would have included Countrywide. Countrywide is now a division of Bank of America. It actually is even a larger class of banks than IndyMac, which was the biggest hit on the Deposit and Insurance Fund. That was only about a $30 billion bank.

Collectively, these two dozen banks, so you've got 25 or the 38 largest banks took about $50 billion in TARP money. They're not the Boy Scout banks either. We're talking about all the misconduct at JP Morgan. About half of them have misconduct charges against them just in the last half decade. That's the most troubling provision.

It also turns back the Volcker Rule, and we can get into that a little bit later. That's the restriction on gambling within the bank, a general restriction. The regulators are expected to reduce those rules in a proposal due out tomorrow, on May 30th, I think. This new bill says that if you've only got $10 billion in assets, you're free to gamble. We won't restrict that other than it has to be about 5% of assets.

Again, I worked in the Senate Banking Committee during the savings and loan crisis where some small tweaks, what seemed to be small tweaks in savings and loan law, essentially allowing developers to run banks, run savings and loans and loan to themselves, regardless of the promise of the particular project, leading to the inflation of real estate prices and so forth. So in other words, while the smaller banks, less than $10 billion, may not be gambling now, this could usher in a new class of banks. They'll just say, hey, let's use that deposit insurance money and gamble and start ourselves a $500 million hedge fund. And since capital is only 5% of a bank's net worth, a good year can be profitable and a bad year can lead to the failure of the bank.

There are also a dozen or more consumer protection rollbacks. Redlining, as I mentioned earlier, which is where banks drew a line around a neighborhood, such as a neighborhood of color and basically said, make no loans there. The Home Mortgage Disclosure Act provided information to see if banks are making loans generally in their market area, including within those red lines.

We learned from the financial crash in 2008 that banks had a different kind of redlining. They were going into some neighborhoods and making predatory loans, high-cost loans even to people who could afford a prime loan. The new HMDA, Home Mortgage Disclosure Data, is supposed to ferret that out. This bill eliminates that new data for pretty much 85% of banks. And there are other anti-consumer provisions in this.

The question is, will this make America greater again? It's not clear. We think it's certainly a step in the wrong direction. I also think that the promise of the bill's authors, that it's going to facilitate economic growth, is going to be hard to defend. The banks are already making - have robust loan portfolios and making record or near record profits. And that's at all sectors, not just the big banks, but the little banks. So this bill was an answer in search of a problem, and again, we think raises the question of whether it will make America greater again.

Chris Martenson: Well, that's a great summary, very well done. And when you said - just so I'm clear on this. You said, for instance, "reduces enhanced supervision." What do you mean by reduces?

Bartlett Naylor: Well, enhanced supervision applied to this class of banks, which means they have to have certain capital. They have to undergo a stress test. They have to produce living wills on a regular basis. This eliminates them. So a bank of $10 billion or $1 billion is now supervised as no more rigorously than a bank of $250 billion. Of those 25 banks, more than half of them are rich enough to sponsor stadiums. In fact, they're called stadium banks - MMT, BB&T. Look across America. And many major sport stadiums bare the name of one of these banks.

So without enhanced supervision these banks may well engage in riskier activities, and the failure of one or two of them can cause systemic ripples leading to serious problems. It may not affect a California, but if some of these Ohio regional banks went bad, it would certainly be bad and would reflect a lot of economic problems in the area of Ohio and the other problems in the Midwest where some of these regional banks are based.

Chris Martenson: Well, certainly contagion can spread. At the taping of this, we're seeing possible Italian contagion spreading pretty rapidly across Europe, Asia markets, even US a little bit. Of course, everything is interconnected. The United States was at the heart of the financial crisis around housing. But Greece went down. They had no exposure to US housing, as far as I could tell. It's just what happens when these things do tend to spread.

Now, Bartlett, for the average person, the person who has money - everybody on my list is familiar with the idea that when we put money in a bank account, we are not an unsecured creditor. We've loaned money to a place. We should have good information as to whether that's a safe place and whether we're going to get our money back.

What sorts of risk the average person is facing as a consequence of all these things we've been talking about?

Bartlett Naylor: Well unfortunately, because of FDIC insurance we're insulated. We depositors, we people have checking accounts, are largely insulated from the shenanigans of a bank. It is, if you will, a moral hazard. It was one of the arguments against federal deposit insurance when it was enacted. In fact, bankers argued against that. I'm sure bankers would be the first to defend it today.

So unfortunately, Americans need not care about how banks operate other than when they operate really badly. We can take our deposits and move them to another bank, a credit union, for example. But unfortunately, our consumer dollar, our deposit dollar is directly unaffected by the shenanigans of the banks.

What can you do? Of course, as a consumer you can move your money, as just said, to one of the smaller banks. We certainly have smaller banks that are too big - too big to fail, too big to jail, too big to manage as we're certainly seeing especially in the case of Wells Fargo. They must know they need to reform, and yet they can't seem to stop their own misconduct, however widespread it is.

I think political. We've talked about how money is power. Wall Street is one of the largest contributors, if not the largest contributor to congressional campaigns and lobbying, spending about $1.5 million a day through some 3,000 lobbyists. And that requires citizen involvement. It involves constant phone calls to members of Congress. When bills come up citizens should weigh in.

We had an interesting situation with a passage of this bill, S2155, where the roll call showed, as they always do, the members that vote in favor and vote against. And our problem is we have too many Democrats voting in favor. In this case, there were 33 Democrats. One of them was Maloney (NYSE:D) New York. Well, we heard from Carolyn Maloney's office that she got a number of angry calls and emails about why she had betrayed America and Wall Street. Well, Carolyn Maloney voted, in my opinion, the right way. She voted against it. But Sean Maloney, also a Democrat of New York voted for it, which we think is the wrong way. But the fact that Carolyn Maloney got so much pushback for the misunderstood vote I think reflected Americans are and can be active as they should be in voicing their opinion.

The conservative CATO Institute - again, a libertarian think tank - put out a poll a bunch of months ago that show that Americans of all political stripes favor strong Wall Street rules. In one sense that's why it takes 3,000 lobbyists spending a million five a day lobbying. Because if a congressman did what he or she thought was right they would be putting in strong rules. It's just that there's that default position to do what your campaign contribution tally is arguing.

Chris Martenson: Well, Bartlett, I'd heard even at one point, a shocking statistic to me, I think it was Nancy Pelosi had mentioned at one point in an interview sort of an off-hand comment saying, well, you need to understand. I went to 400 fundraising events last year. Like 400? More than one a day, and you're only in session 200 days out of the year? That means basically waking up every single day, your job is to go to fundraising, and you've got a firm out there handing out a million and a half lollipops a day.

This really caught me. In an April 24, 2018 speech to the American Bankers Association, Mick Mulvaney, the acting director of the Consumer Financial Protection Bureau said, if you're a lobbyist who never gave us money, I didn't talk to you. If you are a lobbyist who gave us money, I might talk to you. Good grief, it certainly sounds like pay to play.

First off, did I misinterpret that comment? Was he trying to be funny and it's gotten taken out of context? Or second, somebody who is not giving money, what voice do we really have here?

Bartlett Naylor: That epitomized, as you rightly say, the pay to play dynamic. And I think it's true. Mulvaney is in his position of intentional arrogance and incompetence right now. As you rightly say, he is leading the Consumer Financial Protection Bureau, and agency as a congress member, he called it a sad, sick joke and tried every which way he could to terminate the agency.

I think that it's true, and you hear it not only in these moments of candor from Republicans. You hear it from Democrats as well, including those who have retired. And they tell you that the money part of this job is the worst part, and they spend - I'm sure 400 might be the high watermark, 400 fundraising sessions in a year. Public Citizens' Capitol Hill office is on the same block as the Democratic Campaign office. And you'll see, in early afternoon, a parade of Democratic congressmen going into that office and hitting the phone banks. You can't fundraise from your congressional office, so they have to take off their little congressional pin and go there.

I don't know why anybody wants to be a congressman, because I think the actual policy work, the thing that appeals to me, is a fraction of what they're doing. And how that affects the policy we assume is pernicious. If you're dialing the 212 area code and the dollars are coming in, it seems like you are - psychologically, Pavlovian - are going to have a founder feel for Wall Street than generally. Because you make the phone calls and the dollars come in, all right. Let's keep that money coming in, and it seems to come in better when I vote the right way.

Chris Martenson: Yeah. You show me the incentive, I will show you the outcome. So we certainly understand the incentives in this, and campaign finance reform would be very high on my list as something where we could get maybe the laws working again for the people.

So first, Bartlett, we're out of time. Thank you so much for your time today. I want to help people find out more about you, your work, follow your work, help your organization, maybe help out in some other ways. Where would they do that?

Bartlett Naylor: Our website is Citizen.org. That's singular, Citizen.org. Follow me at Twitter, @BartNaylor, or follow Public Citizen on Twitter. We certainly welcome contributions. We're 400,000 members and supporters, and I like to think we're active. The reason there weren't more than 33 Democrats that went to the other side I think is in part because of citizen action. But the reason this bill I think that just was signed by the President is not as grand as a bunch of the Republicans had hoped for was because I think of the fine efforts by Public Citizen members and other Americans to make sure their member of Congress knows that Main Street should be favored over Wall Street.

Chris Martenson: Bartlett, thank you, again, so much for your time today.

Bartlett Naylor: Thank you.

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