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Wall Street's Next Political Storm

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The Wall Street vs. Main Street fight has now helped determine the outcome of two presidential elections: 2008 and 2012. Will it define a third?

By 2016—a full decade’s distance from the housing bubble’s spring-2006 peak—the financial industry may expect a break from both rhetoric from candidates and rules from regulators. But Big Finance shouldn’t get too comfortable. True, establishment candidates looking to be White House contenders from both sides of the aisle rarely talk about too-big-to-fail financial institutions’ unfair advantage over the rest of the economy.

But upstart candidates from the right and left are clinging fast to the issue, and finding success in doing so — ensuring that during primary season, at least, it won’t fade into memory.

President Obama, of course, won two elections in part because voters didn’t trust Republicans on the economy and finance. But now he hopes to put Wall Street regulation behind him. The president’s 2014 State of the Union speech was the first in his six years’ worth of such speeches that he didn’t criticize the financial industry and Washington’s previous failures to govern it—not once. Obama even made a conciliatory gesture, saying “let’s all come together … from Wall Street to Main Street to give every woman the opportunity she deserves” in the workplace.

Contrast that language with that of 2009, when he pledged to end “bank bailouts with no strings attached” and to stop the practice of “hold[ing] nobody accountable for their reckless decisions.” (Obama also said that inaugural year that the government would continue to “provide the support [to major banks] to clean up their balance sheets,” jarringly wonky language that reminds us, half a decade later, of how the most obscure details of the financial crisis riveted “regular people” at home.)

Why has Obama dropped Wall Street—easing up, too, even on the broader “fat cat banker” language? One reason, of course, is that the president cleared his signature financial-reform law, colloquially known as Dodd-Frank, a full four years ago, two years into his first term. Though he adeptly used the public’s dissatisfaction with the financial industry to help get himself elected in 2008, financial reform was never his core domestic issue compared to Obamacare. It makes sense for the president to focus public attention on Obamacare milestones rather than Dodd-Frank milestones.

There’s another reason, though, why this narrative change makes sense—and one that points to an opening for future politicians. Obama cannot claim that financial regulation on his watch is a great success.

Beyond Dodd-Frank

The problem is not what it was a few years ago, when critics, mostly on the right, were complaining that the 849-page law was far too complex and that it was taking regulators years to write and implement its 399 separate rules, leading to uncertainty and paralysis in the financial industry. After years of missed deadlines, Obama can now fairly claim that regulators are closer to the end than to the beginning of Dodd-Frank, having now passed 52.3% of the necessary rules—including the signature Volcker Rule to separate proprietary trading from commercial banking—and have proposed another 23.6%, according to the June progress report by the Davis Polk law firm.

The problem for the president now—and a much more politically potent one—is that it’s becoming clear that the Dodd-Frank law didn’t do what it was supposed to do: end too big to fail and, more generally, end crony capitalism in the financial sector.

It’s no longer just politicians on the right saying that (although they still are). Sen. Elizabeth Warren (D-Mass.) got herself elected in 2012 in part by reminding voters that “Wall Street CEOs—the same ones who wrecked our economy and destroyed millions of jobs—still strut around Congress … demanding favors.” One of her first acts in office was to team up with Sen. John McCain (R-Ariz.) to introduce a “21st-century Glass-Steagall bill.”

The bill—clocking in at 30 pages, just 3.5% of Dodd-Frank’s weight—pointedly notes that “the financial crisis, and the regulatory response to the crisis, has led to more mergers between financial institutions, creating greater financial-sector consolidation and increasing the dominance of a few large, complex financial institutions that are generally considered to be ‘too big to fail’, and therefore are perceived by the markets as having an implicit guarantee from the federal government to bail them out.”

That may sound wonky—but what Warren is saying, more or less, is that when Obama stood before the nation in 2010 and said that Dodd-Frank ensured “there will be no more tax-funded bailouts, period,” he was either wrong or lying.

Think that interpretation goes too far? Consider what Warren says in her new book, A Fighting Chance: “Too Big To Fail allows”—note the present tense—“megabanks to operate like drunks on a wild weekend in Vegas.” And of Obama himself, she writes that “the president chose his [Treasury] team, and when there was only so much time and so much money to go around, the president’s team chose Wall Street.” She adds that the “secretary of the Treasury believed that government’s most important job was to provide a soft landing for the tender fannies of the banks. Oh Lord.” For good measure, she also tells us that Treasury Secretary Geithner is so clueless about risk management that he doesn’t even wear his seatbelt.


Republicans might sense an opening here. The senator who arguably knows the most of any national elected figure about what to do about a failing company—“I’d taught classes about business failure for nearly thirty years”—thinks that Dodd-Frank is largely a failure. She’s finding success in pointing that out, too. Her memoir sold 27,000 copies in its first two weeks, according to Nielsen—not bad for a wonky memoir by an obscure first-term senator.

And Hillary Clinton, who beats Warren 69 to 7 in early Democratic-primary polls, never says a word about whether Obama favored banks over struggling homeowners, preferring to focus on her, um, foreign-policy victories in her new memoir. Warren, should she choose to, could pick away at a real vulnerability for Clinton here in a primary—and Warren could weaken Clinton even if she were to ultimately lose to her.

GOP Dilemma

But the right has to tread carefully. If Dodd-Frank is a failure, it’s just another reminder that maybe Washington, under then-President George W. Bush, shouldn’t have bailed out the big financial firms in the first place nearly six years ago—or, at least, that the White House should have made investors take some of the losses they deserved. Of the fall 2008 AIG bailout, for example, Warren helpfully notes that “taxpayers gave AIG’s creditors a better deal than they had already agreed to. Goldman Sachs, for example, was one of AIG’s largest creditors, and they walked away with $12.9 billion. It must have seemed like Christmas in October—free money!”

Indeed, TARP still matters. Econ prof David Brat came out of nowhere to beat House Majority Leader Eric Cantor in a Virginia congressional primary in June partly by reminding voters that “Eric voted to bail out the big Wall Street banks in 2008,” and that “the same banks that received TARP bailout funds are also some of Cantor’s largest donors.” Brat’s win was a reminder to the establishment right: It may be a bad idea for mainstream presidential candidates to remain silent about Bush’s financial-industry failures.

The establishment right—of which Cantor was a member—should keep in mind, too: The public still blames Bush, not Obama, for continued economic woes. In April, 47% of potential voters told Wall Street Journal pollsters that “Obama inherited” current economic conditions; only 39% said he was responsible for them. To be sure, the percentage of people blaming Obama creeps steadily up over the years—but his economic-absolution figure is still remarkably high for someone three-fourths through his two terms in office.

What does all this mean for Wall Street? To risk stating the obvious, it’s highly unlikely that anyone is going to run—successfully, at least—on easing up on Big Finance. In fact, Wall Street should consider its public “friends” its enemies. A candidate who refuses to acknowledge Wall Street’s very real failures over the last decade or so—and refuses to acknowledge both parties’ role in those failures—is likely a losing candidate.

Big Finance can grasp at one hope, though—and it’s a pretty big one. The country is still addicted to private-sector debt. Consider mortgage debt, which doubled between 2000 and 2008, from $4.8 trillion to $10.7 trillion. It fell by every quarter after that—to $9.4 trillion in the second quarter of 2013. Don’t look now, though, but it’s leveling off, even growing slightly for one quarter last year. Five years’ worth of zero-percent interest rates have done their work in re-inflating house prices—and making everyone feel a tiny bit better. Higher interest rates that would be the real crackdown on Wall Street would pop the public’s perception of a recovery even before it really takes hold.

So people like Warren and Brat can say all they want—but unless they’re brave enough to say that bringing real market discipline to Wall Street would mean less credit for everyone and lower home prices, it’s all just talk. It’s not what Washington says—or even what it does—that matters most. It’s still how cheaply Washington lends.

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