Hillary Clinton has a wide-ranging plan to make Wall Street safer. It would make bankers defer some of their compensation so that it could be recovered later if their activities lead to losses that blow up the bank.
Increasing the statute of limitations on financial crimes to 10 years from six is legitimately hard-nosed, as are her proposals to hold bank executives accountable when subordinates break the law, and to beef up the budgets of agencies that police the markets. The dozens of recommendations, though, seem designed to avoid having to reinstate the Glass-Steagall Act, the Depression-era law that separated commercial from investment banking. To call for Glass-Steagall’s comeback would create a big stink: The law was eliminated during her husband’s administration, and it’s anathema to Wall Street banks. Instead, she would make it more costly for banks to take on excessive risks, give regulators more authority, and close loopholes in the 2010 Dodd-Frank financial reform law.
In this she risks achieving little and, in some cases, causing harm. This is especially true for her two biggest and most interesting ideas — a so-called risk fee on the largest banks and a tax on high-speed traders.
The risk fee has been proposed before, including by President Obama, and criticized as a bad idea. The fee is a surtax, essentially, levied according to a sliding scale of risk on institutions with more than $50 billion in assets.
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Her aim is to make these too-big-to-fail banks think twice about using leverage, peddling derivatives, packaging subprime mortgages into bonds, and the like. The problem is that this annual fee would come out of a bank’s capital (money raised from the sale of stock and retained profits). Regulators, however, should want banks to have as much capital as possible to absorb losses, in the way that a homeowner with 20 percent equity in a house wouldn’t be under water even if the home’s market value suddenly declined by 10 percent.
By one top U.S. bank regulator’s accounting (using global standards), most big banks today don’t even have that 10 percent buffer. The eight largest U.S. banks, in fact, have borrowed on average 94 cents for each dollar they’ve loaned out.
If Clinton really wanted to make the financial system safer, she would require banks to have more capital, making failure less likely in the first place. Instead, a bank could interpret payment of its risk fee as a license to behave in an even riskier manner.
Clinton’s second big idea, a tax on high-frequency trading, falls into the same good-intentions, bad-consequences category. A costly and wasteful arms race to achieve faster and faster trading speeds is taking place with little economic purpose.
Companies are trying to shave thousandths of a second off trading times, in part by putting their computer servers next to stock-market servers to reduce data-transmission times. High- speed traders use complex algorithms to place billions of buy and sell orders to sniff out demand and profit on split-second changes in price.
Meanwhile, traders cancel many more orders than they complete. Some traders have no intention of actually buying or selling the shares behind their orders, but are just probing the market. There are no real penalties for this strategy, although the Securities and Exchange Commission occasionally goes after trading strategies it finds especially abusive.
Not everyone agrees super-fast trading is predatory; some say it makes markets more efficient. Others argue that professional traders have always had advantages over the little guy in markets, and no amount of regulation will fix that.
No matter where you stand, though, the proliferation of orders has made stock exchanges vulnerable to accidents and outages, like the flash crash of 2010. High-speed trading has also left the impression that markets aren’t fair or safe for ordinary investors.
Clinton obviously agrees, yet her solution is too blunt an instrument. Her tax would apply only to those with “excessive levels” of canceled orders. She doesn’t define excessive, possibly because it’s an impossible line to draw.
Every legitimate trader withdraws orders once the market price has moved. Not to withdraw stale orders would be to deliberately lose money. Even if half of a company’s orders are canceled throughout the day, that’s not necessarily evidence of bad intentions. It could simply be that supply and demand signals are rapidly changing prices.
Many of Clinton’s fellow Democrats would prefer that she keep it simple and bring back Glass-Steagall. Her many supporters on Wall Street hate that idea, so her alternative proposals allow her to protect that part of her donor base while defending her husband’s legacy — all while signaling to voters that she’s no pushover. That might work politically — at the cost of getting anything done.
Paula Dwyer writes editorials on economics, finance and politics.
© 2015, Bloomberg View