Ted Kaufman considers the fate of corporate reform.
READ FULL TRANSCRIPT
I’m Alexander Heffner, your host on The Open Mind.
A half-decade removed, the financial crisis considered the most vulnerable American economy since the Great Depression already seems like an ancient memory to the country’s political elite.
And most politicians have since focused alone on the jobs mantra to the stem the continued tide of outsourcing and job-cutting, while ignoring what went so fatally wrong in our markets and how to do justice by the millions exploited…that is, except for our guest today and a few others.
Former US Senator Ted Kaufman from Delaware, longtime Chief of Staff to Vice President Biden during his Senate tenure, was Chair of the Congressional Oversight Committee of the Troubled Asset Relief Program. He serves now as Visiting Professor of Practice at the Duke University Law School.
In the direct aftermath of the financial crisis and perhaps ever more fervently today, Senator Kaufman has been the leading advocate for corporate reform. He’s taken to his weekly column in the News Journal to expound:
“I really wonder why there hasn’t been more popular outrage over the fact that bank executives have admitted they committed fraud,” he wrote. “They have admitted their failure to comply with federal, state, and local laws. And yet not one of them has been criminally charged.”
Our guest has seen U.S. government in the trenches, and after extending a hearty thanks for his visit, I want to ask him if financial reform will ever be achieved in this country … if the American oligarchy continues to displace our democracy …Senator …
KAUFMAN: The answer’s I think … yes. I, I go back to the Trusts and Trust-busting with Teddy Roosevelt … which you go back to after the great stock market crash … FDR … they had the Pecora Commission … they set Glass-Steagall Act … they set up the FDIC, so … I know it’ll get fixed. What I keep saying, Alexander, is I know we’re going to get it fixed. It’s just how much damage we’re going to do until we get it fixed.
HEFFNER: But the stakeholders in the US Senate, the former body in which you participated …
HEFFNER: … they represent the interests of corporate America more so than the average investor.
HEFFNER: … and in your farewell address you mentioned the average investor. So how can the average investor be represented?
KAUFMAN: Let me give you an example. Senator Biden was Chairman of the Judiciary Committee and in 1984 he said, “We’ve got to do something about crime in this country.” And he put together a Bill and a bi-partisan support for it and it just languished ’84, ’86, ’88, ’90, ’92 and then in 1994 the public perception was that crime was really getting bad.
And he said it was amazing. He came into a meeting of the Democratic caucus and all of a sudden we’re saying, “We’ve got to do a crime bill”. And he said, “How much you want to spend?” He said, “Half a billion?”, “No, no two billion dollars.” And so what happens in, in … when you’re in Washington for a while is things can happen inside the Beltway and they can go on and on and on. And then all of a sudden the American people really kind of get upset about it … at that point, that’s where you have real reform. And that’s when reform will come.
But right now the American people have been able … I think Wall Street has done a great job of keeping the American peoples’ eye off the ball. So that they’re not very concerned about it. It’s really amazing to me that Tea Party, which is supposed to be a, you know, a populist organization back to our Constitutional roots and the rest of it, never talks about taxes, never talks about Wall Street reform.
It seems like a natural issue for them and to many people that are supporting it now in the Republican Party, for instance, come from states like Georgia, Louisiana, Alabama, Wyoming, which historically have been very good at watching over Wall Street.
So I think all the pieces are there of the puzzle. But what hasn’t happened is something, unfortunately, it looks like something really, really bad has to happen before we’re going to get the movement we need.
HEFFNER: You mean another scandal, another meltdown?
KAUFMAN: I don’t know …
HEFFNER: … something like that?
KAUFMAN: Yes … some, something, something, something of that nature. I … God … hope it isn’t like … that causes another great recession. Because you talk about jobs, the reason that jobs are a problem today is because the great Recession. The Great Recession was, was caused by the, by the stock market crash and the, the financial crash, the mortgage crash and we’re in danger of putting ourselves right back in the box if we don’t really put in place the safeguards we need to avoid it happening again.
HEFFNER: At the time of the collapse there were many economists who were very much convinced that we needed a second American Reinvestment and Recovery Act.
HEFFNER: Do you think that’s still …
KAUFMAN: Oh, no … I think the Stimulus Bill was excellent … I mean this is a different question, but clearly the Stimulus Bill, $800 billion dollars we put in the stimulus was key and one of the things, Alexander, and I’m not … I’m a Wharton guy, okay, I went to Wharton Business School, I’m a corporate guy, I worked for duPont, so don’t look on this as some populist just bashing up on corporations.
But the truth of the matter is when the Stimulus Bill was on the floor, to spend the $800 billion dollars for it, a lot of people who were opposed to it, said, “Oh, no, let … don’t have government do this, government doesn’t know how to do this, let the private sector do it.”
And at the time it was clear, the private sector was not going to invest in, in anything at that present time because business was so bad. And here we are five years later and corporations, even to this day … I just saw the report that they’re spending something like 57% … the top companies … in S&P are spending something like 57% of their money on stock buy backs and another 40%, 34% of their money on, on dividends, leaving only 9% of the money for investment.
So, we’ve got to change the … kind of the idea of the country about how, how we …
HEFFNER: It stabilized, if you will, Wall Street …
HEFFNER: It, it re-empowered Wall Street. But it has not yet allowed for the kind of main street productivity in income generation.
KAUFMAN: Absolutely … that’s what you need … but oh, no … it did the stock market …
HEFFNER: That’s what you’re saying.
KAUFMAN: Yeah, I’m saying …
HEFFNER: … record profits …
KAUFMAN: … yeah, the corporation did great, exactly right. But the fact of the matter is, the numbers show that the vast majority of the money … every time I say this, I think like I’m sounding like a populist … but the truth of the matter is, the vast amount of money from the, from the … what’s happened … the good things that have happened … has gone to the top 1% of the people of the country. That’s a number that keeps bouncing around, but it really is true, the vast majority of the money went to the top 1% of the people, very little filtered down to the, to the 99% of the people.
HEFFNER: Mean from your work as an advisor to then Senator Biden …
HEFFNER: … and your work as a U.S. Senator … you’re very much steeped in the contemporary American political tradition, so I, I’m wondering … when you attempted to cross the aisle …
HEFFNER: … with people who you might have …
HEFFNER: … thought at the time were bought, paid for and bought by industry …
KAUFMAN: No …
HEFFNER: … it doesn’t work that way? It’s not …
KAUFMAN: No, I don’t think people are bought. First off, I don’t … I really don’t think people were bought. I think, Alexander, the way it works is … it’s not, it’s not like people come and say, “I’ll give you $10,000 if you vote for me”.
There’s this great speech, supposedly by Webster when he said, he gave a speech on the floor in the Railroad Commission … he wrote to the Railroad Commission and said, “If you want me to give another speech like that on the floor, I’ll give you another … give me another $10,000.”
So those days are gone forever. There’s no quid pro quo. So what happens is … if you get up one morning and you say, “I want to run for the United States Senate.” And I get up and I say “I want to run for the United State Senate.”
And you say, “I want to run for United States Senate because I genuinely believe, genuinely believe that we should reduce capital gains, limit the corporate income tax, ah, ah … and I … and I’m running for office and I think, what we’ve got to do is worry about the poor and disadvantaged, we have to figure out what we’re going to do about jobs and the rest of it.
The fact of the matter is … for your truly held beliefs, you will get one heck of a lot more money, then I’ll get with my truly held beliefs. So I don’t find very many Senators that are bought and paid for … I think most Senators … but Senators do get elected a lot of times that have a proclivity to agree with what Wall Street …
It’s just like you can go out now and find an academic, these academics write these stories about “Oh Wall Street’s doing great, everything’s wonderful.”
I don’t think anybody goes and gives a professor at a major university money and says, “Write a thing saying Wall Street’s doing great.”
I think what they do is, they look around and they find a professor that agrees with them and that’s the one that gets the money and that’s the one that gets the publicity.
HEFFNER: This may not be a new trend, but the proliferation of millionaires and billionaires in our institutions of government, that is, has really become the status quo …
KAUFMAN: Oh, yes.
HEFFNER: … today. So are we an oligarchy?
KAUFMAN: No, no, no we’re not. Well, by the way, we’re not now, we’re in danger of being an oligarchy. I think what’s happening now … oh, yeah, in terms of, of … we’re not quite a monopoly, but in a lot of areas, we definitely are, are turning into an oligarchy.
And we do have a problem … the problem … I heard this … now I have not been able to check this out, but, but it sounds fascinating to me … from someone I respect. They said when the Sherman Anti-Trust Act was debated in Washington, they never talked of economics, they talked about how dangerous it was for the country to have so much money in the hands of a small number of people who did not understand how the rest of the country had to live.
You know, we get tied up in economics and economics and money and that’s what I did. That’s what I do, you know, financial and money … but you know, is it really good for this country to have our decisions be made by people … even if they’re good people, who just have a totally different view of how life goes on from the vast … I mean like the vast majority of the American people. That’s the dangerous part.
And the great thing about … Alexander … I’m going to wave the flag … because I believe this is the greatest country on earth.
In a democracy we will change. We will adapt. The majority will rule eventually, it’s just as I said, how much damage we do before we get to the point of making the changes we need to make … that we absolutely have to make to avoid having another major financial crisis.
HEFFNER: In one of your columns you reflected on the state of the economy and the failure, which I alluded to in the introduction …
HEFFNER: … to act. You said, “Four years after the passage in July 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we’re pretty much back to square one in terms of fixing the major causes of the financial meltdown”.
HEFFNER: The megabanks, you go on to say, are bigger …
HEFFNER: … and hungrier than ever …
KAUFMAN: I mean everybody says … “oh if you went down on the Senate floor … and listened to all the speeches on Dodd-Frank, every Senator, at some point … I didn’t count them all, but it sounded like every Senator … got up and said, “This Bill’s going to do away … one thing we have to do … we got to get rid of ‘too big to fail’ … that’s the one thing that everybody can agree on.
And then they put together a bunch of stuff and they said, “We’ve solved Too Big To Fail” …
HEFFNER: With sloganeering …
KAUFMAN: Yeah, they put in a thing called “Living Wills”, there was … how do you write a living will which is supposed to say, “If we get in trouble, this is what we’re going to do”. How do you write a living will if you know you’re going to have that problem, you know you’re never getting to that problem … and what happened? Ah, the, the Fed just threw out all the proposals for living wills by the big banks, they don’t have a clue how to do it.
Second thing what they were going to do is they were going to say, “We can resolve these banks across state lines.” Well, you know, across state lines is one thing … across national lines is another.
Financial Stability Board in the EU said, “We don’t have any ability to resolve.” So the fail part, “To end this problem, we’re going to need the Federal government to come in and bail out again, or we’re going to go down the tubes.”
But of the “Too Big” part, Alexander, there is no argument. These banks are bigger today than they were in 2008 when we know they were too big to fail. Because if you look back and see the mergers that went on during 2008 with Merrill Lynch going into Bank of America and JP Morgan Chase get Washington Mutual and getting Bear Sterns and, and those kinds of, of, of mergers, you know the banks are bigger today and we’ve really not done anything.
Now we’re doing … finally the Fed is doing some good things. Not the Congress, not the Administration …the Fed.
And what they’re doing is they’re saying, “You’re going to have to carry more capital. You’re going to have to increase your liquidity in case something like that happens.”
But outside of that, we put, we put a bunch of things in. Wall Street does an incredible job of complaining about regulation, regulation, regulation, regulation. But the real regulation that we should have put in, we didn’t. And that was return to Glass-Steagall.
Glass Steagall came out of the Pecora Commission, out of the great, great Depression and it basically said, if your bank, it can be a commercial bank, which means you’re going to do okay … you’re not going to have a lot of risk, but you’re not going to make a whole lot of return, but it’s a good solid business and for 60 years it was a good solid business.
And then investment banks, where you’re going to have to take some risk, but boy you can really make a lot money.
And we said, “Okay, that’s the way we’re going split things up. You can be an investment bank or, or commercial bank. Now in order to encourage people to become commercial banks, we said, “We’ll give you FDIC insurance.”
So if you had a deposit in a commercial bank, that’s the why the bank runs ended. We give the commercial bank … if you have money in a commercial bank, you know it’s going to get paid by the Federal government.
Well, during the 1990’s there was a series of acts, finally in 1999 we removed Glass-Steagall. And what happened? Banks started getting into very competitive, risky business, derivatives, mortgage backed … residential mortgage backed securities … and all these issues and that’s really what brought us down.
The obvious thing to do after, after the … after the crisis was to put Glass Steagall back in. We didn’t do that. We will do it. But it’s just … as I said … it’s a matter of how much damage we’re going to do before we actually do it.
HEFFNER: But the folks who oppose that …
HEFFNER: … the reenactment are in the circles that we’ve discussed … I mean …
HEFFNER: … they’re not bought by the investment bank monolith …
KAUFMAN: I, I think it would be, it would be very, very distracting. In the beginning the argument was … when Geithner was Secretary of the Treasury, the argument was, “Well, you know, the banks are too fragile, the banks are too fragile, the banks are too fragile”.
But the banks aren’t fragile any more and this is something we have to do. Can we afford to have another financial crisis? Can … by the way … Wall Street … they came out great … as, as you pointed out earlier.
No one went to jail, bonuses were great. They did terrible things which they’ve admitted to doing, which you, which state the same … terrible things … and nobody called back their bonuses … all the bonuses they made on that stuff where they committed fraud and broke, you know, state and local and Federal law … all that money they made in bonuses, they still got that. So they came out fine.
It’s the other … American …the American people have to do it. So they’re not worried about it on Wall Street … they figure, “look, this happens again, I’ll come out fine, just like it happened before.” It’s the American people who are going to get it again.
HEFFNER: I’m asking you this question in a different way …
HEFFNER: What’s the counter punch? I mean how, how do you serve the interests of main street … and I mentioned the stimulus because there was the, the feeling in this country that there were bailouts for mega operations and not for the middle class …
KAUFMAN: I think what’s going to have to happen … I hate to say it … but it’s what’s …
KAUFMAN: … something’s going to happen that gains the, the, the notice of the American people to what’s happening and that’s the way it’s going to happen.
The Stimulus Bill, by the way, was as big as we could get. There’s not way …
KAUFMAN: … the Republicans in the, in the Congress would have signed on. We just barely … we needed 3 Republicans to get it over the top and they said, “This is the limit to what, to what it is that we do”.
HEFFNER: I mean part of the gridlock is certainly the partisan divide …
KAUFMAN: Oh, yeah.
HEFFNER: I mean … since your own tenure in the US Senate, it’s only gotten worse.
KAUFMAN: There’s a wonderful book by Robert Draper, I can’t remember the name of it … if you look up Robert Draper, you’ll get the book … and he, he actually found out what I had said I thought happened, early in my term at Senate right after Obama was elected.
And essentially what I said happened was that the Republicans sat down, Republic leadership, and Draper has the documented … who was there at the meeting and everything else.
But they said, “Look, we lost the Presidency, 60 Democratic Senators, big majority’s in the House for Democrats, if we don’t do something radical, we’re going to get rolled. They’re … all this legislation’s going to pour through. So what we’re going to do, we’re going to oppose anything that’s proposed that possibly … by the Democrats and by Obama … which is what they did.
Fortunately, the Democrats had 60 voites, they could overcome the philibuster and we got the Stimulus Bill passed, we got the healthcare bill passed, we got other Bills passed.
But that was really what … that was their basic strategy and it worked for them. They won the House in 2010, it looks like they could win the, the … the odds on favorites, I think, to win the Senate in 2014 … so that was their basic strategy.
As long as they’re in that mode, as long as their in the mode … the Repubicans and the Democrats could do the same thing … once, once one of the two parties in our country gets in the mode where “we’re going to vote against anything they want”, then you have gridlock.
Now it’s getting better. Because what happens is as it becomes clearer to the American people … we get back to the American people … its clear to the American people the Republicans are literally just stonewalling any of the Democrats proposals.
If you look at the popularity numbers, the Congress is terrible. The Democrats are bad and the Republicans are awful. So people are begin … so the Republicans are now beginning to have a budget, they’re beginning to do some of the things they have to do or they’re going to lose all credibility with the American people.
HEFFNER: One of the things you highlighted in your farewell speech … you said you gave seven major speeches on the floor of the US Senate calling on the Securities and Exchange Commission to conduct a comprehensive review of equity market structure in high frequency trading to advance reforms that promote clear and transparent markets
KAUFMAN: Basically it’s wonderful, Alexander, they even have … they used to trade on stock exchanges … and they still do … a few … but, but most of the stuff now is on called “dark pools” … I love it … they call them “dark pools” (laugh) and they start out as being a place where you could go if you were big, big, big corp … like Chase Manhattan … or a big bank wanted to trade back in the old Chase Manhattan days … wanted to trade with, say, Goldman Sachs, and there was just two of them and there was a big trade … they said “We need a place to go off in the quiet and do it … so we set up these dark pools.”
Well now there’s dark pools all over the place and most of the trade in the dark pools are not big trades, they’re small trades. They’re as small as the trades on the exchange, but they’re dark … so that what goes on there … people just do not know. And we have every indication, I mean I don’t know if you’ve read “Flash Boys”, by Michael Lewis and he just laid it out pretty clearly, you know, what’s going on … this thing called “spoofing”, where you get out in front of the traders.
But basically, in fact, they are giving schools now for people that trade in the, in the dark pools on how to avoid getting taken by the high frequency traders. And more and more is coming out about the high frequency traders … the Security and Exchange Commission is just beginning to do it.
Five years ago I said “You gotta find out what’s going on.” In the old days there used to be a, a tape that went across the exchange … you could see every trade. And you knew who made the trade, not on the tape … but you could go and say, “Who made that trade? Who is …”
On this high frequency trading no one knows what is going on the trade. When we had the “flash crash” several years ago, it took them six months to try to figure out what happened. And they just agreed to do a con … last year they agreed to do a consolidated audit trail, which will keep track of all the trades in the market. But that isn’t in place yet and I am absolutely convinced the high frequency traders are still taking advantage of the small investors.
And the reason for this, Alexander, is … the main reason is is because it goes to the credibility of our financial markets. One of the great things about this country has been our financial markets … democracy through financial markets has been the big idea. But our financial markets and, and how they work democratically and, and how they’re open and how people know what’s going on … people come from all over the world to trade in our famous markets.
And the combination of the financial crash and high frequency trading is the kind that just drives people away from our markets. And if … you talk about … people talk about “I don’t pass on to my grandchildren this … bad thing or this bad thing” … one of the worse things we can do … would pass on to our children … US financial markets that are not credible. So it’s really important that we do something about high frequency trading and finding out exactly what’s being and how it’s being traded … each one of these different markets.
HEFFNER: I mean we started this conversation by asking … “Is the American government an oligarchy”? These kinds of get rich quick schemes that take advantage of people who don’t know better …
KAUFMAN: I think there is a culture in this country, which is great, it’s a positive culture. I mean, you know, I remember when Ronald Reagan was President, he really started the whole idea, which, which is not a bad eye, you know, the idea of the cowboy, we’re out there, we’re on our own, we’re doing this thing, that really people should be freed up to do their own … you hear this a lot now and … from politicians … “oh well, let’s … everybody …” and you know, the Democrats had gone astray, probably in the seventies, they kept saying “It isn’t good to be rich”.
But my grandparents, great grandparents and most people that came here in this country as immigrants, one of the big reasons they came was because of freedom of religion. The other reason they came because the streets were paved with gold. There’s nothing wrong with people making a lot of money, and it should be good for the country … it is good for the country that make a lot of money.
But what, what, what Reagan never talked about and which isn’t talked about enough since then is … we all should be independent, have individuals and do what thing is right. But we all have responsibility to our community … we are a community. I mean if you saw the difference between the Republican convention … last Republican convention, last democratic convention. The Republican convention was all about individuals, individualism … the Democratic message was about something about individuals, but they talked about the fact that we have a responsibility to others.
HEFFNER: I mean is part of that responsibility having a US Senate or again forms of government where there’s a diversity across socio-economic lines.
HEFFNER: I mean that’s absent right now.
KAUFMAN: Absolutely. Absolutely.
HEFFNER: Most people and politicians talk about how the middle class is feeling, but they don’t know it.
KAUFMAN: Yeah. Well, I think … look, when you get down there to Senate … you, you have the Senate today … most of them are raised middle class …
HEFFNER: But not living …
KAUFMAN: No, no … it’s hard, you can’t get elected … put it this way, if you don’t really feel inside the middle class, you’d better have a lot, a lot, a lot of money … because people can pick that up on you. I mean democracy still works, it’s still we have, you know we have good people down there, in my opinion … people that are smart, people that, that … most of it is the vast majority may have made money, if they came out of a middle class background. That’s not a problem. What we have … the problem is in the debate, the public debate. One side has their finger on the scale, when you go to academic studies with whose … when you go to campaign finance … whose … when you go to newspaper stories. I mean its amazing the newspaper stories you read. We just know that the person that’s writing the story took it just verbatim from someone on Wall Street.
I spent a lot of time up here when I was a Senator going around and meeting with people trying to figure out all this, you know, what was going on … ’cause I knew a lot of people because of my background.
And they really believe it. The, the … some of the stuff they believe is just incredible. And the press starts believing it. The press starts writing stories that … pick up, pick up any, pick up the Wall Street Journal and the New York Times and read through it. Even Deal Book in the New York Times and read through it and see … are they really presenting a middle class view or are they presenting a kind of a view of the people they meet with every day.
HEFFNER: If our democracy is endangered …
HEFFNER: … then are there checks that need to be imposed …
HEFFNER: … that are not there?
KAUFMAN: Well …
HEFFNER: … like requiring a certain diversity of income in, in these chambers of governance.
KAUFMAN: Well, you know, I like detective novels and there’s always the detective novel … in many of them the story about the guy who’s been wronged by gang … he’s been, you know, he’s been shot or robbed or anything else. And he’s making the decision, should I go back and shoot them, just the way they shot me. Is that what we should be … is that my doing? And most, most of them they come out and say “no”, that’s not what we’re doing.
Democracy is democracy. You can’t limit democracy. That’s what happens to countries all over the world … they say, “Oh, we’re going to have an election, anybody can come, but we’re going to pick who’s going to be the candidates.” That’s what they do in Iran, that’s what they in Russia, that’s what they do in so many countries in the world.
So, see you want democracy, in terms of term limits, Alexander, if you ask the American people … do they want term limits … they say, “oh, yeah” … 60, 60% say they want term limits …
HEFFNER: But they want to vote for their Congressman.
KAUFMAN: You know what they want term limits on? They want term limits on the other members of Congress …
HEFFNER: That’s …
KAUFMAN: … so, so you know, and what you’re doing is you’re beginning the slippery slope of saying I’m going to limit who can serve. We have had institutions here that have worked for 200 years. I do not think that’s the basic, you know, cause of the problems. And by the way, final thing on term limits … you put in term limits … (washes hands) when I was a staff person I would run the Senate … the staff would run it. I was there for 22 years, if I was competing against a new Senator like Ted Cruz, it would be a walk in the park.
You’ve got people that just come in, don’t know … never been there before, don’t know how it functions, don’t even know how to interact with folks … staff people would take care of. We do not want staff … I’ve been a staff person … some of the greatest people I know are Senate staffers … I want United States Senators running the Senate.
HEFFNER: Senator Ted Kaufman I hope you’ll join us again to talk about how Constitutional theory can trickle into the Senate staff.
KAUFMAN: Love to do that, Alexander.
HEFFNER: Thank you Senator. And thanks to you in the audience. I hope you join us again next time…for a thoughtful excursion into the world of ideas. Until then, keep an open mind.
Please visit the Open Mind Website at thirteen.org/openmind to view this program online or to access over 1,500 other Open Mind interviews. And check us out on Twitter & Facebook @OpenMindTV for updates on future programming.