Hillary Clinton Tries to Walk Delicate Line in Plan to Rein In Banks

  • Proposals further empower regulators to break up big banks
  • Critics say ideas not as tough as her Democratic rivals'

Democratic presidential hopeful Hillary Clinton speaks to guests gathered for a campaign event at Iowa State University on July 26, 2015, in Ames, Iowa.

Photographer: Scott Olson/Getty Images

Call it Hillary Clinton’s Wall Street dilemma.

In unveiling her most specific plans yet to stiffen rules on financial firms, Clinton’s presidential campaign is aiming to shore up her standing with the liberal base of the Democratic party that has made getting tough on the industry a near litmus test for their support.

At the same time, the Democratic frontrunner’s move was greeted with a shrug by many bankers because it stopped short of the calls by Vermont Senator Bernie Sanders, her closest rival for the party’s nomination, to break up the biggest lenders.

The effort highlights the difficulty that Clinton’s campaign has in crafting a middle ground at a time when U.S. voters still blame the financial industry and lax Washington oversight for the 2008 market meltdown. As a former New York senator, Clinton has developed close ties to many financial companies and remains Wall Street’s favored Democratic candidate.

Finance executives will keep seeing Clinton as “better by comparison,” said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc. Her ideas are “not going to cause people at Bernie Sanders demonstrations to come racing over to her.”

Clinton’s recommendations, released in a 15-page paper on Thursday, are often nuanced and delve into areas ranging from high-speed trading to derivatives to criminal penalties for bank executives. She pledged to defend the Obama administration’s Dodd-Frank Act from Republican attacks and prevent future taxpayer bailouts of financial firms.

‘Proper Role’

“We have to encourage Wall Street to live up to its proper role in our economy -- helping Main Street grow and prosper,” the campaign wrote.

To craft its proposals, Clinton’s economic team relied partly on Gary Gensler, the former chief of the Commodity Futures Trading Commission who is now the campaign’s chief financial officer. It also consulted ex-Congressman Barney Frank, co-author of the 2010 law that overhauled financial regulations and created the Consumer Financial Protection Bureau that polices mortgages, bank fees and student loans.

Campaign officials stressed that the paper contains tough, but realistic goals rather than pie-in-the-sky proposals, such as immediately splitting up the biggest banks. They emphasized that Clinton would appoint tough and independent people to oversee law enforcement agencies and regulators.

Still, critics, and even some supporters, said Clinton’s ideas have little chance of getting through a gridlocked Congress, a situation that few think will change with the 2016 election. The plan comes as Clinton is falling in polls to Sanders in early primary states Iowa and New Hampshire. She is also facing the prospect of a run by Vice President Joe Biden, who has yet to enter the race.

Though Clinton remains well ahead nationally, Sanders has made major gains in fundraising, trailing Clinton’s $28 million in third-quarter donations by only $2 million.

Clinton, Sanders and ex-Maryland Governor Martin O’Malley are among Democrats scheduled for their first debate next week in Las Vegas and Wall Street reform, income inequality and corporate crime are all expected to be topics of discussion. Sanders and O’Malley have explicitly called for shrinking Wall Street’s mega-banks -- a position that has energized progressive Democrats.

Risky Banks

While Clinton’s proposal doesn’t go that far, it does tack in that direction.

“If firms can’t be managed effectively,” the position paper argues that regulators be given additional authority to “require that they reorganize, downsize or break apart.”

Following the release of Clinton’s plan, Blackstone Group LP Chief Executive Officer Steve Schwarzman said calls by Democratic politicians to stiffen financial regulations had gone too far and would ultimately hurt the economy. The anti-Wall Street campaign has been led by lawmakers such as U.S. Senator Elizabeth Warren, whose attacks on banks have dovetailed with a surge in her popularity.

“You can’t have an economic recovery with the financial sector in retreat and under siege,” Schwarzman said in an interview Thursday. “You will get slow economic growth, you will have higher levels of unemployment.”

Clinton also wants to institute a tax on banks that have more than $50 billion in assets. The fee would rise depending on how much debt a firm took on, the campaign said. The idea would be to discourage lenders from risky behavior that could imperil the bank, such as using excessive leverage to make investments.

Still, much of the document has left progressive groups underwhelmed and wondering how as president Clinton would back up her words.

“Throwing out a few ideas isn’t enough without knowing who she’ll appoint to top law enforcement and regulatory positions,” said Jeff Connaughton, a former lobbyist and Senate aide who wrote a book on Wall Street’s power in Washington. “I’m very skeptical she’ll name anyone other than the usual suspects.”

Some of Clinton’s harshest demands about the banks are less than meets the eye. For example, the Dodd-Frank law already gives the regulators power to break up banks and sell off pieces if they’re too complex to be resolved in a bankruptcy.

Volcker Rule

The plan also calls for toughening one of the Dodd-Frank Act’s core provisions -- the Volcker Rule ban on banks speculating with their own money -- by closing what the campaign describes as a loophole in the law that allows banks to invest up to three percent of their capital in hedge funds. Clinton said banks are structuring their activities to avoid the Volcker ban.

The policy paper demands tougher penalties for Wall Street businesses that repeatedly break the law. It would extend the statute of limitations for major financial fraud, allowing prosecutors up to 10 years to bring cases. Now the window is five or six years.

Echoing criticism from other Democrats, Clinton said she would curtail the use of waivers issued by the Securities and Exchange Commission that allow firms to escape extra sanctions when they settle cases.

One of Clinton’s marquee ideas is a new tax on high-frequency traders, who are often accused of contributing to market turmoil and front-running other investors. The plan would go after “unfair and abusive” strategies used by speed traders who repeatedly submit and then cancel orders.

Her point: Vast numbers of dubious orders strain the markets. For every 27 orders placed on U.S. stock exchanges, about one is filled, according to data from the SEC, so approximately 96 percent of all orders sent to equity markets are canceled.

While the suggestion has drawn the ire of high-frequency traders, it also failed to satisfy some of the industry’s critics.

“It’s a political stunt and a headline-grabber,” said Joe Saluzzi, a partner at Themis Trading LLC.

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