Can Hillary Outflank Bernie on Wall Street Reform?

If there’s one issue in the Democratic presidential primary on which Bernie Sanders’s advantage over Hillary Clinton should be clear-cut, it is Wall Street reform.

The Vermont senator has made his name on assailing the monied interests, calling for breaking up big banks and blaming corporate corruption and greed for the nation’s widening gap between the rich and the poor. And Clinton is vulnerable on the issue. She and her husband have been famously cozy with Wall Street barons, first during Bill’s business-friendly administration and then during Hillary’s eight years representing New York in the Senate. President Clinton signed what many progressives consider the worst piece of financial deregulation in the last two decades: the repeal of provisions of the 1933 Glass-Steagall Act separating the commercial and investment banking businesses.

Sanders has belittled Clinton’s claims that she told Wall Street bankers to “cut it out” when she was in the Senate. Yet as the two candidates unveil their policy plans for regulatory reform, it is Clinton who is trying to outflank Sanders by arguing that her proposal is far tougher on the banks whose risky bets actually caused the financial crisis in 2008.

The dispute centers on the regulation of so-called “shadow banks”—large institutions like AIG, Lehman Brothers, and Bear Stearns who were not subject to the same rules as big commercial banks that take deposits. The collapse of all three firms precipitated the free-fall that led to a $700 billion bank bailout passed by Congress. In a lengthy financial-reform plan Clinton unveiled in October, she called for strengthening regulations and reporting requirements on these companies to lessen the risk of another “too-big-to-fail”-type economic spiral. And as Sanders prepared to detail his own proposals on Clinton’s home turf Tuesday, her campaign launched an unusual pre-emptive attack by releasing an aggressive statement from her chief financial officer, Gary Gensler, a former top regulator at the Commodity Futures Trading Commission.

Unfortunately, Senator Sanders has so far taken a hands-off approach to some of the riskiest institutions and activities in our economy, which were among the biggest culprits during the 2008 crisis. In his speech tomorrow, Senator Sanders should go beyond his existing plans for reforming Wall Street and endorse Hillary Clinton’s tough, comprehensive proposals to rein in risky behavior within the shadow banking sector.

Gensler’s missive got the attention of Sanders, who devoted a big chunk of his speech on Tuesday to rebutting the Clinton campaign’s argument.

Now, my opponent, Secretary Clinton says that Glass-Steagall would not have prevented the financial crisis because shadow banks like AIG and Lehman Brothers, not big commercial banks, were the real culprits.

Secretary Clinton is wrong.

Shadow banks did gamble recklessly, but where did that money come from? It came from the federally-insured bank deposits of big commercial banks—something that would have been banned under the Glass-Steagall Act.

Sanders said that as president, he would immediately order his Treasury secretary to draw up a list of firms—both traditional banks and “shadow banks”—that were too big to fail. Within a year, he said he would use provisions under the Dodd-Frank law to break them up, necessitating a vote only of regulators, not Congress. (Whether that is even possible is a matter of debate, as Quartz notes.)

If Sanders plans to break up large “shadow banks,” does that mean they don’t need the additional regulations and reporting requirements that Clinton is proposing? His campaign won’t say, but Sanders’s policy director, Warren Gunnels, told me that Gensler’s suggestion that Sanders was taking a “hands-off” approach to the firms was “absurd.” The new Glass-Steagall Act that Sanders supports, he said, “would strike at the heart of shadow banking” because it would prohibit those firms from getting their financing from commercial banks.

“It really doesn’t make any sense to me that they would say that,” Gunnels told me Wednesday in a phone interview. “It’s really disingenuous to make the claim that Senator Sanders is somehow not concerned about shadow banking. Of course he’s concerned about shadow banking.” Gunnels also took a passing shot at Clinton’s messenger and his Wall Street ties. “Senator Sanders doesn’t take his advice from a former Goldman Sachs executive who supported the repeal of Glass-Steagall during the Clinton administration,” he said of Gensler.

Sanders’s plans drew praise from Warren, who tweeted her support for his proposals while diplomatically noting that all three Democratic candidates were strong on Wall Street reform. Gunnel highlighted an analysis from Guggenheim Partners, an investment firm that said Sanders’s agenda would have “radical impacts.” “We continue to believe Clinton would be one of the better candidates for financial firms, as she is pushing concrete reforms where one can understand the downside risk rather than more radical overhauls,” the firm wrote, in a statement that undoubtedly warmed the heart of the Sanders high command.

The politics of Clinton's play are fairly easy to divine. By picking a fight over shadow banking, she can distract attention from Sanders’s focus on his more populist proposals to break up the banks and reinstate Glass-Steagall, which for many progressives is a sorer spot on Bill Clinton’s legacy than even his impeachment. Clinton also is attacking Sanders’s perceived strength, knowing that if she can dent him there, the rationale for his challenge to her becomes much weaker. (That she’s attacking at all, however, might indicate that she’s more worried about Sanders’s standing in Iowa and New Hampshire than her commanding lead in national polls would suggest.)

But what’s interesting in the divide over financial regulation is that while Clinton has adopted some of the more popular items on the progressive wish list—debt-free college, expansive proposals on immigration, gun-control, and criminal-justice reform—she is relying on a wonkier approach to Wall Street reform. Sanders delivered red meat to the crowd in Manhattan, drawing cheers for his denouncements of “greed” and “usury,” his call for a financial-transactions tax, and his consumer-focused plans.

But Clinton’s detailed plans have drawn equal if not greater praise from liberal economists who say she is targeting areas most in need of oversight, in ways that don’t require the passage of major legislation through a hostile Congress. And in 2012, even Warren suggested that the demise of Glass-Steagall was not the main driver of the financial collapse, adding that she focused on it in large part because it was an easier issue for the public to understand. Austan Goolsbee, the former chairman of President Obama’s Council of Economic Advisers, criticized Sanders’s break-’em-up approach to shadow banks, saying that more targeted regulations were needed.

In many respects, the fight over shadow banking is like the broader philosophic divide between the go-big-or-go-home Democratic socialist and the more pragmatic, work-within-the-system Clinton. But while she has tagged Sanders’s ideas as simply too costly or unrealistic in other areas (like health care, college financing, and infrastructure), she is making a more assertive case on financial reform. Her proposals, she has argued, are both more targeted and tougher. In a political climate in which voters in both parties are responding to messages of economic populism, she isn’t risking much as she looks to a general-election debate. And even if Clinton might not win over progressives on a core Sanders issue, she’s really just trying to narrow the gap.