When It Comes to the Banks, Hillary Won’t Bite the Hand That Feeds Her

“Shadow banking:” you probably haven’t heard too much about it before CNN’s first Democratic Debate. But presidential hopeful Hillary Clinton assures us that this practice is worse than anything that the Glass-Steagall Act could hope to fix. As she said on Tuesday night:

“But we also have to worry about some of the other players -- AIG, a big insurance company; Lehman Brothers, an investment bank. There's this whole area called ‘shadow banking.’ That's where the experts tell me the next potential problem could come from.”

These experts couldn’t possibly work for Goldman Sachs or Citigroup Inc. (who have donated a combined $1,585,142 to Clinton out of the goodness of their hearts), could they? And since Lehman Brothers has been kaput since 2008, Clinton can say what she wants about them (even if they contributed around $362,853 in the past).

The Former Secretary of State has proposed her own rules to keep the banks honest, but it seems that in her plan, we’d have to allow the banks to get too big first, and then slap them with “risk fees.” As Dennis Kelleher, president of financial reform advocacy group Better Markets put it, “Clinton did say large firms should be required to ‘downsize or break apart,’ but only if they can prove to regulators that they can be managed effectively.”

Rolling Stone’s Matt Taibbi discussed this difference in-depth in his recent article:

It's a subtle difference. But such subtle differences between real action and ambiguous verbiage are what turned the Dodd-Frank bill into a mountain of legislative leprechaun tricks, as opposed to the sweeping, simple, FDR-style reform of a plainly corrupt marketplace that it should have been.

Whether or not you think Hillary Clinton plans on doing anything to fix Wall Street corruption really comes down to your read on her intentions. Both regulators and criminal prosecutors already have enormous theoretical power over the market. They're not particularly handicapped by a lack of regulatory tools. The issue is how much political will a future executive plans on exerting.

Clinton’s diversion to blaming “shadow banking” -- or hedge funds and high-frequency trading --for the 2008 financial collapse was also critiqued by Christopher Whalen, senior managing director at Kroll Bond Rating Agency and author of Inflated: How Money and Debt Built the American Dream. As Whalen wrote, “It is incorrect to blame the crisis on shadow banks. You can’t really differentiate between what they were doing and what Citi was doing.”

Hillary is at a strange crossroads with her legacy in politics: She can’t undo what her husband did as president and reinstate Glass-Steagall after Bill did away with it in 1999, even if that means she can’t give the voters what they want. So what’s her best option? Create a straw man out of “shadow banking” and try to ride that all the way to the White House.