Speaker 1: Hello, and welcome to the Votes and Verdicts podcast, hosted
Speaker 1: by the litigation and policy team at Bloomberg Intelligence. We
Speaker 1: are the investment research platform of Bloomberg LP. This podcast
Speaker 1: series examines the intersection of business policy and law. I'm
Speaker 1: Nathan Dean and analysts with BI covering financials policy.
Speaker 2: And my name is Elliott Stein and I'm an analyst
Speaker 2: with BI covering financials litigation.
Speaker 1: So our topic for today is the current state of
Speaker 1: US financial regulation. And look, if you follow in financial
Speaker 1: regulation or in my case, have been in financial regulations
Speaker 1: for fifteen years, you know who our next guest is.
Speaker 1: This is Dennis Keller, co founder, president, and chief executive
Speaker 1: officer of Better Markets. And for those of you who
Speaker 1: aren't aware, Better Markets is Washington, DC based nonprofit organization
Speaker 1: whose goals are to make finance and government serve society,
Speaker 1: fight and justice and any and promote economic security, opportunity,
Speaker 1: and prosperity for all Americans. Prior to co founding Better Markets,
Speaker 1: Dennis worked for eight years and senior staff positions in
Speaker 1: the United States Senate, including as chief counsel and Senior
Speaker 1: Leadership Advisor to the Chairman of Senate Democratic Policy Committee.
Speaker 1: And earlier in his career, mister Keller was a partner
Speaker 1: with the international law firm as Garden, Armed, Slate, Meager
Speaker 1: and Flom. So with all that, Dennis, thank you very
Speaker 1: much and welcome to the Votes in Verdicts podcast.
Speaker 3: Thanks happy to be here.
Speaker 1: Oh, thank you, And I'm just going to nerd out.
Speaker 1: This is exciting for me because I've been following all
Speaker 1: of your work for the last fifteen years, and you know,
Speaker 1: we're really excited to have you on today's show because
Speaker 1: you know, ever since the Dodd Frank Act, any rulemaking
Speaker 1: that I've looked at, Better Markets has been there in
Speaker 1: terms of providing their comments and their thoughts, and you know,
Speaker 1: we'll get to some of those comments in the bit,
Speaker 1: but before we do, we'd like to always ask our
Speaker 1: guests a little bit about their background. So could you
Speaker 1: tell us a little bit more about your career and
Speaker 1: Better Markets and why you decided to create it.
Speaker 3: Sure you hit most of the highlights, you know. I
Speaker 3: was a partner at scaton Arks for a long time.
Speaker 3: I was there for almost two decades. I then served
Speaker 3: in three senior staff positions in the Senate, including five
Speaker 3: and a half years as a chief counsel and senior
Speaker 3: leadership advisor to the Chairman of the Democratic Policy Committee,
Speaker 3: so as a leadership staff position. And when President Obama
Speaker 3: signed the Dodd Frank Financial Reform Law in July of
Speaker 3: twenty ten, about a year and a half after close
Speaker 3: to two years after the two thousand and eight crash,
Speaker 3: it was pretty clear that the financial industry was going
Speaker 3: to try and win in the regulatory process what they
Speaker 3: had lost in the legislative process, and it was also
Speaker 3: clear that there was no effective counterweight to the financial
Speaker 3: industry in the regulatory process. So I decided, along with
Speaker 3: Mike Masters, who was a hedge fund manager in Atlanta,
Speaker 3: we both thought that the public interest or organization that
Speaker 3: prioritized and focused on the public interest with some substantive expertise,
Speaker 3: participated in the rule making process, which is how a
Speaker 3: law like Dodd Frank becomes a reality in the world.
Speaker 3: And we thought it was setting up to be kind
Speaker 3: of a one sided rule making process, and we thought
Speaker 3: the public interest deserved its own organization to participate in that,
Speaker 3: and that's why we founded Better Markets, and we founded
Speaker 3: it as frankly a different organization than normally see in Washington.
Speaker 3: We from the beginning, wanted to hire people who were
Speaker 3: derivative securities, commodities banking experts with ten, fifteen or decades
Speaker 3: worth of experience to be able to engage on a
Speaker 3: substantive expert level, whether it was at the FED or
Speaker 3: the FDIC or the occ of the SEC, the c FDC,
Speaker 3: the alphabet souper financial regulatory agencies to provide the public
Speaker 3: interest perspective to be a substantive counterweight to the financial industry.
Speaker 3: I mean, one of the things people talk about a lot,
Speaker 3: and I'm sure you hear this, Nathan all the time,
Speaker 3: is well, you know, the financial industries active with lobbyists
Speaker 3: in Washington, and that's true, and they're entitled to do that,
Speaker 3: but they are all like all private sector businesses, looking
Speaker 3: to promote their interest, maximizing profits, maximizing revenue, expanding their business,
Speaker 3: maximizing bonuses. You're entitled to do that, but the law
Speaker 3: dot Franklaw was actually passed to prioritize the public interests,
Speaker 3: not the maximization of profits of anybody in particular. So
Speaker 3: we have built a team of experts. As you indicated,
Speaker 3: we've actually participated in more than four hundred rule makings
Speaker 3: since October of twenty ten, as well as dozens of
Speaker 3: litigations associated with those rules. We testify quite a bit
Speaker 3: and provide expert advice in Congress, and we're pretty engaged
Speaker 3: across the entire range of policymaking as it relates to
Speaker 3: the financial industry frankly, the economy at large, across all
Speaker 3: of Washington.
Speaker 2: You know, speaking of litigation and you know, the financial
Speaker 2: industry lobby, you know, we certainly see no shortage of
Speaker 2: lawsuits currently challenging rules that are promulgated by agencies. One
Speaker 2: of one of the recent rules we want to ask
Speaker 2: you about is the SEC's climate disclosure rule, which of
Speaker 2: course was released on March sixth. And you know, as
Speaker 2: we've seen very you know, time and time again recently,
Speaker 2: lawsuits came swiftly thereafter. There were multiple lawsuits that have
Speaker 2: now been consolidated in the Eighth Circuit Court of Appeals.
Speaker 2: I just wanted to get your thoughts on that particular litigation.
Speaker 2: You know, how you see it playing out, you know,
Speaker 2: courts like the Eighth Circuit, the Fifth Circuit, and the
Speaker 2: Supreme Court too. Now are you know, very skeptical of
Speaker 2: government overreach? And it feels like there's always you know,
Speaker 2: sort of a thumb on the scale of the challenge,
Speaker 2: you know, in favor of the challenger challenging these rules.
Speaker 2: So I just get wanted to get we wanted to
Speaker 2: get your thoughts on, you know, whether whether it's think
Speaker 2: this SEC climate disclosure rule will actually survive the litigation.
Speaker 3: Oh sure, I'd like to take a step back and
Speaker 3: address the broader issue and then answer your specific question
Speaker 3: if I could, Elliott, Absolutely, Yeah, the broader issue, and
Speaker 3: it's really a very serious issue, no matter what side
Speaker 3: you're on. Is we have you know, we had during
Speaker 3: the Trump administration, frankly court packing with judges who are
Speaker 3: ideologically driven and they were chosen to be put on
Speaker 3: the bench for ideological reasons. And we have a whole
Speaker 3: variety of judges now in effect whole courts where facts
Speaker 3: merits policy actually do not matter very much at all,
Speaker 3: and these courts are basically rubber stamping lawsuits against the
Speaker 3: government independent of the facts. Better Market is going to
Speaker 3: put out a report, We've been working on it for
Speaker 3: a couple of weeks now to kind of show what
Speaker 3: some of these decisions. I mean, anybody I was a lawyer,
Speaker 3: it's gotten offers. For twenty years, I litigated cases all
Speaker 3: across the country. I you know, one some I shouldn't
Speaker 3: have won, lost some I shouldn't have lost. But I
Speaker 3: never sat around thinking, you know, well that was just
Speaker 3: a judge. Before I went in the courthouse door, you
Speaker 3: would know almost with certainty how the case was going
Speaker 3: to come out. Nowadays, you know, Corporate America in the
Speaker 3: financial industry know how the case is coming out almost
Speaker 3: to a certainty if they're in the Fifth Circuit. And
Speaker 3: some of the cases in the Fifth Circuit are shockingly
Speaker 3: completely devoid of precedent, facts and merit, and that should
Speaker 3: trouble everyone, regardless of what side you're on. There's also
Speaker 3: a second, really bad outcome of that, which is it
Speaker 3: incentivizes the financial industry and corporate America to litigate file lawsuits.
Speaker 3: There likelihood of winning has gone up dramatically, again regardless
Speaker 3: of the facts of the law. And so as a result,
Speaker 3: there's almost a free option. If you're the industry, you'd
Speaker 3: be a damn fool not to soe nowadays, because your
Speaker 3: odds of winning, even if you've got a bad case
Speaker 3: are actually quite high. And that's what we're seeing kind
Speaker 3: of across the board, So you're seeing lawsuits that you
Speaker 3: never would have seen five years ago. They wouldn't even
Speaker 3: have been thought about five years ago. And that's not
Speaker 3: just bad because of there's more litigation and you've got
Speaker 3: adverse decisions. But you know, the way the financial regulatory
Speaker 3: system has worked is the regulated entities and the regulators
Speaker 3: have this you know, it's supposed to be a professional relationship,
Speaker 3: but one that has tension. Right, regulated entities don't want
Speaker 3: to be regulated. Being regulated costs money. On the other hand,
Speaker 3: being regulated protects the public interest, protects investors, protect the customers,
Speaker 3: protects financial stability. So historically there's been a push and
Speaker 3: all and a healthy tension there that sometimes spills over
Speaker 3: to unhealthy tension, but by and large there's been a
Speaker 3: working relationship between regulated entities and regulators, and that is
Speaker 3: deteriorating significantly because regulated entities know, we don't actually have
Speaker 3: to work with the regulators anymore. We can just go
Speaker 3: to court and win. So that's the broader context. The
Speaker 3: specific question as it relates to the SEC case, I
Speaker 3: think anybody would be a fool to think that the
Speaker 3: odds are not dramatically in favor of the industry winning
Speaker 3: the lawsuits here. It's just as I said earlier, it's
Speaker 3: basically a free option when you look at some of
Speaker 3: these cases and it's in the Eighth Circuit, not the
Speaker 3: Fifth Circuit. If it's the Fifth Circuit, I mean, you know,
Speaker 3: it's almost not worth litigating if you're you know you're
Speaker 3: being sued by the financial industry. The Eighth Circuit is
Speaker 3: the only thing you can say about the Eighth Circuit
Speaker 3: right now is that it's not as bad as the
Speaker 3: Fifth Circuit. That's not saying much.
Speaker 2: So.
Speaker 3: I think anybody who has followed the way these courts
Speaker 3: are ruling, thinking that the industry is not almost certain
Speaker 3: to win, are fooling themselves. That doesn't mean the SEC
Speaker 3: should not defend the case. It doesn't even mean the
Speaker 3: SEC did a bad job on the rule. Frankly, if
Speaker 3: you compare the proposed climate rule to the final climate rule,
Speaker 3: is really difficult to see how anybody in the industry
Speaker 3: could be legitimately and meritoriously harmed here. It's a disclosure rule,
Speaker 3: a disclosure rule by an agency that exists to ensure
Speaker 3: investors have disclosure, and every investor out there from the
Speaker 3: small single investor somewhere, you know, looking at stocks for
Speaker 3: themselves to trade or for for one k, all the
Speaker 3: way up to the big dogs, whether you're Black Rock
Speaker 3: or Fidelity or Pimco or CalPERS. If you're an investor,
Speaker 3: you ought to really start being concerned about some of
Speaker 3: these decisions, because these courts are basically saying that you're
Speaker 3: right to have some very basic information, even apart from climate.
Speaker 3: It's going to apply to climate here a very very weak,
Speaker 3: gutted climate rule. And to beyond, anybody honest it looks
Speaker 3: at the proposed rule and looks at the final rule,
Speaker 3: has to conclude that this is a pretty skeletal rule,
Speaker 3: pretty minimal rule focused exclusively on disclosure of material information
Speaker 3: to information material to investors. Investors are getting the short
Speaker 3: end of the stick here, and our entire capital markets
Speaker 3: in capital formation capital allocation system depends upon investors having
Speaker 3: trust and confidence in our markets that they can get
Speaker 3: all material information, that they canvaluate the information, and they
Speaker 3: can decide intelligently where to put their hard earned money
Speaker 3: or the money that they're fiduciaries for. When investors start
Speaker 3: concluding that they can't get that information or the information
Speaker 3: they're getting is inadequate, Our capital markets are going to suffer.
Speaker 3: We are the pre eminent capital markets in the world,
Speaker 3: but it's not preordained that we're going to stay there.
Speaker 3: We are the pre eminent capital markets in the world
Speaker 3: because they are well regulated, they are well policed, and
Speaker 3: investors have trust and confidence in those markets and in
Speaker 3: the regulators. And that's really what's at stake right now,
Speaker 3: and it's getting completely lost in the litigation onslaught of
Speaker 3: financial industry. Actors who pursuing their individual profit maximization motives
Speaker 3: are going to win the battle, but they risk losing
Speaker 3: the war here.
Speaker 2: And do you think I mean you talked about the
Speaker 2: s you see, you know, watering down its climate disclosure rule.
Speaker 2: It took out the scope three disclosures for example. I mean,
Speaker 2: do you think this is something that regulators should be
Speaker 2: taken into account when they promulgate these rules? You know
Speaker 2: just how anti government some of these courts are, or
Speaker 2: anti administrative action some of these courts are, Or do
Speaker 2: you think you know that an agency should expect to
Speaker 2: be sued and so it might as well continue to
Speaker 2: put out an aggressive rule rather than watering it down
Speaker 2: since it's going to get sued anyways.
Speaker 3: Well, I think it's a little bit of a false
Speaker 3: choice elite if I can, If I can say that,
Speaker 3: And it's important to realize that the change between the
Speaker 3: SEC's proposed climate rule and its finalized rule is not
Speaker 3: The changes are not limited to Scope three. It is
Speaker 3: true Scope three is not in the rule, but the
Speaker 3: provisions as to Scope one and two were also dramatically changed,
Speaker 3: and so you cannot be a responsible regulator promulgating rules
Speaker 3: for any industry without taking into account litigation risk. On
Speaker 3: the other hand, you can't let an our view and
Speaker 3: there are reasonable people can disagree about how government should
Speaker 3: approach the current state of the courts, and some people think, well,
Speaker 3: you should just continue doing whatever you were doing in
Speaker 3: terms of promulgating rules. Our view is that these agencies
Speaker 3: exist for really really important public policy purposes. I mean
Speaker 3: they exist. We can disagree. Reasonable people can disagree about
Speaker 3: whether or not they calibrate the way they discharge their rulemaking,
Speaker 3: their regulation, their supervision, their enforcement. Are they actually doing
Speaker 3: it optimally? Should they do more, should they do less?
Speaker 3: Should they do different? Reasonable people can have those discussions,
Speaker 3: but nobody can challenge the fact that they exist to
Speaker 3: protect investors to protect financial customers and to protect financials
Speaker 3: to ability, and that's their mission, and they have a
Speaker 3: mandate to actually do that. It's not discretionary. The SEC
Speaker 3: isn't just making stuff up, just like the banking regulators
Speaker 3: aren't making stuff up. They have a mandate to protect investors' markets, customers,
Speaker 3: and financial stability. And so our view is that they
Speaker 3: should continue to discharge that duty, and that means rule making,
Speaker 3: and they should promulgate their rules that are in the
Speaker 3: best public policy, consistent with that mandate and the strongest
Speaker 3: form possible in a way that maximizes their likelihood of
Speaker 3: success before a court that actually cares about the facts
Speaker 3: and the law, and if they end up in a
Speaker 3: court that doesn't care about the facts in the law,
Speaker 3: like the Fifth Circuit, which frankly, you know, I practice
Speaker 3: law for a long time, and I don't I'm not
Speaker 3: usually negative or pejorative about judges or courts. I have
Speaker 3: a very high respect for lawyers, judges and courts. But
Speaker 3: I have to tell you that it's hard not to
Speaker 3: come to the conclusion that the Circuit is actually becoming
Speaker 3: a kangaroo court. But you can't let a court like
Speaker 3: that that such an outlier drive public policy decisions at
Speaker 3: financial regulatory agencies that are mandated to protect the public interest.
Speaker 3: So what our view is, what you should do is
Speaker 3: promulgate the right rules, the best rules you can take
Speaker 3: after going through the Administrative Procedures Act, following all the procedures,
Speaker 3: getting all the input, listening to the industry, listening to
Speaker 3: the stakeholders, taking it all into account, making your best judgment,
Speaker 3: and acting a rule. Finalizing a rule that actually is
Speaker 3: sufficiently robust that you believe that a fair minded court
Speaker 3: would uphold your rule as consistent with the APA, the facts,
Speaker 3: and the law. And if you end up in a
Speaker 3: kangaroo court where they don't care about it and they
Speaker 3: throw it out, that's going to happen. But you can't
Speaker 3: let that drive your policymaking. You can't let that drive
Speaker 3: your mandate because it will undermine your mandate and you
Speaker 3: would end up essentially handing the pen over to the
Speaker 3: industry that's being regulated, and that would be detrimental to everyone.
Speaker 3: And that's part of the problem that we have right
Speaker 3: now is that people kind of think, oh, well, these
Speaker 3: are government agencies that are for some reason, like engaging
Speaker 3: in crazy rules. I mean, you said earlier there were
Speaker 3: courts skeptical of government overreach many of these rules. Nobody,
Speaker 3: no fair minded person who wasn't on the payroll of
Speaker 3: a financial industry would think these rules are overreaching anything.
Speaker 3: And when it comes to rules that are pure disclosure rules,
Speaker 3: the SEC was created for that purpose and was populated
Speaker 3: with experts for that purpose. And it doesn't mean that
Speaker 3: they can't make a mistake. It doesn't mean that they
Speaker 3: can't get things wrong. I'm not, you know, I'm not
Speaker 3: in any way suggesting that the financial regulatory agencies are
Speaker 3: always right. And frankly, you know, Nathan earlier said that
Speaker 3: he has been following us for some time, and I
Speaker 3: appreciate that, but then he knows because anybody who follows
Speaker 3: us for sometimes and we are some pretty we are
Speaker 3: pretty brutal on these agencies sometimes and when we don't
Speaker 3: think they're doing the right thing, we let them know it. So,
Speaker 3: but we all have a vested interest in financial regulatory
Speaker 3: agencies fulfilling their mission as best as they can, taking
Speaker 3: into account the many stakeholders that they should and fulfilling
Speaker 3: that mission. And unfortunately it's all being you know, significantly
Speaker 3: impaired and not just at the SEC but kind of
Speaker 3: across the board.
Speaker 1: Yeah, when you mentioned that first vision, I had the
Speaker 1: S twenty one to fifty five issues from twenty eighteen
Speaker 1: on the saity thresholds. So, but you know, you mentioned
Speaker 1: the banking regulators, and this is a good good segue
Speaker 1: to talk about the Bozzle three endgame. And you know,
Speaker 1: for the listeners who don't know what I'm talking about,
Speaker 1: this is the last remaining piece of the Bazzle three
Speaker 1: accords that you know, the American regulators had to implement,
Speaker 1: and they put out a propose last year. This is
Speaker 1: the FED, the FDIC, and the Office of the Comptrol
Speaker 1: or the Currency, which would increase capital requirements probably around
Speaker 1: nineteen percent for the globally systemic banks like Bank America,
Speaker 1: City Group and JP Morgan, and the regional lenders could
Speaker 1: see around five to six percent.
Speaker 3: You know.
Speaker 1: But there's been intense industry pushback to the proposal, and
Speaker 1: the banking industry has gotten some of the moderate Democrats
Speaker 1: even to question this, and as a result, we've started
Speaker 1: to see statements from FED Vice Chairmichael Barr and FED
Speaker 1: Chairman Jerome Powell. Then insinuated that changes are coming. So
Speaker 1: what would you say to them if you were advising them,
Speaker 1: should the proposal drastically changed? Do you think that there
Speaker 1: should be a reproposal in the cards or do you
Speaker 1: think they got it right on the first time.
Speaker 3: Well, you know, we'll share with you we've said to
Speaker 3: them face to face, which is that we think this
Speaker 3: is a good, solid role. Again, it's not a perfect role.
Speaker 3: People should you know know I assume they know this,
Speaker 3: but you know, I believe this is true. But I
Speaker 3: can't think of a single rule that was finalized that
Speaker 3: didn't have changes from the rule that was proposed. And frankly,
Speaker 3: that's the way the process is supposed to work. The
Speaker 3: agencies proposed a rule and then they put it out
Speaker 3: for public comment, which typically means being overwhelmingly industry comment,
Speaker 3: and the agency is supposed to take the comments into
Speaker 3: account and then finalize a rule. And as I say,
Speaker 3: we participated in four hundred rules. I haven't systematically gone
Speaker 3: back and looked at this, but I can't think of
Speaker 3: a single rule that was finalized that wasn't different and
Speaker 3: to some degree from what was proposed. So the mere
Speaker 3: fact that there are going to be changes in the
Speaker 3: capital rule. That's just ordinary course of business, and nonetheless
Speaker 3: we think it's a very good, strong, and importantly necessary rule.
Speaker 3: You know, people don't understand what basil is, what the
Speaker 3: endgame is, but people understand capital crashes and bailouts. And
Speaker 3: as you know, in twenty twenty three, just literally twelve
Speaker 3: months ago, three of the four largest bank failures in
Speaker 3: the history of the United States happened twelve months ago.
Speaker 3: And they happened because those banks did not have enough capital.
Speaker 3: If those banks had enough capital, they would not have failed.
Speaker 3: If they didn't fail, they wouldn't have been bailed out.
Speaker 3: And one of the things people really need to understand
Speaker 3: is what is a bailout. What a bailout is is
Speaker 3: the government, after the fact, providing banks with capital that
Speaker 3: they should have had before they failed. You know, the
Speaker 3: direct cost of those failures are going to be between
Speaker 3: forty billion dollars. That's the amount of money the United
Speaker 3: States government had to put into those banks capital to
Speaker 3: prevent them from failing and prevent the depositors ending up
Speaker 3: with no money or at least depositors under the two
Speaker 3: hundred and fifty thousand dollars sealing for the guarantee from
Speaker 3: the FDIC. They failed because they didn't have capital. The
Speaker 3: government then injected capital to save the bailout those banks.
Speaker 3: So what this rule is, in the simplest form, is
Speaker 3: to make sure banks have enough capital so that if
Speaker 3: something happens, regardless of why it happens, it could because
Speaker 3: of deficient boards and executives. It could because it's taking
Speaker 3: reckless risks. It could because there's something else going on
Speaker 3: in the world that changes the dynamic, whether it's you know, war,
Speaker 3: an epidemic, or just you know, a downturn in the
Speaker 3: business cycle which causes loan defaults to go up and
Speaker 3: people to no longer pay on their obligations to banks.
Speaker 3: Capital is nothing more than a cushion that a bank
Speaker 3: has to save it from failing, and importantly, people need
Speaker 3: to understand capital of banks. Capital is the only thing
Speaker 3: standing between a failing bank and a taxpayer bailout. It's
Speaker 3: also important to remember that when banks fail, everybody pays
Speaker 3: the price. So the three banks that failed in twenty
Speaker 3: twenty three, the direct costs are between thirty and forty
Speaker 3: billion dollars. That was the capital the government had to
Speaker 3: put into those banks to fill the capital hole that
Speaker 3: the banks didn't have in the first place, right, So.
Speaker 4: The issue in capital is who's going to have it
Speaker 4: and when is it going to be Our view is
Speaker 4: banks should have enough capital so they don't fail, rather
Speaker 4: than having the government and taxpayers have to shovel capital
Speaker 4: in after they failed to prevent greater damage to society and.
Speaker 3: Last year, so you get thirty to forty billion dollars
Speaker 3: in direct costs for paying the capital. But Golden Sacks
Speaker 3: and JP Morgan Chase both estimated that the credit contraction
Speaker 3: due to those failures was going to be between point
Speaker 3: five and one percent of GDP. Well, one percent of
Speaker 3: GDP is two hundred and seventy billion dollars. In addition
Speaker 3: to that, you have the collateral consequences of contagion that
Speaker 3: rippled through both community and regional banks as well as
Speaker 3: the big banks on Wall Street and other systemically significant
Speaker 3: financial firms like money market funds and other places where
Speaker 3: money flooded into. So when you add all that up,
Speaker 3: the cost of the three bank failures last year, it's
Speaker 3: going to exceed three hundred billion dollars. That's real money.
Speaker 3: That's the American people who are paying that money now. Yes,
Speaker 3: the thirty to forty billion dollar bailouts get assessed on
Speaker 3: the banks. It's true that they have to replenish the
Speaker 3: FDIC Deposit Insurance Fund. That's how the system works. So
Speaker 3: the bank fails, the FDIC shovels capital into the bank,
Speaker 3: and then the FDIC recoups that capital from the financial industry,
Speaker 3: from the banking industry. But as you know, the banking
Speaker 3: industry did not cut its bonuses last year by thirty
Speaker 3: or forty billion dollars to make up for that capital payment.
Speaker 3: They're going to make those make back that capital and
Speaker 3: those assessments through services and fees over time, and so
Speaker 3: we're all paying for that from last year. So the
Speaker 3: capital rule, although it's very long, the basel three end
Speaker 3: game capital, it's long, it's got a lot of different visions,
Speaker 3: it's complicated. At bottom, the bottom line is making sure
Speaker 3: banks have enough capital so they don't fail. And importantly,
Speaker 3: one of the most important arguments that the industry makes
Speaker 3: is saying, well, wait a minute, if you make us
Speaker 3: have more capital, we're not going to be able to
Speaker 3: lend as much and it's going to hurt the economy. Well,
Speaker 3: our view is it's to tell every time the banking
Speaker 3: industry or the financial industry doesn't like something. They never
Speaker 3: say it's going to hurt our revenue or bonuses. They
Speaker 3: always say it's, oh, it's going to hurt the economy,
Speaker 3: it's going to hurt small business, it's going to hurt minorities.
Speaker 3: But those are typically smoke screens, and Better Markets has
Speaker 3: put out a substantial amount of materials that address each
Speaker 3: and every one of the banking industry's objections. Here. The
Speaker 3: lending to small business will go down, that's false. Lending
Speaker 3: to minorities and communities of color will go down. False.
Speaker 3: It's going to cause the economy to tank because they
Speaker 3: won't be able to lend us much. False. In fact,
Speaker 3: what they don't talk about is the data, and there's
Speaker 3: robust data that shows for every one percent increase in capital,
Speaker 3: there's actually a two percent increase in lending. Now that
Speaker 3: should actually makes sense because if you have more capital
Speaker 3: and therefore you're less likely to fail, your actual cost
Speaker 3: of capital should go down. I mean, it's economics one
Speaker 3: oh one, But there's also other collateral benefits to having
Speaker 3: more capital and funding yourself with equity rather than debt.
Speaker 3: The only real downside to funding yourself with more equity
Speaker 3: rather than debt, and that's what we're talking about here.
Speaker 3: The only real downside is the bonus pool goes down.
Speaker 3: And I'm sure you both know this because the bonus
Speaker 3: pool is dictated by roe return on equity, and return
Speaker 3: on equity goes up as leverage goes up. Return on
Speaker 3: equity goes down as equity goes up. And so the
Speaker 3: reason that we're seeing this ferocious, multi hundred million dollar
Speaker 3: fight against capital by the biggest banks in this country
Speaker 3: is because this is all about the bonus pool. The
Speaker 3: bonus pool is gonna get hit significantly whenever capital goes up,
Speaker 3: because leverage goes down and return on equity goes down.
Speaker 3: That's at the core of much of this fight, which
Speaker 3: is why we have walked through at better Markets. You
Speaker 3: can go to our website www. Beetamarkets dot org. Type
Speaker 3: in capital under the little question mark or Basel three
Speaker 3: endgame or you know, false claims of the financial indo
Speaker 3: or the banking industry on Basel three, and you'll come
Speaker 3: up with fact sheets that we put out that detail
Speaker 3: we go through, I don't know what it is. Ten
Speaker 3: of the fifteen top arguments the banking industry makes against
Speaker 3: the Basel three capital rules, and it lays out the data,
Speaker 3: It lays out the arguments with links you don't have
Speaker 3: to believe us with and you can see that the
Speaker 3: arguments against the pending rule frankly do not have a
Speaker 3: meritorious basis. On the other hand, they are going to
Speaker 3: be very, very beneficial to the American people, the American economy,
Speaker 3: and the American financial system, which will be much more
Speaker 3: stable when the banks have more capital.
Speaker 1: So I'm gonna I'm gonna ask two quick follow ups.
Speaker 1: One is, were you surprised that the stop Bozzo three
Speaker 1: endgame went to the NFL? And secondly, you know, I'm
Speaker 1: gonna I'm gonna because it's our podcast, I have a
Speaker 1: lot of power, and so I'm gonna make you the
Speaker 1: new FED vice chair Supervision apologizes if Michael bar listens,
Speaker 1: but Dennis is now the new FED vice chair. What
Speaker 1: are what would you want to do after the Bozo
Speaker 1: three end game incentive compensation the proposal that's been out there,
Speaker 1: maybe LCR changes, maybe the EESLR. Are there any things
Speaker 1: out there that you would like to see done?
Speaker 2: And just to clarify that your term as vice chair
Speaker 2: ends at the end of this episode.
Speaker 3: Oh darn, Nathan was almost my best friend. Man, guy,
Speaker 3: I gotta worry about.
Speaker 2: But your rules will live on past this episode. Rules.
Speaker 3: I was not surprised that there was a commercial, you know.
Speaker 2: Uh.
Speaker 3: The one thing that you know you can count on
Speaker 3: is that as any rule that in any way goes
Speaker 3: anywhere near executive compensation at the banking of financial firms,
Speaker 3: it is going to result in a furious, furious pushback.
Speaker 3: They will go to the mattresses. They will spare no
Speaker 3: expense when you go anywhere near the bonus pool. That's
Speaker 3: why we had such ferocious fights over the vocal rule,
Speaker 3: as you'll remember, and that's why, you know, we always
Speaker 3: knew that the fight over capital and Basel three was
Speaker 3: going to be ferocious no matter what it was, for
Speaker 3: that reason. You know, when you add it all up,
Speaker 3: my view is that they're going to spend two three
Speaker 3: hundred million dollars or more trying to defeat this rule
Speaker 3: wouldn't surprise me at all. On the other hand, that's
Speaker 3: a drop in the bucket compared to what they're going
Speaker 3: to make up on the other end in terms of
Speaker 3: the bonus pool as well as the payouts dividends, stock buybacks,
Speaker 3: that they're going to do with the capital that they have.
Speaker 3: People need to remember this is not an issue as
Speaker 3: to whether or not the banks have the capital. By
Speaker 3: the way, they already have more than enough capital to
Speaker 3: cover all these increases. If the final rule was exactly
Speaker 3: the same as the one proposed, they have already today
Speaker 3: enough capital to comfortably cover that. And keep in mind
Speaker 3: the four I think it's the four biggest, the six
Speaker 3: biggest banks in the United States. In the last ten years,
Speaker 3: one trillion dollars in profits, one trillion dollars in profits.
Speaker 3: There were about eight hundred and eighty million dollars of
Speaker 3: that were paid out in stock buybacks and dividends. So
Speaker 3: the issue isn't whether the banks have enough capital. They
Speaker 3: have more than enough capital. They have so much capital
Speaker 3: they don't know what to do with it. The issue
Speaker 3: is whether or not they're going to retain just a
Speaker 3: little bit of that, a little little bit of that
Speaker 3: to make the banking system safer, to lower the risk
Speaker 3: of failure and lower the risk of bailouts. Now, if
Speaker 3: I was Vice chair for Supervision for a day, and
Speaker 3: I'm glad I was appointed to the position because I'd
Speaker 3: never get confirmed by the United States Senate the background
Speaker 3: check Elliott, I'd fail that across the board. But I'll
Speaker 3: take Nathan's appointment for a moment, and I would. I
Speaker 3: would absolutely do. The executive comp rule that was in
Speaker 3: Dodd Frank was required to be finished by Dodd Frank
Speaker 3: I think eighteen months after the law was finalized. But
Speaker 3: the financial industry got their allies to put in Frank.
Speaker 3: And I worked in the Senate at the time. I
Speaker 3: was a senior leadership advisor at the time in the Senate,
Speaker 3: and I was involved in much of this. But the
Speaker 3: financial industry's lobbyist embedded a bunch of land mines to
Speaker 3: blow up once the rules. Once the law got to
Speaker 3: the regulatory agencies, and this rule was one of them.
Speaker 3: And I go back to the point I just made
Speaker 3: why because it goes to executive comm So the landmine
Speaker 3: they put in there is it required six financial regulatory
Speaker 3: agencies to agree, six of them. I mean, most of
Speaker 3: the time they can't even agree within their own agency, right,
Speaker 3: So getting six regulatory agency are requiring six regulatory agencies
Speaker 3: to agree is embedding a landmine that the financial industry
Speaker 3: knew would prevent paralyze the agencies and likely prevent the
Speaker 3: role from ever being finalized. And here we are fourteen
Speaker 3: years yeah, fourteen years later, and it's still not finalized.
Speaker 3: And it was one of the most important rules we
Speaker 3: everybody knows that one of the core drivers of the
Speaker 3: two thousand and eight financial crash, and frankly, one of
Speaker 3: the core drivers that happens over and over and over
Speaker 3: again is financiers and bankers engaging incredibly high risk activities
Speaker 3: because they they tend to get the upside of swinging
Speaker 3: for the fences and they don't get the downside of
Speaker 3: swinging for the fences. And so if you look at
Speaker 3: the bonuses before two thousand and eight, five, six, and
Speaker 3: seven broke records, the bonuses broke records, the compensation was
Speaker 3: astronomical in those years, and they did it because of
Speaker 3: high risk. And same thing happened in the twenty twenty
Speaker 3: three bank failures. Those bankers pocketed tons of money in
Speaker 3: the years before they failed last year because they took
Speaker 3: on unreasonable high risks and they pocketed that money, and
Speaker 3: they literally still have their pocket stuff with that money
Speaker 3: while their banks failed and the American people had to
Speaker 3: suffer the consequences and pay the bills and they walk off.
Speaker 3: Literally the day the FDIC walked into Silicon Valley Bank
Speaker 3: to take it over, literally that day, the CEO of
Speaker 3: Silicon Valley Bank was landing in Hawaii to go to
Speaker 3: his multimillion dollar ocean front home paid for with the
Speaker 3: high risk activities that he engaged in before the failure.
Speaker 3: And so the executive comp rule is targeted at ensuring
Speaker 3: that banks have in place policies and procedures such that
Speaker 3: executives in senior leadership or in positions to take high
Speaker 3: risks that there are policies and procedures to make sure
Speaker 3: that those high risks are supervised, managed and mitigated so
Speaker 3: that they do not take risks, outsized risks that threaten
Speaker 3: the stability of the bank. That's kind of a colloquial
Speaker 3: way to put it. It's a very long rule, it's
Speaker 3: a long provision, it's complicated, but it's a very important rule.
Speaker 3: So that's one of the first things I do. I'd
Speaker 3: also start working on the liquidity rules. The liquidity rules
Speaker 3: need to be strengthened. And one of the great scandals
Speaker 3: of twenty twenty three that nobody's talking about, and this
Speaker 3: gets back to another point we talked about earlier that
Speaker 3: we've criticized the regulators about. It is absolutely shocking that
Speaker 3: in twenty twenty three, thirteen years after the passage of
Speaker 3: Dodd Frank, that the regulators bailed out three relatively small
Speaker 3: banks instead of putting them through the resolution process. One
Speaker 3: of the most important financial reforms of dot Frank was
Speaker 3: for the regulators were mandated to make sure banks had
Speaker 3: resolution plans so that they could be resolved without being
Speaker 3: bailed out, so they could be resolved without collateral consequences,
Speaker 3: so they could be resolved without contagion. And the failure
Speaker 3: of the regulators in twenty twenty three to not have
Speaker 3: resolution plans in place so that these three relatively small
Speaker 3: banks could have been put through a resolution process instead
Speaker 3: of bailed out is absolutely inexplicable, and so the banking
Speaker 3: regulators have to prioritize planning and making sure that these
Speaker 3: banks have plans so that the only thing standing between
Speaker 3: a failing bank and a taxpayer bailout isn't just capital,
Speaker 3: but it should be a robust resolution plan that would
Speaker 3: enable the orderly wind down of the banks in a
Speaker 3: way that don't result in bailouts.
Speaker 2: And I want to pick up on you you're discussing
Speaker 2: about high risk activities and use that as a segue
Speaker 2: to crypto. And I wanted to get your thoughts on
Speaker 2: how the regulators are doing, you know, supervising crypto, in
Speaker 2: particular the SEC, but maybe also the CFTC. I think
Speaker 2: in the past you may have called crypto quote a
Speaker 2: fraud on the public unquote, but the SEC, I think
Speaker 2: it has been, you know, pretty aggressive in terms of
Speaker 2: enforcement actions. We have cases against coin base and finance
Speaker 2: and ripple and cracking currently. Think youre just swap got
Speaker 2: a wells noticed yesterday and you know, going back years
Speaker 2: the SEC was going after I CEOs and things like that.
Speaker 2: But I think you were also a bit critical of
Speaker 2: the SEC for approving the spot bitcoin ETF although you know,
Speaker 2: I think a lot of people thought the SEC's hands
Speaker 2: were sort of tied by the DC circuit on that.
Speaker 2: But I just wanted to get your thoughts on sort
Speaker 2: of how you think the SEC in particular is doing
Speaker 2: on crypto.
Speaker 3: Sure. Well, again, because we don't have the time to
Speaker 3: go over everything, people really should go to our website.
Speaker 3: We put out a substantial amount of materials on crypto,
Speaker 3: on the SEC's record, on the failures of the CFTC,
Speaker 3: and also why we take the position we take on crypto.
Speaker 3: You know, our view is that crypto is a lawless
Speaker 3: industry and it's really quite shocking if you think about it.
Speaker 3: And you two are you know, keen observers of financial
Speaker 3: markets and financial firms over many years, not that you're
Speaker 3: not very young guys, don't get me wrong, but you know,
Speaker 3: ask yourself, when is the last time there was an
Speaker 3: industry in the United States that took the position no
Speaker 3: laws applied to it. The banking laws don't apply, the
Speaker 3: securities laws, the commodity laws don't apply. Their position is
Speaker 3: where special we're unique, and we're entitled to special interest
Speaker 3: legislation that regulates us the way we want to be
Speaker 3: regulated in no other way. And until we get our
Speaker 3: special interest legislation that we're going to buy, but through
Speaker 3: campaign finance, we're going to just break the law. We're
Speaker 3: not going to follow any of the securities laws, any
Speaker 3: of the commodity laws, or any of the banking laws,
Speaker 3: and we're going to play catch us if you can
Speaker 3: with the regulators. No other industry and history that legitimate,
Speaker 3: non mafia industry that I can think of in the
Speaker 3: United States has ever done that. So and what does
Speaker 3: that mean. I mean, look at the court losses for
Speaker 3: the crypto industry are very, very substantial, and they know
Speaker 3: what's coming for them. What's coming for them is like
Speaker 3: every other financial product that has come on the scene
Speaker 3: since the nineteen thirties have fit comfortably within the definition
Speaker 3: of securities or commodities. And that's true for crypto as well.
Speaker 3: And when you read, particularly the recent decisions, two different
Speaker 3: decisions of the Southern District of New York, but there's
Speaker 3: also other decisions across the country. This is not complicated.
Speaker 3: This is black letter law. When you look at the
Speaker 3: law and you look at crypto, the securities laws apply
Speaker 3: somewhere in the neighborhood of ninety percent of the time
Speaker 3: or more. The commodity laws apply the rest of the time.
Speaker 3: There is one small gap in the laws relating to
Speaker 3: the spot regulation of the spot market that could be
Speaker 3: fixed within a minute if the Congress was not being
Speaker 3: flooded with crypto money. So what we have here is
Speaker 3: a completely lawless industry, and intentionally and knowingly so that
Speaker 3: is rife with conflicts of interest and a product that
Speaker 3: has after fourteen years, no legitimate social use. It's only
Speaker 3: use his speculation and gambling and criminal activities. It is
Speaker 3: the financial product of choice of global criminals for a reason.
Speaker 3: And the wrap sheet on the industry could not be
Speaker 3: more clear. And it's interesting because it's not just illegal conduct,
Speaker 3: but it's a predatory business model. You know, we were
Speaker 3: opponents of FTX and Sam Bankman Freed. Sam Bankment Freed
Speaker 3: offered better markets a million dollars or more if they
Speaker 3: would if we would support him at the CFTC for
Speaker 3: what he wanted to do there, he probably would have
Speaker 3: given us ten million bucks. He was desperate for our
Speaker 3: approval because we were so vocal and in the lead
Speaker 3: opposing him. He came to my office. He sat, you know,
Speaker 3: six feet away from me for ninety minutes, him and
Speaker 3: his team to convince me why his model was such
Speaker 3: a great thing. Part of the promise, you know, is
Speaker 3: not a lot of people follow what goes on with
Speaker 3: the details of financial activities of financial regulation, but his
Speaker 3: model with the CFTC, he wanted this new fancy model.
Speaker 3: He wanted to get them to approve for a clearinghouse
Speaker 3: and basically his model was based on eliminating investor, customer
Speaker 3: and financial stability protections. It was fundamentally a predatory model.
Speaker 3: You know, most financial activities, if you get rid of customer,
Speaker 3: investor and financial stability protections, your profit margins will go up.
Speaker 3: To me and I sat there and I said, you know,
Speaker 3: I could not figure out for the life of me,
Speaker 3: how so many people thought this guy was a genius.
Speaker 3: You know, I mean, if that's genius, then we've got
Speaker 3: a problem in this country. And yet a lot of
Speaker 3: people gave him a lot of money. But a lot
Speaker 3: of crypto is based on the same thing, which is
Speaker 3: a predatory business model because it has no social use.
Speaker 3: Which is why we were so disappointed Eliott and the
Speaker 3: SEC's decision on the ETFs. It did not have to
Speaker 3: make that decision based on the DC circuit. We put
Speaker 3: out materials on this. What the DC Circuit said was
Speaker 3: that the SEC insufficiently explained the basis for its decision.
Speaker 3: And under the law, regulatory agency makes a decision of finalize,
Speaker 3: as a rule, it has to provide an ample, substantial
Speaker 3: basis as to why it did what it did. And
Speaker 3: the court said pointed out several areas where the SEC's
Speaker 3: explanation was deficient. And so what we said they should
Speaker 3: have done and still believed to this day they should
Speaker 3: have done it. Have been very critical of them that
Speaker 3: they didn't do. This is they should have detailed why
Speaker 3: it was they were rejecting the ETF and instead they caved.
Speaker 3: And our view is they shouldn't have because the DC
Speaker 3: Circuit is not a kangaroo court. It's a circuit with
Speaker 3: Republican and democratically appointed judges who care a lot about
Speaker 3: the facts, the law, and the policy. And so I'm
Speaker 3: not saying they got the court got the decision wrong.
Speaker 3: What I'm saying is the SEC was told what it
Speaker 3: had to do. It did not have to cave. It
Speaker 3: caved for a lot of reasons that you know, different
Speaker 3: people can argue about they shouldn't have done it. And
Speaker 3: the problem with that is is they basically legitimized crypto,
Speaker 3: and we said that was going to be one of
Speaker 3: the bad things that happened. And now you've got all
Speaker 3: these people trying to put crypto into retirement accounts and
Speaker 3: other places in marketing and selling these, but this product
Speaker 3: has nothing similar to their other investments. You know, you
Speaker 3: look at their portfolio. They got bonds, they got stocks,
Speaker 3: who knows what else they have. But you know, how
Speaker 3: do you evaluate crypto. Do you look at the revenue,
Speaker 3: there's no revenue. Do you try and net present value?
Speaker 3: You can't do that. Do you look at market share?
Speaker 3: You can't. I mean like there's nothing there. I like
Speaker 3: to say Elliott that it's worse than the tulip craze.
Speaker 3: And the reason it's worse than the tulip craze is
Speaker 3: because when the tulip bubble burst, at least you had
Speaker 3: a toolip. With crypto, you don't even have a toolip.
Speaker 3: You've got nothing. It's smoke, it's a scam, it's predatory,
Speaker 3: and it's the financial product of choice of criminals worldwide.
Speaker 3: When you see ransomware in your town, or your hospital
Speaker 3: or your local business is being held up by ransomware,
Speaker 3: thank crypto. Without crypto, ransomware would die. Yes, some ransomware
Speaker 3: does use cash, but ransomware has taken off because of crypto.
Speaker 3: And the people who say cryptos not anonymous or bitcoin
Speaker 3: isn't anonymous, will tell that to the crypto croops that
Speaker 3: are currently financing Russia and evading sanctions and tax dodging
Speaker 3: and narco terrorism. We could go down the list. The
Speaker 3: rap sheet for Crypto should make everybody understand pretty clearly
Speaker 3: what Crypto's all about.
Speaker 2: Well, speaking of the tool of Craze, Nathan can tell
Speaker 2: you all about it because he just got back from
Speaker 2: taking his family to Amsterdam and other parts of the Netherlands.
Speaker 1: So I highly recommend.
Speaker 3: I'm glad that you said. I thought you were going
Speaker 3: to say he was around there for it and comment.
Speaker 2: On the Listen, we were running short on time, so
Speaker 2: we want to wrap up with the substance of questions
Speaker 2: and ask you a question that we ask of all
Speaker 2: our guests, sort of the fun grab that question, and
Speaker 2: that is, if you were stranded on a desert island,
Speaker 2: what are three pieces of music you would take with you?
Speaker 2: It can be an album, it could be a song.
Speaker 2: You know, you name it. So what are the three
Speaker 2: you would take? You know?
Speaker 3: It's a really tough question, right, So I'm tempted to
Speaker 3: say Frank Sinatra is my way, but I'm gonna say
Speaker 3: John Lennon's imagine Springsteen's Born to Run, Darkness on the
Speaker 3: Edge of Town, and No Surrender. If I was to
Speaker 3: talk about songs, but for albums, I think you have
Speaker 3: to say Springsteen's The Rising. And you know, I'm a
Speaker 3: former firefighter. One of the things many things people don't
Speaker 3: know about me is I was a crash rescue firefighter
Speaker 3: in the Air Force. And I think The Rising is
Speaker 3: really one of the best albums that's ever been put out.
Speaker 3: And if I was really on a stranded on an island,
Speaker 3: I'd probably sneak even though only had three choices, and
Speaker 3: I'm way beyond that, I would sneak in YouTube's Joshua
Speaker 3: Tree album excellent.
Speaker 2: Yeah, I can't go wrong with any of those. As
Speaker 2: a current New Jersey resident, obviously I have to support
Speaker 2: you Springsteen's choices. I do also love you.
Speaker 1: Too, so well with that, I think we're going to
Speaker 1: wrap up this episode of Oots and Verdicts. We're extremely
Speaker 1: grateful to you, Dennis for appearing on this episode. I
Speaker 1: think it was really informative discussion about just a really
Speaker 1: important time in American regulatory and legal history, and we
Speaker 1: thank you the listener as well for taking the time
Speaker 1: to join us. As a reminder, you can always read
Speaker 1: our research on the Bloomberg terminal at b I GO.
Speaker 1: Thank you again, and have a great day.