Washington, DC – America’s presidential campaign is already well underway. The election is not until November 2016, and very few candidates have formally thrown their hats into the ring, but the competition to promote and develop ideas – both behind closed doors and publicly – is in fully swing.
Earlier this month, Citigroup took advantage of this formative political moment by seizing an opportunity to score a tactical victory – but one that amounts to a strategic blunder. Using legislative language apparently drafted by Citi’s own lobbyists, the firm successfully pressed for the repeal of some of the 2010 Dodd-Frank financial reforms. The provision was then passed after it was attached to a last-minute spending bill – a tactic that ensured very little debate in the House of Representatives and none at all in the Senate.
At a stroke, Citi executives demonstrated both their continued political clout in Washington and their continued desire to take on excessive amounts of financial risk (which is what this particular legal change permits). Lobbying to be allowed to load up on risk is exactly what Citi did during the 1990s and 2000s under Presidents Bill Clinton and George W. Bush – with catastrophic consequences for the broader economy in 2007-09.
As a result, breaking up Citigroup is under serious consideration as a potential campaign theme. For example, in a powerful speech – watched online more than a half-million times – Senator Elizabeth Warren responded uncompromisingly to the megabanks’ latest display of muscle: “Let’s pass something – anything – that would help break up these giant banks.”
Defenders of the megabanks – Citi, JP Morgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley – dismiss Warren as an avatar of left-wing populism. But this is a serious misconception; in fact, Warren is attracting a great deal of support from the center and the right.
Senator David Vitter of Louisiana is the most prominent Republican member of Congress in favor of limiting the size and power of the biggest banks, but there are others who lean in a similar direction. Similarly, the vice chair of the Federal Deposit Insurance Corporation, Thomas Hoenig, a political independent, consistently warns about the dangers associated with megabanks. And former FDIC Chair Sheila Bair, a Republican from Kansas, argues strongly for additional measures to rein in the biggest banks.
From the perspective of anyone seeking the nomination of either of America’s political parties, here is an issue that cuts across partisan lines. “Break up Citigroup” is a concrete and powerful idea that would move the financial system in the right direction. It is not a panacea, but the coalition that can break up Citi can also put in place other measures to make the financial system safer – including more effective consumer protection, greater transparency in markets, and higher capital requirements for major banks.
From the left, the emphasis has been on the megabanks’ abuse of power and the great rip-off of the middle class. From the right, the stress is on the hazards of crony capitalism, owing to the massive implicit government subsidies that these banks receive. But both left and right agree on the fundamental asymmetry that the recent “Citigroup Amendment” implies: Bankers get rich whether they win or lose, because the US taxpayer foots the bill when their risky bets fail.
Potential Republican presidential candidates have hesitated to take up this issue in public – perhaps feeling that it will inhibit their ability to raise money from Wall Street. Among the Democrats, however, the opportunity seems to be much more compelling; indeed, avoiding a confrontation with Wall Street might actually create problems for a candidate (as Hillary Clinton may well find out).
The Progressive Change Institute is currently running “The Big Ideas Project,” whereby people can vote on what they regard as the most important policy proposals. Three of the top ten ideas under “Economy & Jobs” are about imposing greater constraints on the big banks – and there is a sharp upward trend in support for Break Up Citigroup (full disclosure: I suggested this item for the website).
This idea would play well in the Democratic primary elections (which start in early 2016). And, because it forms the basis for responsible policies, it would attract support from centrists. And voters on the right like proposals that offer a credible way to end the favoritism – if not outright corruption – that has come to define the relationship between the top levels of government and Wall Street.
“Break up Citigroup, end dangerous government subsidies, and bring back the market.” The US presidential candidate who says this in 2016 – and says it most convincingly – has a good chance of winning it all.
Simon Johnson is a professor at MIT’s Sloan School of Management and the co-author of White House Burning: The Founding Fathers, Our National Debt, And Why It Matters To You.
Copyright: Project Syndicate.