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Wall Street weighs up Bernie Sanders’ financial plans

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Via Financial Times

While Bernie Sanders may have taken the lead in the race for the Democratic presidential nomination, Wall Street is only now beginning to weigh up the possibility that the self-proclaimed democratic socialist might be the next US president.

The billionaire-bashing Vermont senator’s policy platform has been defined by broad welfare programmes — from Medicare for all to student debt forgiveness — but for Wall Street his agenda reads like a declaration of war.

Though rival Democratic contender Elizabeth Warren has been more frequently cast as the bane of banks in the 2020 presidential campaign, in part because of her legislative record after the financial crisis, her failure so far to gain a substantial foothold in the race has focused attention on Mr Sanders’ agenda, which, if enacted, would radically remake the financial world.

Here are some of the areas in which Mr Sanders is looking to make big changes.

Breaking up banks

Mr Sanders wants to reinstate the Glass-Steagall Act’s separation of investment and retail banking, which would force JPMorgan Chase, for example, to break itself up.

He has also pledged to end “too big to fail” banks. A Senate bill he introduced in 2018 would break up any bank with “total exposure” equivalent to more the 3 per cent of US gross domestic product, or about $650bn in assets. That would force Wells Fargo, JPMorgan, Bank of America and Citigroup to split. up

At just seven pages long, the bill is relatively short on specifics. “There’s a lot more detail in the Warren stuff. The Sanders [bank] break-up bill is what I could call more impressionistic,” said Bartlett Naylor, a financial policy advocate at Public Citizen, the consumer watchdog group.

Financial transactions tax

Like other Democratic candidates, including the more moderate Michael Bloomberg, Mr Sanders has proposed slapping a tax on a fraction of a percentage on every financial transaction — 0.5 per cent of stock trades, 0.1 per cent on bond trades and 0.005 per cent on derivatives trades — to fund some of his social welfare programmes.

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Such a levy could transform the economics of high-speed trading by making it costly to rapidly enter and exit market positions — and ultimately “restrict rapid-fire financial speculation”, according to his campaign website.

Consumer banking

Mr Sanders has proposed a cap on interest rates on all consumer loans at 15 per cent in order to cut debt costs for Americans. Such a move would radically reduce the size of the credit card operations of banks from Citibank to PNC Financial. It would also reshape the subprime auto and payday lending industries by banning higher cost debt that such companies use to ensure their profits while lending to riskier borrowers.

He also wants to overhaul retail banking by offering checking and savings accounts, debit cards, online banking and “low-interest, small dollar loans” through the existing US Postal Service network.

Mr Sanders has pledged to wipe out $1.6tn in student loan debt, paid for by the proposed financial transactions tax. While it is still a long shot that such a plan would win backing in Washington, it could remove a financial burden from millions of Americans.

Doing so could also improve the value and performance of other forms of consumer debt, according to Todd Baker, a senior fellow at the Center for Business, Law and Public Policy at Columbia University. “If you eliminate $1.6tn in consumer debt, those consumers have a significant windfall, and their overall balance sheet and cash flow is improved,” he said.

The Fed

Mr Sanders has come out in support of a plan to “audit the Federal Reserve and make it a more democratic institution” — a broad proposal to give Congress more checks over the US central bank, which could mean a range of things in practice.

While he has not divulged who he would appoint to the Fed if elected president, Mr Sanders previously joined Ms Warren in signing a 2016 letter urging the Fed to find ways to assemble a more diverse group of policymakers, including women and racial and ethnic minorities, in order to better serve the needs of disadvantaged groups.

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In the past he has also called for bank executives to be banned from the Fed’s regional boards, and an end to the payment of interest on the excess reserves banks park at the central bank. That would mark a profound change in how the Fed carries out monetary policy.

Raising taxes for the super-rich — and normal rich

Mr Sanders has long advocated for raising taxes on the wealthiest Americans, including a special wealth tax on the top 0.1 per cent of US households — those with a net worth over $32m. The progressive tax would start at 1 per cent and rise to 8 per cent for wealth in excess of $10bn.

He also proposes eliminating the income cap on the social security tax that is taken out of every US worker’s pay cheque: a 12 per cent levy, split between employer and the employee. Right now income above $137,700 is not subject to the tax, so removing it would represent a major tax increase on those earning significantly more than that threshold.

One of Mr Sanders’ most recent policy ideas — outlined in a Senate bill he introduced this week — is to eliminate tax breaks for special executive retirement plans, under which corporate bosses can put off paying taxes on compensation they defer until after retirement.

Doing so would recoup an estimate $15bn in federal tax revenue, according to Mr Sanders, which he would use to shore up multiemployer retirement plans for workers.

Bernie’s platform, in brief:

  • Green New Deal: $16.3tn to transform US energy systems away from fossil fuels, paid for by measures including levies on and elimination of subsidies for the fossil fuels industry, reductions in defence spending, income tax on an estimated 20m new green jobs and increased corporate taxation.
  • Medicare for all: extending government-run health insurance to everyone in the US and eliminating existing private insurance plans. Higher federal taxes on individuals and companies would pay for the system, as opposed to the combination of federal, state and personal contributions that fund the current one.
  • $2.2tn to cancel student debt and make public colleges and universities tuition free, paid for by a levy on stock, bond and derivative trades.
  • Expanding social security by lifting the payroll tax cap on income above $137,700.
  • Eliminate homelessness, funded through a wealth tax on those with a net worth over $32m.
  • $1.5tn for universal child care and pre-school, paid for through a wealth tax.
  • Eliminate $81bn in past due medical debt, paid for through an income inequality tax on large corporations with high executive pay
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Even if he wins the Democratic nomination, and eventually the White House, Mr Sanders could encounter substantial hurdles in Congress to enacting his most sweeping reforms — particularly if, as some Democratic officials fear, his presence on the top of the ticket could hurt the party’s chance of winning seats in the House of Representatives and Senate. 

That’s why some Wall Street analysts and investors say a Sanders presidency is still not front of mind for them, even as he gains ground at the ballot box. An executive at a large fund with significant investments in banks said that a Sanders presidency is “on our radar, but not really a top five concern for me right now”.

Others see that changing. While bank investors are still focused on interest rates and the inverted yield curve, Mr Sanders is getting more attention, according to Stephen Scouten of Sandler O’Neill: “After Super Tuesday [March 3, when 14 states and one US territory hold primaries], if he is still in the lead, you will see more of it priced in.”

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