Financial Reform Is Working, But Deregulation That Incentivizes One-Way Bets Is Sowing the Seeds of Another Catastrophic Financial Crash
Just less than ten years ago, the Lehman Brothers investment bank filed for bankruptcy and ignited the most severe financial crash since the Great Crash of 1929, almost 80 years prior. That calamity caused the worst economy since the Great Depression of the 1930s, costing the United States (U.S.) more than $20 trillion in lost GDP, a figure that does not include the political, social and human damages that continue as ongoing costs of this crisis. Just eight years ago, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was passed and has been substantially implemented only in the last couple of years. Indeed, many of the rules required by Dodd-Frank have not been finalized and many more have not been implemented or interpreted, much less enforced.
Nonetheless, the evidence overwhelmingly demonstrates that financial reform is working. The risk of a crash or economic catastrophe in the U.S. has been reduced to such a degree that finance is more stable, banks are highly profitable and significantly increasing their lending, and the economy is steadily growing. While more still needs to be done, the two primary goals of Dodd-Frank have been largely achieved thus far, despite relentless opposition from the financial industry and its allies. First, the most dangerous and unreasonable risks in the financial system have been significantly reduced and a financial crash is much less likely due to Dodd-Frank rules which:
- increase capital and liquidity,
- regulate derivatives,
- require living wills and stress tests,
- reduce counterparty exposure,
- protect financial consumers,
- police predatory conduct, and
- prohibit proprietary trading, among other reforms.
Second, to ensure that financial actors serve their social purpose, justify their social costs and earn their taxpayer backing, the rules have rebalanced and refocused the largest, most dangerous banks to traditional banking activities and away from trading, which is little more than socially useless gambling designed to enrich a few thousand financiers and executives. The aforementioned provisions of Dodd-Frank have benefitted the U.S. and global financial markets as proven by record bank revenues and profits as well as increased lending to the real economy.
Furthermore, these financial protection rules are focused primarily on the handful of uniquely dangerous financial institutions in the U.S. and the world which have carved out a special exemption from the fundamental rule of capitalism that failure leads to bankruptcy.
These institutions are so gigantic, interconnected, leveraged, complex and critical to the basic functioning of society that they have become “too-big-to-fail” for fear of collapsing the entire financial system and leading to economic devastation equivalent in scope to a second Great Depression. However, out of the thousands of banks in the U.S., only 43 have $50 billion or more in assets, less than 1% of all banks, which is the threshold for most of the enhanced financial protection rules. Thus, properly regulating this handful of uniquely dangerous too-big-to-fail institutions is manageable if the political will to do so exists.
Unsurprisingly with the tens of billions of dollars at stake for the too-big-to-fail firms, there continues to be an all-out attack on financial reform in the U.S. as exemplified by the first two financial regulation reports issued by President Trump’s Treasury Department and the passage by the House of Representatives of the CHOICE Act. The impetus for de-regulation has been motivated by the pretext of reducing the onerous burden that Dodd-Frank rules impose which are, critics say, reducing economic growth. While the facts demonstrate that none of that is true, deregulation is proceeding apace. This paper will first discuss a key example illustrating the dangerous deregulatory developments in the U.S., which are likely to result in a handful of enormous financial institutions externalizing their costs, shifting them to taxpayers, and greatly increasing the likelihood of a crash. The paper will then review the data demonstrating that the claimed basis for these deregulatory actions is baseless. This paper will conclude with a warning from two leading global financial statesmen about the dangers of deregulation and the need for leadership and courage to fight it. That is the challenge of our time.
II. Gutting the Financial Stability Oversight Council and the Dangerous Deregulation of AIG: Incentivizing a Bailout Culture and Cycle
One of the most important reforms of Dodd-Frank was the creation of the Financial Stability Oversight Council (FSOC), which is comprised of federal and state financial regulators, chaired by the Secretary of the Treasury, and tasked with the mission of identifying and responding to risks that threaten the financial stability of the United States. A primary mission of FSOC was to ensure that the shadow banking system was regulated. The key mechanism to effectuate the FSOC’s objective is through the designation of systemically significant nonbanks which are subjected to heightened regulation if appropriate and after considerable data-driven analysis has been performed. Even then, such a nonbank could only be designated pursuant to a two-thirds vote of FSOC’s ten voting members.
While innumerable nonbanking institutions received massive bailouts in 2008-2009, which by definition meant that they were systemically significant, the Obama administration only designated four systemically significant nonbanks for increased regulation before leaving office. Two were and should have been entirely noncontroversial. One was AIG, which not only failed spectacularly and engaged in outlandishly irresponsible conduct, but also required an unlimited bailout, which amounted to $182 billion. The other entity was GE, which, although with fewer headlines and less egregiousness, would have gone bankrupt without being bailed out as well. The other two were global insurance companies, Prudential and MetLife.
However, as soon as they arguably gained the required two-thirds voting representation, President Trump's appointees to the FSOC, and Janet Yellen, the U.S. Federal Reserve System Chair, voted to deregulate AIG, the global financial firm that was central to the cause and contagion of the catastrophic 2008 financial crash. The proclaimed "landmark move” of the Trump Administration was the de-designation of AIG as a systematically significant nonbank. Consequently, the financial regulatory decision of the Trump administration transforms deregulation from rhetoric to reality. For the following reasons, this is extremely unwise as it breeds the environment for another costly financial crash, thereby precipitating its occurrence.
First, the financial crisis did not occur in a vacuum. The indicators that led to its occurrence were bred in a pre-crisis period fostered by a two-tiered regulatory system that enabled massive risks to build up in the shadow banking system, unregulated and unseen until it was too late and taxpayer bailouts were required to prevent the collapse of the global financial system and a second Great Depression. Consequently, designating systemically significant nonbanks is the critical reform in ending the dangerous pre-crisis regulatory approach. Before the crash, banks were regulated by the Fed, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS), but financial firms engaging in high-risk, bank-like activities were lightly regulated, if they were regulated at all. Unsurprisingly, bank-like activities and their associated risks then migrated from the higher cost, regulated banking system to the lower cost, unregulated shadow banking system, which is where much of the crash was spawned. The impetus for making systemically significant banks and nonbanks subject to a similar regulatory regime was intended to end the misaligned incentives and opportunities for regulatory arbitrage as heightened regulation obliges these entities to internalize the costs of their high-risk behavior.
As explicated by the Chairman of the Federal Reserve during the crisis, Ben Bernanke, AIG maximized regulatory arbitrage opportunities at the expense of the stability of financial markets: “AIG exploited a huge gap in the regulatory system. There was no oversight of [AIG’s] Financial Products division. This was a hedge fund, basically, that was attached to a large and stable insurance company.” Since AIG did not reserve or post margin for the credit default swaps (CDS) it sold, it was also probably the most highly leveraged hedge fund in the world at the time as well as the most interconnected.
The behavior of AIG provided the foundation for bipartisan and industry-wide support in 2009-2010 in favor of creating an entity that would address the regulatory gap, thus preventing a future calamity. The FSOC was the answer to the regulatory arbitrage problem; therefore, it became the only governmental entity with the power and duty to analyze and designate for regulation systemically significant nonbanks. Nevertheless, the Trump administration appears committed to neutering FSOC by using it as a mechanism to deregulate the financial sector. The policy objective of undermining the FSOC will lead to the recreation of the two-tier regulatory system and the revival of a dangerous and fragile shadow banking system as regulatory arbitrage incentivizes risk to again move out of the regulated banking system.
Second, the criticisms of FSOC and its regulation of systemically significant nonbanks is far removed from reality. The FSOC has been cautious to a fault in wielding its designation authority, considering the many nonbanks that had to be bailed out in 2008 and 2009. Despite the large number of bail-outs conferred, only four nonbanks were designated as systematically significant by the FSOC during the Obama administration. As previously mentioned, two of the four (AIG and GE) were incontestable. The FSOC’s record demonstrates that it exercised its designation authority with great restraint and minimal action, which conclusively rebuts concerns of a designation-happy council. As for the Trump administration, in his announcement of FSOC deregulation of AIG, Treasury Secretary Steve Mnuchin, proclaimed "this action [de-designating AIG] demonstrates our commitment to act decisively to remove any designation if a company does not pose a threat to financial stability." The real question is whether the Trump administration will show equal zeal and speed in regulating systemic risks from nonbanks when they do exist or if they will even undertake the analysis to identify them in the first place.
Third, as detailed by the members of FSOC who dissented from the vote, there is a strong proposition to be made that AIG continues to be a systemically significant nonbank that does not qualify to be de-designated on the merits. The Center for American Progress issued an extensive report in which they arrived at the same conclusion.
Fourth, AIG is not just any systemically significant nonbank. Unsupervised in the years before the 2008 crash, AIG proved to be one of the most reckless financial firms in the world and a leading cause of the crash. By the end of 2007, AIG had written $527 billion of insurance instruments called "credit default swaps" (CDS) on collateralized debt obligations (CDOs) and other subprime mortgage related derivatives and structured products, among other toxic assets. Subsequently, there is a solid case to be made that the crisis and crash would have been less severe, shorter, and more manageable if AIG's actions had not enabled the fraudulent subprime bubble to be supersized. By one calculation, AIG developed a portfolio that totaled more than $2.7 trillion notional amount in credit derivatives, with $1 trillion in contracts with just twelve institutions as counterparties.
Every time AIG sold a CDS, it enabled other reckless market participants (i.e. the buyers of the CDS) to keep packaging, selling, and distributing worthless toxic assets because they were able to shift their risk of loss to AIG. This in turn created artificial demand for subprime mortgages, which kept the fee-based, originate-to-distribute predatory mortgage mills running long after they should have collapsed. The deregulation status quo rewarded AIG for accepting all this risk, inflating the historic subprime bubble, and compromising the financial health of so many individuals as AIG collected billions in fees, virtually all of which dropped into the bonus pool for AIG's executives because it failed to set aside reserves for this CDS insurance, insanely claiming that it was inconceivable that it could ever lose even "one dollar.”
In reality, the losses were not shifted to AIG, but were shifted to taxpayers and the American public. AIG and the other market participants enriched themselves, their shareholders, and executives at the expense of the American people, who were forced to cover their losses with the $182 billion bailout. Brazenly, AIG used some of that bailout money to pay bonuses to some of the very executives who engaged in the reckless activities that bankrupted the company in the first place. Indefensibly, there was no accountability for a single AIG executive (or any other executive or supervisor on Wall Street for that matter). The guilty pocketed their bonuses and the American taxpayers paid the bills. That’s the definition of subsidizing one-way bets: privatizing the gains and socializing the losses.
Since the crash and subsequent bail-out, AIG has reduced its systemic footprint. However, that alone should not lead to de-designating AIG since doing so would require ignoring AIG's uniquely critical role in the 2008 crash. It would also require ignoring AIG's egregious recidivist history, which was detailed by William D. Cohan in "The Fall of AIG: The Untold Story" as well as in two books: Roddy Boyd's Fatal Risk and Jesse Eisinger's new book The Chickenshit Club.
Fifth, the issue isn't de-designation or having a so-called "off ramp" once designated. There is no so-called "Hotel California" problem where you can check in, but you can't check out. Given GE's high risk financial activities before the crash and its 2008 bailout, it was appropriately designated as a systemically significant nonbank. Following the financial crisis, it dramatically and comprehensively de-risked, which led to it being de-designated by FSOC during the Obama administration pursuant to its procedures. That was appropriate. However, GE, unlike AIG, didn't have a history of taking enormous reckless risks, abysmal to nonexistent risk management and repeated management failures.
Where does all that lead? Should a firm designated as a systemically significant non-bank remain so forever? Of course not. How then to deal with AIG and other systemically significant non-banks, including those that de-risk? Former Goldman Sachs banker and current Bloomberg View Columnist, Matt Levine, wrote the most concise, sensible, and historically-informed answer to these questions, which merits quoting in full:
Part of the point of designating companies as “systemically important financial institutions,” and imposing higher capital and regulatory requirements on them, is to make them stop being systemically important. “Break up the banks,” people say, and one way to break up the banks is by making life difficult for the ones that stay un-broken-up.
And so a SIFI designation -- and also more generally its painful hangover from the financial crisis -- seems to have driven American International Group Inc. to divest businesses, shrink itself and improve its capitalization. “This company has dramatically changed its risk profile and controls since the financial crisis,” says its chief executive officer. That's good! That was the point! And AIG has shrunk and transformed so much that now the U.S. Financial Stability Oversight Council is considering removing AIG's SIFI designation.
That's also ... sort of good? SIFI regulation is generally considered a second-best outcome: You'd prefer not to have any systemically important financial institutions whose failure could crash the economy, but if that's not possible, you should at least keep a close eye on them. If keeping a close eye on them encourages them to stop being systemically important, you should reward them for their progress. Giving firms a realistic off-ramp from SIFI status encourages them to shrink and become less systemic. If doing that doesn't get you out of SIFI status, then every existing SIFI will have no incentive to shrink, and every incentive to get bigger.
On the other hand, you know, it's AIG. It was at the center of the global financial crisis, as an under-regulated non-bank that took on massive risks whose implications were not well understood by regulators or the rest of the financial system. It would not be totally unreasonable to say that its punishment for that should be to remain a SIFI for the rest of eternity.
Levine’s paper proposes the optimal balance, which is to regulate systemically significant nonbanks to protect the economy but deregulate them if, like GE, they appropriately de-risk. However, AIG should be treated as a special case. It is appropriate to impose heightened regulation on AIG, which demonstrated uniquely reckless disregard for the risks it was taking and the consequences of those risks to its counterparties, the financial markets and ultimately the country. In addition, AIG was egregiously reckless, requiring an unlimited bailout from taxpayers, which was partially used to pay bonuses to some of the very executives who assumed the excessive risks in the first place. It would be fair to say that it should not be subject to enhanced regulation for “the rest of eternity,” but certainly for more than a mere nine years after it played such a key role in blowing up the country's financial system and spreading contagion around the globe.
The FSOC's de-designation of AIG will once again leave it unsupervised and free to return to its high-risk gambling. This is not speculation: at the same time it was deregulated, the Financial Times reported that "a team of federal officials who have been stationed within [AIG] to monitor its activities will be heading for the exit," leaving AIG free to engage in the behavior that landed it a protagonist role in the financial crisis, namely making large acquisitions, which the CEO said it is going to do. As Bloomberg News put it, "AIG Is No Longer Too Big To Fail, So Now It Wants To Get Bigger," which the Financial Times pointed out "will be a reversal for AIG, which since the crisis has shed assets around the world . . . in a push to become smaller and simpler." That, of course, was the basis FSOC just used to justify de-designating AIG, which is immediately changing course.
The net result: AIG will now be less regulated than before the 2008 crash. AIG will be “supervised” by state insurance regulators, which have no capacity to regulate a gigantic global financial company like AIG. Before the crash, AIG was ostensibly also supervised by the OTS as a Savings and Loan Holding Company (SLHC), which are now supervised by the Fed because the disreputable OTS was eliminated in Dodd-Frank. However, in 2014, AIG deregistered as a SLHC; therefore, it is not subject to federal supervision. Matt Levine concisely captured how this action will incentivize a bailout culture that will lead to a bailout cycle:
[G]iven AIG's centrality to the last crisis -- and its plans to start growing again-- it does seem a little ominous. What if the entire cycle plays out entirely within AIG? Regulations were loosened [in the years before the 2008 crash], AIG grew big and reckless, it crashed the economy [in 2008], regulations were tightened , AIG got small and cautious , everyone forgave it, regulations were loosened , and now AIG can grow again. What comes next?
It seems pretty clear that irresponsible risk taking, big bonuses, failure and more bailouts are “what comes next.” The message conveyed to enormous financial firms and their executives is that recklessness and breaking the law are worthy investments. There is little doubt that AIG and other financial firms will repeat their grossly deficient and irresponsible behavior due to the perverse incentives created by the bailouts, lack of accountability resulting from the behavior, and irresistible gains generated for executives.
When analyzed in conjunction with the other deregulatory pursuits of the Trump administration, (i.e. from the Treasury, Securities and Exchange Comission, Commodity Futures Trading Commission, Federal Reserve and elsewhere), this action and attitude makes subsidizing one way bets the de facto policy of the administration, dangerously signaling that it is not consequential to engage in the activities that instigated the crash. As postulated by Levine, “the entire cycle [will not] play out entirely within AIG,” but will infect all of Wall Street and finance as it did before.
That is the unsettling and undeniable truth behind former Citigroup CEO Chuck Prince’s infamous quote: “As long as the music is playing, you’ve gotta get up and dance . . . .” Morgan Stanley’s CEO, John Mack, made the same point after the crash when he said: “[w]e cannot control ourselves. You [lawmakers and regulators] have to step in and control the Street. Regulators? We just love them.” Once any one of the designated or non-designated systemically significant financial firms starts to engage in high-risk, high return activities, the competitive pressures due to rising revenues, profits, bonuses, and stock prices will push them all into a competitive spiral without breaks, which can only be stopped – if at all – by unconflicted, courageous, “grown, intelligent people,” as Fed Vice Chair Fischer stated (as discussed below).
III. The Claimed Basis for Deregulation is Contradicted by Data and Is Based on the False Choice Between Financial Protection Rules and Economic Growth
Remarkably, the stated reasons for the deregulatory actions of the Trump administration are baseless. Financial reform, particularly Dodd-Frank was criticized by the financial industry and its allies who claimed that the legislation was so burdensome and onerous that banks would not be profitable, which would lead to lower lending and therefore less economic and job growth. Those unending “sky-will-fall” claims have been bellowed by the industry in response to virtually every proposed law, rule, and regulation since the Great Depression of the 1930s. Despite the tendency of these claims to be consistently disproved over the decades, the financial industry, its allies, and the Trump administration continue to echo the same false premises to attack financial regulation.
Contrary to these claims, it is simply not the case that financial protection rules, on the one hand, and bank profitability and lending as well as economic growth, on the other, are mutually exclusive. In fact, a strong banking sector and durable, sustainable economic growth require effective financial protection rules that ensure a balanced, competitive financial sector working in support of the real economy, jobs, savings, education, a secure retirement and a rising standard of living. In addition, financial crashes are the ultimate growth and job killer (as proved by the costs of the 2008 crash) and, as Wall Street titans Chuck Prince and John Mack admitted, without rules to stop the inevitable excesses of finance, another horrific crash is inevitable.
America’s financial system is today much better capitalized and much less leveraged, with lower risk, than it was before the 2008 financial crisis, while still lending to and supporting the productive economy and economic growth. This has been amply demonstrated. For example, the FDIC reported that the financial sector is seeing record profits, the rate of loan growth for the industry remains above the growth rate of GDP, and loan balances for community banks are up an astonishing 7.7 percent year-over-year.
The FDIC Chairman reviewed this data in recent testimony before the Senate Banking Committee and noted “[A]nnual increases in industry net income have averaged 7.8 percent per year since 2011. FDIC-insured institutions reported a record $171.3 billion in net income in 2016, marking a net increase of 44 percent over the past five years.” The American Banker also reviewed the evidence and concluded:
Republicans have repeatedly asserted that the 2010 financial reform law has increased the cost of consumer lending and cut off access to credit. . . . Yet the available data indicates otherwise. Consumer credit has roared back in the six years since Dodd-Frank, with a 46% jump in outstanding consumer credit to $3.8 trillion. . . . [T]he fact remains that mortgage, auto and credit card lending have all gone up since 2010. [Mortgage] lending standards are as loose as they’ve been since the downturn. . . . Auto lending has been on a tear since the financial crisis. . . . Credit card lending has returned to pre-crisis levels with total lending hitting an all-time high of $996 billion . . . .
Bloomberg reached a similar conclusion:
Lending declined initially after 2008, when the entire banking industry was almost wiped out by the collapse of the U.S. housing market. But it’s grown steadily since then, expanding by 6 percent a year since 2013, far faster than the economy. Banks now have a record $9.1 trillion of loans outstanding.
The Federal Reserve Board Chair testified before the Senate Banking Committee that commercial and industrial lending has surged in recent years, along with industry profits:
There’s much more capital in the banking system. U.S. banks are generally considered quite strong, relative to their [international] counterparts. They built up capital quickly, partly as a result of our insistence that they do so, following the financial crisis. . . . They’re gaining market share and they remain quite profitable.
Former Federal Reserve Board Chair Paul Volcker made similar observations in April 2017 in remarks to the Bretton Woods Committee:
Claims that Dodd-Frank and other regulatory approaches have somehow gravely damaged the effective functioning of American financial markets, the commercial banking system, and prospects for economic growth simply do not comport with the mass of the evidence before us. Here we are in 2017 with a near fully employed economy, close to stable prices, bank profits at a new record, and the return on banking assets again exceeding one percent. Loans at both large and small banks are at new highs, double the pre-crisis years. In fact, loan growth has again been exceeding growth in nominal GDP.
These statements and data, gathered years after Dodd-Frank was passed and substantially implemented, provide real-time, real-life evidence that financial protection rules have not damaged the banks or the economy. Rather, they have created the conditions for sustained economic growth, broader prosperity and reduced inequality, which, if the financial protection rules are allowed to continue working, should become durable and sustainable.
Additional evidence of this comes from comparison to European banks. According to the European Banking Authority, “[t]he EU banking sector continues to struggle with high levels of non-performing loans (NPLs), low profitability and efforts to restore confidence, notwithstanding the steady strengthening of the capital base.” What accounts for the difference between the U.S. and European banks? The U.S. took comprehensive action to stabilize the financial system, as explained by President Trump’s former National Economic Council Chairman, Gary Cohn, who spoke to Bloomberg TV in 2016 when he was serving as President of Goldman Sachs:
Almost all US banks took our medicine [recapitalizing, restructuring, and implementing financial reform rules] early. We went out and raised capital really early in the process and then we went out and raised capital a second time. . . . We really built our balance sheet up. We really de-leveraged ourselves. We really built enormous excess liquidity. . . . And we made ourselves as financially secure as we could. We’re subject to enormously robust stress tests here in the United States, and I give the Fed enormous credit for what they’ve done in stress testing the major banks here in the United States. [It’s t]o the point where no one should question the viability of the big U.S. banks. I think some of the European banks have been slow to getting themselves recapitalized and getting their financial balance sheet in the best place it can be.
Mr. Cohn’s emphasis on the importance of increased capital has been definitively established by recent robust data-driven academic work establishing that better capitalized banks have higher rates of lending and a lower cost of capital throughout the business cycle. In particular, Morris Goldstein’s new book, Banking’s Final Exam: Stress Testing and Bank-Capital Reform, undertakes a rigorous review of the data and analysis, demonstrating that 14% to 18% capital levels for the 8 U.S. G-SIBs (and a sliding scale for smaller banks) would be appropriate with negligible impact on lending. The understated summary of the analysis is worth considering in full:
At the heart of the banking industry’s opposition to much higher capital requirements is the assertion that higher bank capital requirements will depress bank lending and thereby reduce output and employment in the economy. This assertion is increasingly at odds with the empirical evidence – as well as with the appraisals of senior bank supervisors . . . . Better capitalized banks lend more, not less, than weakly capitalized ones. One recent impressive study, which looked at 105 large banks from advanced economies over the 1994-2012 period, finds that after holding other factors constant, a 1%-point increase in the equity to total assets ratio (i.e., the leverage ratio) is associated with a 0.6% increase in total lending growth. With this empirical finding, a key pillar of the case against much higher capital requirements is taken away.
Thus, the evidence proves that increasing levels of capital has little, if any, effect on increased lending costs and, therefore, lending and economic growth. It cannot be denied that U.S. banks and financial institutions are much stronger and more stable today as a direct result of financial protection rules, including but not limited to capital. Moreover, those financial firms are in a much better position to support the real economy and the evidence proves that they are doing so, with lending increasing at twice the rate of economic growth. Thus, while seeking to promote economic growth and jobs is a laudable goal and a social imperative, subpar performance is not related to lending, bank profitability, or financial protection rules.
IV. Deregulating the Global Too-Big-To-Fail Financial Firms Is “Extremely Dangerous and Extremely Short Sighted,” Requiring Grown, Intelligent, Unconflicted People to Step Up and Courageously Lead the Fight Against It
Some people are prone to exaggeration or overstatement. The former Vice Chair of the Federal Reserve Board, Stanley Fischer, is not one of those people. He is the opposite. He is an urbane master of understatement, speaking in soft, measured tones, sometimes barely audible. He was described by the Financial Times in a lengthy interview as “self-effacing,” “courtly, quietly spoken and unobtrusive.” He is, however, a giant voice in finance and financial regulation and he had an important warning about the deregulatory zeal pervading Washington, DC today:
It took almost 80 years after 1930 to have another financial crash that could have been of that magnitude. And now, after 10 years, everybody wants to go back to the status quo before the great financial crisis. I find that really extremely dangerous and extremely short sighted. . . . [T]he pressure I fear is coming to ease up on the large banks strikes me as very, very dangerous.
He criticized calls to ease up on stress testing, saying pressure to loosen standards on big banks was “very, very dangerous.“ He argued that the U.S. had yet to deal with the so-called shadow banking system, which operates outside mainstream lenders, calling this a “terrible mistake“:
I am worried that the US political system may be taking us in a direction that is very dangerous. . . . One can understand the political dynamics of this thing, but one cannot understand why grown, intelligent people reach the conclusion that [you should] get rid of all the things that you have put in place in the last 10 years.
He referred to this phenomenon as “mindboggling”; however, “mindless” is probably a better word. The industry’s self-serving and bonus-driven cries for deregulation are as understandable today as they were when Upton Sinclair memorably observed in 1934 “[i]t is difficult to get a man to understand something when his salary depends on his not understanding it.”
That also explains the industry’s purchased allies in elected office, its lobbyists, lawyers, PR spinners, academics, and so many others. But all the other “grown, intelligent people” Mr. Fischer references should know better and should stand up to those letting their salaried-interests trump what is best for the country, the financial system, and global stability. Another understated, dedicated, and relentless public servant, FDIC Vice Chairman Tom Hoenig, has recently issued a warning, calling for courage, “guts,” and leadership to stand up to the enthusiasms and politics of the moment. While specifically addressing “the role of bank supervision and capital in counterbalancing the moral hazard dilemma,” his call to action is broadly applicable. He begins by quoting “Paul Warburg, a German-born New York banker during the Great Depression and an early advocate for the Federal Reserve System, [who] observed this phenomenon as he commented on the public's attitude leading up to the Great Depression”:
In a country whose idol is prosperity, any attempt to tamper with conditions in which easy profits are made and people are happy, is strongly resented. It is a desperately unpopular undertaking to dare to sound a discordant note of warning in an atmosphere of cheer, even though one might be able to forecast with certainty that the ice, on which the mad dance was going, was bound to break. Even if one succeeded in driving the frolicking crowd ashore before the ice cracked, there would have been protests that the cover was strong enough and no disaster would have occurred if only the situation had been left alone.”
He wryly observes that “[s]uch attitudes can be as prevalent today as they were before the Great Depression. As they develop and as the crowd noise drowns out calls for prudence, supervisors and insurers must force the crowd from the proverbial ice.” The same is true for responsible elected officials, regulators, policymakers and academics. As Mr. Hoenig notes, if they fail, they cannot hope to “protect the economy and the public from the inevitable correction and its resulting economic suffering.” He correctly observes that “[i]t is exhausting work, and it is most difficult to accomplish in the boom period just before a crisis.” When the “boom period” is fueled by White House and administration cheerleading, as it is now, the difficulty is exponentially magnified.
There is a great deal of wisdom in Mr. Hoenig’s speech that is applicable far beyond the ground-level supervision of banks and role of bank supervisors (however important they are). He provides the following warning: “Information gathering and validation, experience, leadership, and true courage” are traits in increasingly short supply, but are desperately required by all those responsible for upholding and protecting the public interest, especially now when the “crowd noise [from Wall Street to Washington] drowns out calls for prudence.”
If anyone suggested that the U.S. should take down half the protections adopted in New Orleans after Hurricane Katrina in 2005 because ten years have passed and no other catastrophic hurricane has since occurred, everyone would correctly laugh at the idiocy of that notion. Yet, when the topic of discussion is protection from catastrophic financial disasters, the siren song from the Trump White House, the administration in general, and much of Washington is precisely the laughable notion explicated above: the absence of a catastrophic financial crisis evidence that we should roll-back the regulations adopted after the crisis.
Financial reform is working, but the Trump administration and others in Washington DC are sowing the seeds of the next crash through deregulation that incentivizes one-way bets, leaving taxpayers on the hook for the risk taking of the industry. This is extremely dangerous and short-sighted. As former Fed Vice Chair Fischer suggests, grown, intelligent people need to stand up, speak truth to power and protect financial reform, for the sake of the economic security, opportunity, and prosperity of the American people and the globe. As FDIC Vice Chair Hoenig points out, that is going to require leadership and real courage. That is the challenge of our time.
 An earlier version of this paper was delivered on October 23, 2017 at a conference entitled “Reawakening: From the Origins of Economic Ideas to the Challenges of Our Time” where the panel was on “Doubling Down on Failure: Subsidizing More One-Way Bets?” The Institute for New Economic Thinking (INET), Edinburgh, Scotland.
 Better Markets is a Washington, DC based non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street, and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business, and pro-growth policies that help build a stronger, safer financial system, one that protects and promotes Americans’ jobs, savings, retirements, and more. See www.bettermarkets.com.
 See The Cost of the Crisis $20 Trillion and Counting, Better Markets (July 20, 2015), https://bettermarkets.com/sites/default/files/Better%20Markets%20-%20Cost%20of%20the%20Crisis.pdf.
 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
 See infra text and data accompanying notes 49-65.
 This is not an academic rule, but foundational to capitalism, including in particular to market discipline and moral hazard. As the Vice Chairman of the Federal Deposit Insurance Corporation, Tom Hoenig, put in when discussing deposit insurance, “the threat of failure serves to ensure that banks remain more sensitive to risk, and it inhibits the industry from trending toward excessive risk.” Tom Hoenig, Deposit Insurance: Addressing the Moral Hazard Effect, (October 11, 2017), https://www.fdic.gov/news/news/speeches/spoct1117.html.
 “Biggest US Banks by Asset Size (2018),” Money Summit, March 20, 2018, https://www.mx.com/moneysummit/biggest-banks-by-asset-size-united-states; see also “Banking’s Line in the Sand,” Wall Street Journal, May 26, 2017, and FDIC Statistics at a Glance, December 31, 2017, https://www.fdic.gov/bank/statistical/stats/2017dec/industry.pdf.
 Id. and see Updated Fact Sheet: Everything You Need to Know About the $50 Billion Threshold, Better Markets, https://bettermarkets.com/sites/default/files/50b%20Fact%20Sheet%20Updated%20Long%20Version%2011.28.16_0.pdf (last updated November 28, 2016).
 “A Financial System That Creates Economic Opportunities: Banks and Credit Unions,” U.S. Dep’t of the Treasury, June 2017, https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf; A Financial System That Creates Economic Opportunities: Capital Markets, U.S. Dep’t of the Treasury, October 2017, https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf.
 H.R. 10, 115th Cong. (1st Sess. 2017).
 For example, on October 12, 2017, the House Financial Services Committee passed 22 bills to “reduce the regulatory burden.” See Press Release, “Committee Advances 22 Bills Forward for House Consideration” The Financial Services Committee, Oct. 12, 2017, https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=402432.
 It should also be noted that the next financial crash will almost certainly be worse than the last one because the fiscal, monetary, political and social capacity to respond are all greatly reduced. For example, monetary policy in the US is fully extended with near zero interest rates and a $4+ trillion balance sheet and fiscal policy is constrained by deficits, debt and selective austerity hysteria. See John Detrixhe, The Fed has a $4 trillion problem when the next recession hits, Quartz Media (Jun. 16, 2017), https://qz.com/1006806/the-us-federal-reserve-has-a-4-trillion-problem-when-the-next-recession-hits/.
 See Better Markets’ Fact Sheet , “The Financial Stability Oversight Council: Saving Taxpayers from the Next AIG and the Next Crisis” (Nov. 2015) https://bettermarkets.com/sites/default/files/Fact%20Sheet%20-%20The%20Financial%20Stability%20Oversight%20Council%20--%2011-2-2015.pdf; see also Testimony of Dennis Kelleher before the United States Senate Committee on Banking, Housing, and Urban Affairs “FSOC Accountability: Nonbank Designations” (Mar. 25, 2015), https://bettermarkets.com/sites/default/files/Dennis%20Kelleher%20Testimony%203-25-15_0.pdf.
 12 U.S.C. § 5321 (2017).
 The FSOC’s voting members are: the Treasury Secretary; the Chair of the Federal Reserve Board of Governors (Fed); the Comptroller of the Currency; the Director of the Consumer Financial Protection Bureau; the Chair of the Securities and Exchange Commission (SEC); the Chair of the Federal Deposit Insurance Corporation (FDIC); the Chair of the Commodity Futures Trading Commission (CFTC); the Director of the Federal Housing Finance Agency; the Chair of the National Credit Union Administration Board; and an insurance expert appointed by the President and confirmed by the Senate. FSOC’s non-voting members include the Director of the Office of Financial Research; the Director of the Federal Insurance Office; a state insurance commissioner selected by the various state insurance commissioners; a state banking supervisor selected by the various state banking supervisors; and a state securities commissioner selected by the various state securities commissioners.
 See SIGTARP Q. Rep. to Congress (July 2009), available at: https://www.sigtarp.gov/Quarterly%20Reports/July2009_Quarterly_Report_to_Congress.pdf.
 See generally Financial Stability Oversight Council, U.S. Department Of The Treasury, https://www.treasury.gov/initiatives/fsoc/designations/Pages/default.aspx (last updated Oct. 2, 2017).
 While the AIG bailout ultimately amounted to $182.5 billion, the amount of money that would be necessary to stop AIG’s collapse and the contagion it would have unleashed when it was initially bailed out was unknown. The federal government, with the Fed in the lead, committed to any amount necessary to prevent that collapse and contagion, thus the bailout was unlimited.
 The discussion here focuses on AIG, but both Prudential and MetLife are expected to be de-designated as well based on the statements and actions of officials in the Trump Administration. If that happens, the result will be that not a single nonbank financial firm will be determined to be systemically significant or regulated as such.
 See Zachary Warmbrodt, AIG Escapes Tougher Regulation 9 Years After Bailout, Politico Pro, September 29, 2017 (explaining that the statute requires a two-thirds vote of the 10 voting members of FSOC to de-designate, which in this case would be impossible because there were three votes against de-designation and SEC Chair was recused from voting due to his or his law firm’s prior representation of AIG. However, FSOC received a legal opinion that his recusal did not have to count toward the vote tally, allowing de-designation based on a 6-3 vote).
 Alistair Gray et al., AIG freed from ‘too big to fail’ regulation, Financial Times (Sept. 30, 2017, 2:29 AM), https://www.ft.com/content/263488f0-a48f-11e7-b797-b61809486fe2?sharetype=share.
 Alistair Gray, AIG sheds $150m in costs along with Sifi label, Financial Times (October 1, 2017, 4:39 PM), https://www.ft.com/content/31b36b9a-a662-11e7-93c5-648314d2c72c.
 Financial Stability Oversight Council, Notice and Explanation of the Basis for the Financial Stability Oversight Council’s Rescission of Its Determination Regarding American International Group, Inc. (AIG) (2017), https://www.treasury.gov/initiatives/fsoc/designations/Documents/American_International_Group,_Inc._(Rescission).pdf.
 See Kelleher, FSOC Accountability: Nonbank Designations, supra note 12.
 Stout, David and Knowlton, Brian, “Fed Chief Says Insurance Giant Acted Irresponsibly,” The New York Times, March 3, 2009, http://www.nytimes.com/2009/03/04/business/economy/04webecon.html.
 See Kelleher, FSOC Accountability: Nonbank Designations, supra note 12.
 SIGTARP Quarterly Report to Congress, July 21, 2009, https://www.sigtarp.gov/Quarterly%20Reports/July2009_Quarterly_Report_to_Congress.pdf.
 See note supra 20.
 U.S. Dep't of Treas., Views of Financial Stability Oversight Council Members Regarding Rescission of Determination Regarding American International Group, Inc. (AIG) (Oct. 2, 2017), https://www.treasury.gov/initiatives/fsoc/news/Documents/Member_Views.pdf.
 Deregulating AIG Was a Mistake (Oct. 11, 2017, 9:01 AM), Ctr. for Am. Progress, https://www.americanprogress.org/issues/economy/reports/2017/10/11/440570/deregulating-aig-mistake/.
 Johan A. Lybeck, A Global History of the Financial Crash of 2007-10 (2011).
 Gretchen Morgenson, Behind Insurer’s Crisis, Blind Eye to a Web of Risks, N.Y. Times (Sept. 27, 2008), http://www.nytimes.com/2008/09/28/business/28melt.html (quoting Joseph J. Cassano) (“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”).
 William D. Cohan, The Fall of AIG: The Untold Story, Institutional Investor (April 7, 2010) https://www.institutionalinvestor.com/article/b150qdkrd30ggk/the-fall-of-aig-the-untold-story?ArticleId=2460649&single=true#.WdGfCVtSzmE. His book, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, about Bear Stearns and the subprime mortgage market is also well worth reading: https://www.amazon.com/House-Cards-Hubris-Wretched-Excess/dp/0767930894.
 Roddy Boyd, Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide (2011).
 Jesse Eisinger, The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives (2017).
 See Fin. Stability Oversight Council, Basis for the Financial Stability Oversight Council’s Final Determination Regarding General Electric Capital Corporation, Inc. (2013), https://www.treasury.gov/initiatives/fsoc/designations/Documents/Basis%20of%20Final%20Determination%20Regarding%20General%20Electric%20Capital%20Corporation,%20Inc.pdf.
 See Fin. Stability Oversight Council, Basis for the Financial Stability Oversight Council’s Rescission of Its Determination Regarding GE Capital Global Holdings, LLC (2016), https://www.treasury.gov/initiatives/fsoc/designations/Documents/GE%20Capital%20Public%20Rescission%20Basis.pdf.
 Cf. Amrita Mainthia, U.S. Regulators: GE Capital No Longer Systematically Important To The Financial System, GE Reports (June 29, 2016), https://www.ge.com/reports/u-s-regulators-ge-capital-no-longer-systematically-important-to-the-financial-system/.
 See Matt Levine, SEC Hacking and Secret Accounts, Bloomberg (Sept. 22, 2017), https://www.bloomberg.com/view/articles/2017-09-22/sec-hacking-and-secret-accounts.
 AIG’s collapse had systemic global implications because 13 of its top 20 counterparties were non-U.S. financial institutions. See AIG, Inc., AIG Discloses Counterparties to CDS, GIA and Securities Lending Transactions 6 (2009), https://www.nytimes.com/interactive/projects/documents/aig-bailout-disclosed-counterparties.
 See Gray, Jopson, & McLannahan, supra note 20; see Gray, supra note 21.
 Sonali Basak and Katherine Chiglinsky, AIG Is No Longer Too Big to Fail, so Now It Wants to Get Bigger, Bloomberg Markets, Sept. 29, 2017, https://www.bloomberg.com/news/articles/2017-09-29/as-aig-sheds-too-big-to-fail-it-sets-sights-on-getting-bigger.
 See Gray, Jopson, & McLannahan, supra note 20; see Gray, supra note 21.
 See Levine, supra note 38.
 See Michiyo Nakamoto and David Wighton, Citigroup chief stays bullish on buy-outs, Financial Times (July 9, 2007), https://www.ft.com/content/80e2987a-2e50-11dc-821c-0000779fd2ac.
 E.g., Regulators? We Just Love ‘em, says John Mack, The Evening Standard (Nov. 19, 2009), https://www.standard.co.uk/business/regulators-we-just-love-em-says-john-mack-6744822.html (quoting John Mack) (“We cannot control ourselves. You have to step in and control the Street. Regulators? We just love them.”); see Dealbook, Morgan Stanley’s Mack: ‘We Cannot Control Ourselves,’ New York Times (Nov. 19, 2009), https://dealbook.nytimes.com/2009/11/19/morgan-stanleys-mack-we-cannot-control-ourselves (same).
 See Wall Street is not a job creator. Wall Street is a job killer… of historic proportions, Better Markets (July 10, 2012), https://bettermarkets.com/blog/wall-street-not-job-creator-wall-street-job-killer%E2%80%A6-historic-proportions.
 See The Cost of the Crisis $20 Trillion and Counting, Better Markets (July 20, 2015), https://bettermarkets.com/sites/default/files/Better%20Markets%20-%20Cost%20of%20the%20Crisis.pdf.
 That is not to suggest that the capitalization of systemically significant financial institutions is adequate, it is not, as FDIC Vice Chairman Tom Hoenig has repeatedly detailed. See Letter from Tom Hoenig, Vice Chairman to Michael Crapo, Chairman and Sherrod Brown, Ranking Member of the Senate Comm. on Banking, Hous. & Urban Affairs (July 31, 2017) https://www.fdic.gov/about/learn/board/hoenig/hoenigletter07-31-2017.pdf; Thomas M. Hoenig, Vice Chairman of the U.S. Fed. Deposit Ins. Corp. & President of the Int’l Ass’n of Deposit Insurers, Remarks at the 16th Annual IADI Gen. Meeting and Conference: Deposit Ins.: Addressing the Moral Hazard Effect (Oct. 11, 2017) (discussing “owner equity capital”), https://www.fdic.gov/news/news/speeches/spoct1117.html.
 Fed. Deposit Ins. Corp., Quarterly Banking Profile: First Quarter 3,17 (2017), available at https://www.fdic.gov/bank/analytical/qbp/2017mar/qbp.pdf.
 See Statement of Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation, on Fostering Economic Growth: Regulator Perspective June 22, 2017, https://www.fdic.gov/news/news/speeches/spjun2217.pdf.
 Kate Berry, Four Myths in the Battle over Dodd-Frank, American Banker, Mar. 10, 2017 (emphasis added) https://www.americanbanker.com/news/four-myths-in-the-battle-over-dodd-frank.
 Zeke Faux, Yalman Onaran & Jennifer Surane, Trump Cites Friends to Say Banks Aren’t Making Loans. They Are., Bloomberg, Feb. 4, 2017 (emphasis added), https://www.bloomberg.com/news/articles/2017-02-04/trump-cites-friends-to-say-banks-aren-t-making-loans-they-are.
 Jeff Cox, Yellen: Trump is completely wrong that banks aren’t lending, CNBC, Feb. 14, 2017, http://www.cnbc.com/2017/02/14/janet-yellen-banks-are-lending-and-quite-profitable.html.
 Paul A. Volcker, Remarks at the 2017 Annual Meeting of the Bretton Woods Committee 2 (Apr. 19, 2017), https://www.volckeralliance.org/sites/default/files/attachments/Paul%20Volcker_Bretton%20Woods%20Speech_19Apr2017.pdf
 Risk Assessment of the European Banking System, European Banking Authority, at 8, (Dec. 2016), https://www.eba.europa.eu/documents/10180/1315397/EBA+Risk+Assessment+Report_December+2016.pdf.
 Dakin Campbell, U.S. Banks Safer Than Europeans Due To Early Medicine, Cohn says, Bloomberg, Feb. 9, 2016, https://www.bloomberg.com/news/articles/2016-02-09/u-s-banks-safer-than-europeans-due-to-early-medicine-cohn-says.
 Morris Goldstein, Banking’s Final Exam: Stress Testing and Bank-Capital Reform, Peterson Institute for International Economics, (2017). https://cup.columbia.edu/book/bankings-final-exam/9780881327052.
 Id., citing Leonardo Gambacorta & Hyun Song Shin, BIS Working Papers No 558 Why Bank Capital Matters for Monetary Policy, Bank for Int’l Settlements Monetary and Econ. Dep’t, (Apr. 2016) at http://www.bis.org/publ/work558.pdf. See generally, Anat Admati & Martin Hellwig, The Parade of Bankers’ New Clothes Continues: 31 Flawed Claims Debunked (Dec. 2015), at http://bankersnewclothes.com/wp-content/uploads/2016/01/Parade-Continues-2015.pdf; Anat Admati & Martin Hellwig, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About it (2013); and Thomas Hoenig, Statement of FDIC Vice Chairman Hoenig On The Global Capital Index Semi-Annual Update (Apr. 13, 2017), available at https://www.fdic.gov/news/news/speeches/spapr1317.html.
 See, e.g., Letter from Thomas Hoenig, Vice-Chairman of Fed. Deposit Ins. Corp to Chairman Crapo and Ranking Member Brown of the Senate Committee on Banking, Housing and Urban Affairs (July 31, 2017), available at https://www.fdic.gov/about/learn/board/hoenig/hoenigletter07-31-2017.pdf (stating that if “the 10 largest U.S. Bank Holding Companies were to retain a greater share of their earnings earmarked for dividends and share buybacks in 2017 they would be able to increase loans by more than $1 trillion, which is greater than 5 percent of annual U.S. GDP.”).
 Sam Fleming, Stanley Fischer, Fed vice-chair, on the risky business of bank reform, Financial Times, Aug. 16, 2017, https://www.ft.com/content/e7a9869c-819f-11e7-94e2-c5b903247afd.
 Upton Sinclair, I, Candidate for Governor: And How I Got Licked 109 (Univ. of Cal. Press 1994) (1934).
 Tom Hoenig, Vice Chairman, Fed. Deposit Ins. Corp., Deposit Insurance: Addressing the Moral Hazard Effect, Remarks at the Annual Meeting and Conference of the International Association of Deposit Insurers (Oct. 11, 2017).
 Id. (quoting 1 Paul M. Warburg, The Federal Reserve System: Its Origin and Growth 513 (1930)).