>> good afternoon, everyone. my name is wayne abernathy, executive vice president for financial institutions policy at the american bankers association. here in the federalist society, i am the chairman of the financial services practice group, who is sponsoring this session today, financial administrationhe -- administrative state. we very much appreciate you being here to listen from our very experienced, distinguished, and insightful panel. if you happen to be interested in the work of a financial services practice group at the federalist society please contact me or one of the officers and weekend at you involved, we love to have people involved. now my important duty besides that is to introduce the moderator for today, judge carlos baya. he serves as a judge on the ninth circuit. he received his bachelors from stanford and his jd from stanford law. he was born in spain. he immigrated to cuba in 1939. notice, you might not unless he stands up, of course you will, the judge served on the cuban national basketball team at the helsinki olympics. i wish i could do that. he became a naturalized citizen of the human state at night -- in 1958. he taught courses in civil litigation, advocacy at hastings college of law and stanford. 1990-2003 he served as judge of the san francisco superior court. presidentinated by george w. bush to the u.s. court of appeals for the ninth circuit and confirmed in 2003. please welcome him. [applause] collect thank you for that kind introduction. we are required to give disclaimers at this point. i played in the alan thicke games in 1952. i was a tourist. we went to-five and the games. i am happy to say our son, sebastian, a real athlete, he won a silver medal in sydney. [applause] also today's subject, financial regulation. concern with a regulatory state often focuses on reforms of formal institution structures and legal doctrines such as the chevron deference. arguably these formal constraints are only the tip of the issues regarding of individual liberty and the rule of law praised by concerns of the regulatory state. we have a distinguished set of panelist today, knowledgeable ,bout the financial industry financial regulation and the effect of the administrative state. your programs will have extensive resumes and biographies. i will give you essentially name, rank, and serial number. scott,ight, professor professor of international financial systems and the director of the committee on capital market regulations at harvard. professor scott will talk on contagion, a nicer word then panic. on economicse a run system at the heart of the 2008 dinosaur recession. -- financial recession. andthe crisis was ended using other tools and how the dodd frank legislation led to future actions by the fed. , professore arthur of law at george washington law school who describes himself as a conservative with a small c. he will discuss the need to prevent the creation of government sponsored enterprises. that allow the creation of groups too big to fail. how we should limit federal safety nets and subsidies, and how we should take another look at universal banking, the commendation of banks security firms, and insurers in one entity and perhaps consider the merits of the former glass-steagall legislation. and, left is peter wallace senior fellow at burns fellow and financial policy of the american enterprise institute who is currently writing a book on the growth of the ministry of state -- administered state. andill discuss firms systemically important financial institutions. by the dodd frank act that has created the financial security oversight council to include banks and nonbanks. the standards or lack of standards used to designate firms and the effect of such designation as an example of the growth of standard administrative power. last but not least, professor richard epstein. professor at nyu law school. senior lecturer at chicago law school. bedford senior fellow at hoover institution who has written a book on the uncertain quest of limited government. will centerstein his remarks on the recent case consumer financial protection bureau, which is in the adc circuit. and whether administered of agencies can be insulated from legislative and judicial review. he will talk about the guaranteed budget of the bureau from the federal reserve and how this bureau fits in with the independent agencies and multiple board members. we give way to professor scott. [applause] >> i have to lower the microphone. it is my pleasure to be here today. , which is a run on the financial system, was the heart of the 2008 financial crisis and others in the past. the crisis was halted in large part by the provision of lender of last resort assistance to nonbanks as well as banks. generated a run on the money market funds, tother or not exposed lehman, which then spread to all short-term funding from the financial system, including commercial paper issued i non-financials and funding of major investment banks. creatingesponded by new facilities under section 13 of the federal reserve act to lend. theddition, the fdic raised insurance levels from $100,000-200 $50,000 and two infinity on demand deposit accounts. it also guaranteed senior debt of depository institutions further assuring their access to funding. exchangeused as stabilization fund to guarantee money market finds -- funds and ultimately congress refused to provide capital. these measures stop the crisis. in the aftermath were crossed -- were criticized as propagating moral hazard and bailing out wall street. i do not regard the use of lender of last resort where there is good collateral when needed and a penalty rate is a bailout, nor do i regard deposit insurance as a bailout. both are clearly government support. in my view, highly desirable. tarp is a bailout, and should only be available if it is the act of a failure on many large financial institutions at the same time, but heavily impact the economy where their resolution as a group does not -- is not a viable option. there is potential moral hazard from all of these measures. in the case of lender of last resort and deposit insurance, it is a small. , do not see how institutions which are victims of panic runs, which is often the case in contagion as opposed to bad business decisions will take more risks as a result of such support. homeowners, expose their buildings to the threat of fire from neighbors because of the existence of the fire department, i don't think so. we attempt, albeit imperfectly to minimize the moral hazard from deposit insurance by charging premiums based on the risk of the insurer. that is a difficult task. due to bailout concerns, major restrictions were placed on the measures that we took during the crisis. the treasury authority used the exchange stabilization fund. dodd frank place major research and on the use of 13-three of the federal reserve act, provide assistance to nonbanks although interestingly discount windows continued to be available to banks without major restrictions. what are these restrictions under 13-3. nonbanks today, in terms of runnable liability, short-term are about 66%. grow as we seeto more and more mediation from the banking system. the ability to lend to nonbanks was important in 2008, it is even more important in the future. what other restrictions the fed put on it? they can only lends to nonbanks with the approval of the secretary of treasurer. significantly limiting said independence, such approval is not required of the district -- discount window. such loans must be part of the product program, which may mean under the fed regulation, which implements the section that it must wait for five institutions to be in trouble, thus making it harder to knit contagion --nnip contagion. previously, loans had to be satisfying to the fed, which allowed them to buy unsecure paper from non-financials. they can only lends to a solvent buyer. it is difficult to actually determine in a crisis. bee, loans to nonbanks must disclosed within seven days to the chairman of the house of financial services on the senate taking communities. that would deter borrowers from obtaining loans, or accelerating the run when the news leaks. banks can no longer freely pass on to the broker-dealer affiliates loans obtained from the discount window. a of theubject to 23 act, which allows only 10% of the capital of the bank. for the restrictions have been passed by the house, but not the senate. authorityn, the fdic to raise deposit insurance has been taken away, only to be restored upon request by fdic through a joint resolution of congress, making it impractical in a timely way. the authority to make new loans has expired. so, let me say a few words about lindner. of last resort in my happy with how the fed operates as a lender of last resort, no. need better coordination between fiscal authorities and lending, where there is a reasonable possibility that the buyer could be solvent, or is not. at the very least we should regard any investment equity as outside their authority, which of course they did. that should be a fiscal decision reserved for the treasury. secondly, we need more of a rule of law of the operations of the in of lender of last resort the sense that the fed should articulate the general policies it has on matters including facilities and programs, how they determined solvency, what a program really as, penalty rates, collateral, etc.. not only is ambiguity not constructive, in this instance it is harmful. deployed, the use of lender of last resort might not be necessary. from the past.n legitimately criticized the fed for operating without articulated constraints. in doing so in a nontransparent way. this is not tenable if the fed is to exercise the powers that they need. undulyof law need not define discretion, but should articulate the principles for exercising discretion. finally i would require those institutions borrowing from the central bank are receiving fiscal support and take a sensible price, particularly where their own losses trigger it. this price range from penalty rates to enhanced supervision or even the replacement of management. costs inre to oppose institutions benefiting from public support is a major factor for popular opposition for the use of these measures that we so successfully employed in 2008. thank you. [applause] >> good afternoon. i would like to thank the federalist for allowing me to participate. federalist for allowing me to participate. madisonian conservatives, among whom i would class myself, i think's professor epstein's reference to classical liberals fits the same group. i think madisonian conservatives should embrace, hopefully would embrace the following four principles of financial regulation. first -- we should stop allowing privately owned financial institutions to operate in effect as government-sponsored enterprises with implicit federal guarantees. we all know about the sad stories of fannie and freddie, undeniably privately owned, government-sponsored enterprises. a very costly, experience. i will argue that the two big to fail financial conglomerates are today's government sponsored enterprises. to achieve principal one we have to end government policies that encourage initial institutions to become too big to fail and reward them for doing so. limit theust strictly scope of the federal safety net for banks. most would agree, certainly i do, that banks perform an liketial social services accepting deposits, providing payment services and making loans to small and medium-sized is as firms not able to sail securities in the capital markets. those are legitimate and important functions. banks are subject to depositor runs partly because they have the maturity mismatch between their short-term liabilities and long-term assets. depressionhe great proved, i think the recent crisis also proved, if you look over for example at the northern rock exit -- episode in the united kingdom that we need deposit insurance for chartered and supervised banks. i also agree with professor scott that we need lender of last resort or chartered -- four chartered and supervise banks. i think i differ with him on whether nonbanks should be able to have that same privilege. in my view, any additional forms of federal support for banks should be carefully scrutinized. support means subsidy. last, in my view, we should oppose any form of federal subsidies for nonbanks financial institutions and non-bank financial activities. federal subsidies will distort market pricing, provide unfair competitive advantages to those who receive them, and undermine the effectiveness of market discipline. in my view, is nonbanks want to have the benefit of the federal safety net they should become chartered as banks and accept the same kind of supervision as -- and regulation as banks. they should not expect the same kind of help when they do not accept that kind of regulation. it is my view that universal banking, which allows banks to combine with security firms and insurance companies and to engage in a full range of capital market activities violates all four of the principles i set forth. the last crisis showed us that federalot contain the safety net to banks when they are affiliated with all of these non-bank capital market activities. you will save the entire conglomerate to save the bank. two examples -- the federal government provided $850 billion of combined support just to save financialnk centered conglomerates, citibank and bank of america. at is adding their lender of last resort assistance, capital assistance, sale of commercial paper to the government, and guarantees they received. that was just two of them. that was a small part of the bill that we paid. the problem with dodd frank, in my view was that it did not change the universal banking model. unlike the glass-steagall act which required a separation firmsn banks and security in 1933 in response to the great depression,. frank basically took the approach of saying, we have these nuclear reactors that blew up. rather than replace reactors or adopting a different form of reactor, let's just improve all of the valves and controls and tweaks. if we have better valves, controls, maybe -- maybe they will not blow up next time. unsound, andhat is an unviable approach. the last 20 years have made clear, in my view, that these giant financial conglomerates cannot be either effectively managed or regular dude -- regulated. if we do not change the model, i am quite sure we will have an -- a comparable financial crisis in the not distant future. we have two choices -- one is to adopt an internal last eagle approach -- glass-steagall approach. it puts firewalls around a bank and says, you cannot make loans or transfers of funds to your affiliates and the government will not protect the affiliate. that is a defensible approach. i think you are questions -- one is, will these firewalls actually be monitored and regular kid -- regulated on the long-term. secondly, when push comes to shove, will the government refused to bailout the affiliates the other approach would the go back to 1933, and say we want banks in one part of our financial system doing what i do, and we want capital markets to operate outside the banking system and not depend on subsidies related to the banking system. we have a big problem with shadow banking. the problem is these non-tank companies are essentially -- section 21 of glass-steagall says no non-bank can deposits. it is a criminal violation to do it. the deposits are short-term debt instruments payable on demand. we basically have those instruments present today. i agree with morgan ricks who has written a provocative book called the money problem. money claims should be limited to banks. we did not have shadow banks before 1965. this is something we have allowed to happen, and it is distorting our entire system. we have to get back to where if you want to issue us short term debt claim payable on demand, you have to be a bank. whether that is at 60 days out or 90 days out, we should not be allowing other institutions to be issuing things that function like deposits. i look forward to our discussion after the presentations. thank you. [applause] >> it is a great pleasure to be here. i am delighted to be a part of this. i'm going to talk about the subject that i am writing a book about now. the growth of the administered state, and why it has come back. in her regulation of financial institutions, it will be from that perspective. i'm going to be talking about the dodd-frank act, and the provision of the dodd-frank act which allows a group of financial regulators to designate certain institutions as systemically important financial institutions. and then to regulate them strictly. act, i'm going to go through what you already know. for those who are not, i want to go through some of the background here so you understand it. created thenk -- toght council, or coordinate regulation in the wake of the 2008 financial crisis. the agency is headed by the secretary of the treasury and consists of all the regulators, the fed, the fdic, and others. it was given the power to designate any non-bank financial firm, for special stringent regulation by the federal reserve. the firms that are designated are described as systemically important financial institutions because their financial structure, their financial daily or or distress could in theory create a systemic breakdown in united states economy. says thate language the financial firm may be is material, it financial distress, or its activities could pose a threat to the financial stability of the united states. the provision was a response to the mistaken belief in congress and elsewhere that lehman's bankruptcy in 2008 caused the financial crisis. the idea was that large firms are interconnected, and that failure of one like lehman will drag down others, creating a systemic condition. to prevent this, special stringent regulation by the fed was considered necessary. in reality, no other firm failed as a result of lehman's failure. so, they interconnected this theory is wrong. is still in effect. accordingly, under the material financial distress or activity , it has designated for non-bank institutions. seriousion can be a .estructive event to a firm it gives the fed unlimited authority to control the firm's business. after having experienced that regulation, ge terminated the business of its subsidiary ge capital in order to hopefully eliminate its designation, which was successful. eliminated time, it a significant source of the funding for small firms. agree to itsot in thetion, and sued d.c. district court. in march, 2016 the court overturned metlife's designation, and a decision has not been rendered. the relevance of all of this is to the-frank --theosis -- what a title the apotheosis of the administrative state. that means the high point of the administrator state, if it were the high point of human straight state, i would be happy. i'm afraid it is only the beginning. repeat the statutory language, any non-bank financial firm can todesignated and subjected this designation, this special regulation if it poses a threat to the stability of the united states. the act contains no standards. that restrict the discretion. there is no definition of material financial distress, no definition of activities, no definition of threat, or what was meant by the financial ability. in the case of bank holding companies congress was able to if the bank has more than $50 million in assets it will be subject to the stringent regulation of the fed. , it wasnate a firm authorized to predict that at some unknown time in the future, in an unknown future, the financial distress of a particular firm or its act -- its activities will have an adverse affect on the entire financial system. this is impossible to know. the matter how skilled an expert, the members of an administrative agency cannot predict the future. the decision is pr discretion. the ability to stop certain activities can apply to a whole industry giving the authority to control entire markets. but when the congress gives these extraordinary discretionary powers to demonstrated agency, it is further empowering the ministry of state. the courts can stop this progress, they have not. although the broad discretion soc, the supreme court has not invoked this concept since 1935, and many people think it is sadly dead. one of the reasons for the courts reluctance is that we do not have a good definition of the difference between legislation on the one hand, and administrative action on the other. this should not be impossible for a court to decide, and determine in individual cases. has oneative decision distinguishing characteristic. it can be wholly arbitrary taking from some and giving to others, and does not require any justification as long as constitution is not violated. just like congress setting a $50 billion threshold for treating a bank holding company, that is an example of a legislative standard setting decision that is completely arbitrary. if the dollars billion makes no more sense than $200 billion in this context. bank holding companies cannot .nd have not challenged that they challenge it legislatively, they have not challenged in the courts because congress is allowed to make those kinds of arbitrary decisions, which and administrative agency cannot. once these decisions are made, and administered agency can be tested carry them out. this goes back to chief justice 1825 when decision in he was also faced with the question of what is the difference between an administrative and legislative decision. his point was that the important issues, the important decisions are made by the legislature. the administrative agency can have some delegate of responsibilities, but not for the important ones. this means someone has to determine what the important decisions actually are, and that is a responsibility of the courts under article three of the constitution. the unwillingness of the courts to make these decisions is responsible for the growth of the administrative state that we are seeing now, and we will see in the future. happye congress has been to send ethical decisions to the administered agencies. the framers, it turns out, were wrong in this respect. congress will not jealously guard its powers. in addition, as chief justice and we heard this from the attorney general, it is emphatically the province and duty of the judicial department to say what the law is. yet, if anything, the supreme inrt has gone the other way the chevron line of cases they have different to the meditative agencies interpretation of what congress authorized. and in effect they are allowing the agencies to say what the law is. in the metlife case, when metlife won, but they did not decide the discretionary powers either. 's was arbitrary and capricious. in other words, although metlife created an opportunity for the court to consider the scope of discretion, congress gave to the fsoc, this decision does nothing to restrain the growth. until the supreme court begins to use the authority to define where legislation ends and administration begins, the administrator state will continue to grow. thank you very much. [applause] >> my job is to continue and see if i can find some horror story that will one up his, explaining how there are other horrors in the ministry to state. i think the horrors i am about to talk about, you have solutions where the once he has talked about are extremely difficult. the thesis i'm going to propose is as follows. went together and demonstrated agency which has an independent status, it can only do one thing. , andn issue regulations prosecute cases, but it cannot internalize inside the organization the functions of a federal district court by putting together a panel or commission. or in the case of the consumer , itncial protection bureau took me a long time to memorize that, you cannot put these people together to give them the power to adjudicate so the only kind of judicial review that you can receive is that which comes from an appellate court. this is an issue which starts , butfinancial regulation it continues everywhere else. many of you have followed the oil states case, where the same pattern takes place. the patent trial and appeal board is designed to substitute for the adjudicative system. as we heard from general sessions earlier on today, a separation of powers is indeed a very important protection of liberty. you never want a situation where one person holds all the keys to the safe. if that person is good things may go well. if that person is bad, and things will turn out for it. you have to guard against systematically in all these cases. the situation we have with the elizabeth warren having to do pb is an cf architectural masterpiece. if you adhere to the progressive playback on how administrative agencies ought to be organized. essentially, people are out there who are disembodied experts who turn out to be rigorous partisans, and what we have to do is insulate them from political pressure so they can detect -- protect the public from abuses that will be inflicted upon them. there is no question that a powerful metaphor in the united states is the relationship between wall street and main street. wall street is thought to be at topic of disapprobation. managed toid is they do everything and their power to insulate it from various kinds of circumstances. they gave it a five year term. they gave it guaranteed budget protection by funding it to the federal reserve. and they gave the single commissioner total autonomous power with respect to the way you decide cases. , you can see the powers that came through. liability was questionable. it had to do with the application of rules that have been put together by a predecessor organization. , not only --out they increased the fine. saying, i think this is a perfectly ideal situation to give a public spanking to a corporation which probably committed no violation at all. when the case comes up to the district circuit on appeal, judge kavanagh decided he was going to give them a choice. fact what you want to do is have a single commissioner, then you must be prepared to accept that this person can be removed at the pleasure of the president. at which point the wall street aurnal remit -- started remove cordray campaign, saying he should be dismissed on cause that the will of the president. he said, if you want these people insulated, then the appropriate way in which to do that is to have a commission which has multiple parties on it so you can blunt the force of a single individual. this is not a perfect protection because if you look at the commissions that are put , the president's party having a deciding vote, you discover there is a rigid partisan separation on every kind of issue. is fullalled expertise of division and bias. i think in effect the mistake in the kavanagh opinion is not that it went too far in trying to upset this particular feature of the ministry of state, i think it did not go far enough. what we have to do is come up with a consistent and powerful position, which calls for the separation of the enforcement and regulatory function, and the adjudicative function on the other. this does not solve all of the institutional problems. question,he further what kind of body do you want to put together? there is a question of whether you want specialized courts like those that exist in taxation or bankruptcy, or whether you want them in the course of general jurisdiction. i am relatively agnostic on this point because the long terms that are associated with these articles in the courts gives them a certain insulation from political pressure, and the fact that these judges tend to be appointed by judges in the judiciary rather than the president tends to soften the kind of very sharp lyrical division that otherwise takes place. make no mistake. we had agency after agency from the new deal, this very , and what isuation the problem associated with this. of flip the problem over. every time there is a change in a presidential administration the majority goes from one party to the other, and you see the commission trying to undo the decisions that were made somewhere else. you have the exact same thing in securities and exchange commission. in many ways, the sec is the worst offenders on the situation because it is now institutionalized under which prosecutions before a judge of its own appointment. they don't have unanimous success, but if you are winning 97% of your cases in front of your own tribunal, the only conclusion you can reach is you are playing with the deck of marked cards. and you do not want to allow that situation to ever exist. companions all who spoke about the arcana of with financial regulation. i am making a simpleminded point that goes back to the principles of separation of powers at the beginning of the republic. it applies and financial areas, but carries on everywhere else. what we have to do is understand we will never undo the administrative state, nor should we try, given the complexity of functions that government has to do. none of these complexities justifies the current amalgamation adjudication, legislation, and prosecution in the same agency. what you do, the agencies will run fine. the rest of the public can take a deeper breath and sleep more quietly and contentedly at night. thank you. [applause] >> i'd like to open up the conversation among the members of the panel. when weght struck me first had a conference call a couple of weeks ago. i was waiting for somebody to say something on this subject. does anybody have anything nice ?o say about dodd-frank >> yes, it's short. [laughter] another nice thing to say, most of the regulation, it's only seven years since adoption. [laughter] >> professor scott, i was thinking, as you talked about the lender of last resort, classical theory of lender of last resort, if i remember my is thecs history publisher of economist magazine. he said lend freely but at high rates. we have let freely at low rates. leant freely at low rates. is this emblematic of an economic theory? [applause] scott: you make a good point. it's go back to the 2008 crisis. the fed had a 50 basis point the crisise when occurred. low and behold, nobody came to them tomorrow. they knew the banks were in trouble. they lowered the rate to 25 basis points. still, nobody came. why? the banks were concerned, they though the fed, even fed had no obligation to disclose the identity of particular borrowers, that this would leak out through reports that the fed issued. you could infer who the borrower was. bank of america. they still do not borrow. then with the fed did was create a term auction facility where any bank borrows at an auction rate. and they borrow because we could not tell the good banks from the bad banks. that wase dilemma exposed in 2008. the penalty rate is high, or you penalize the borrower, then that particular borrower will not borrow. the situation gets worse. you have a more difficult problem. they should pay a penalty. whether it is a penalty in the form of a penalty rate or something else. consequence,. there is too much information out there. scott: it would leak out. that was the concern. there are studies which i have cited, which showed that term auction facility and other lending facilities that bank of america received vacated effective interest rate of 0.8%. 1.4%.oldman paid those are rates that no one else could have gotten at the market. that is part of my point, once you create these failing institutions, you decide like nuclear reactors that they are not allowed to fail, you will do anything necessary to subsidize. these were a norma's subsidies they received. we charge you a fair market rate, you're doomed to fail. one of the things that is wrong about the whole federal reserve lending system is that it only allows the government and lenders to take back interest rates. in my view if you start thinking on thehe flexibility, federal housing financial act, wey allow the government -- are going to give you a situation where you get 2.0 interest. welcome to an equity kicker. we now own 50% of this business at such and such a rate. we will take it out. we may sell it back on the open market, but it will allow for the recoupment. what happens is you don't want people in the lending business to make an all or nothing judgment on successive failure. au would rather have this as contingent process. if you were to change the nature of the situation, you can do it. with that aig situation, you so't have that flexibility, a sham transaction was created where you have a third-party corporation, which was taking equities. the problem is owned by the united states government. then you have litigation. you not want to force people to have the wrong statute, and get the wrong result. when youto understand, call the fed the lender of last resort, the word lender is it dangerous term because what it does, it limits the way in which you can provide relief. no private party is going to come and give assistance with say it will be alone or nothing, and we should not handicap that in that way. >> would like to make a comment about too big to fail. people are not making enough about the distinctions. when you read in the press that fail,nks were too big to there is some distinction that should be made. i don't think ordinary corporations are too big to fail. i think what we saw and the financial crisis when lehman failed was that there is not interconnection between these large financial institutions, so when one fails it will drag down others. that too big to fail institutions are the banks, the that have deposit insurance. they are gigantic. we have four of them that are over the trillion dollar mark. those institutions are too big to fail. they are not covered by the dodd-frank act. they are under the jurisdiction of the fdic. they don't have the resources to deal with the failure of a bank. we are still in a position where we have no way of handling the failure of one of these large institutions. trying to propose any kind of action, but we are to understand that the dodd-frank act which intended to deal with the too big to fail problem is a total failure at that, as it does not deal with the real institutions that could cause a financial crisis if one of them fail. judge bea: professor willmar, you are suggesting we go back to a division under the glass-steagall act. i remember when the glass-steagall act was got rid of, banks could not compete with foreign banks that were doing universal banking. abolishingwe are glass-steagall is to be able to --e pete in the universe universal globalist market. is that not a problem. there has been a lot of discussion about that. if you go back to the 90's, the european banks could not compete with our institutions. including specialized investment banks like goldman morgan stanley, merrill lynch, the old jp morgan. our institutions were doing extremely well. in my view that was a story that was told. certainly, i think if you went what -- you would have institutions more specialized, more focused, and i think they would be better at what they do. we've had more problems once you have an institution trying to do everything. when you try to do everything, you tend not to do anything that will. banking problems are universally caused by bad loans. not by securities actions. sure you areake not subsidizing this banking system, let them do everything that make loans. of robbing their powers was in terms of risk. so that you would disperse if i -- you would diversify their activities to decrease overall risk of their enterprise. that idea to me is valid. i don't think we want to go back to the world in which if the bank part goes down, the whole thing necessarily goes down. it is good we have diversification in the banking system. >> it was because if you look at the data, you see that most of the financing that is done in this country is done to the securities markets. the trend is all in a direction. in banks have been flat terms of financing that they provide to the corporate world. want to have successful financial institutions, you cannot freeze them into a position where they are basically losing their role in the economy. iey have to be allowed, as see it, to compete in the areas that are growing. that is the securities markets. i would like to make another point. you want to reverse engineer past failures. at least you don't make the same dumb mistake twice. if you said banking practices in the 1930's and 1940's, it was common to have situations where 50% ofould be limited to asset value, very low. you don't get a lot of leverage, and you don't get a lot of failures. we decided, no, we want to goose up home ownership. any time you have an ideal it is a mistake. homeownership is good, it should be able to survive without subsidies. you tell the banks, we would like you to lend that 80% or 90%, or sometimes at 98%. nobody is going to do that unless you get a guarantee. you have the implicit fannie and freddie guarantee, implicit guarantees are terrible because you do not know how much they cost. they are not on the books. implicit guarantees are terrible because they create opportunities by the government to put collateral obligation on you. then the bill comes through because of social failure. .ou have to let banks compete you cannot go back to another system where there are implicit guarantees that can come through, because then you see a repetition of what happened in 2008. that is not exactly what happened. fannie and freddie may be out of that. to political situation subsidize homeownership and so forth is so great, what happens wethe way in which we think will be dodd's is we take a huge number of losing bets. that this will all work out. like the old days and that jewish government as this, this is the joke, you don't make up by having large volume, and that is something the lenders and the united states seems to not have learned. >> you securitized really bad loans and sold them around the world, pretending they were good. just like the big angst did foreign bonds in the 1920's. you use credit default swaps were a form of insurance to convince people, someone will cover this if things go wrong. we again combined banking with securities and insurance, and peddled what was terrible stuff as if it was good guaranteed stuff. when everything blew up, uncle sam had to step in, because the institutions doing this were so gigantic, they could not be allowed to fail. i think the moral hazard you get when you say, i am not putting loans in my own portfolio, i can package them in securities, seldom around the world, get aaa to provided get aig credit default swaps to back them up. there were a series of perverse incentives. look at the complex of interest created by universal banking. there was an interesting article on deutsche bank, one of the european banks, they pointed out that shareholders of deutsche bank had gotten something like $15 billion of euros and dividends over the life of deutsche bank since 2001. insiders of deutsche bank had gotten $71 billion of euros in bonuses. it has been a bonanza for the insiders. they have made out like bandits. shareholders, not so well. they give. mr. wallison: we have been debating this for years. the way it was phrased was that the banks sold these mortgages back securities around the world. a were bought, -- they were bought around the world. why were they bought around the road? the policy in the united states caused a gigantic bubble. that was far beyond any we had in the past. what was happening in the bubble is that people were taking out mortgages with good high rates on them. the banks were willing to lend to them. no cousin there were defaults. there were never any defaults, or very few, when there is a can't because everyone refinance in the united states without any problem. you never see defaults. see high rates. people in europe and around the world wanted these obligations. so the banks were running out of the available mortgages as things got hotter and hotter toward 2008, and begin to use credit default swaps. you cano say one thing, use a credit default swap to imitate an actual mortgage backed security, which is what they did. one thing about credit default swaps, a complicated subject of course, lehman brothers was a big player in the credit default swap market. when they failed suddenly, without any warning, the credit default swap market kept operating all through the financial crisis. so don't get frightened by something like a credit default swap. it turns out that it is not as harmful as people suggest it is. it is very useful for institutions to manage their risk. what we have done with credit default swaps since the crisis in the dodd-frank is to make that much more difficult. and also to set up a set of institutions of financial market which are now backed by the fed, and which will be the cause of the next crisis. mr. wallison: -- mr. epstein: if you are a responsible company, you start think about diversification and the rest of that stuff, what you do is look at an entire portfolio and see its internal stability. you may have some credit default swaps or other kind of derivative it institutions that look highly in one direction, but if you have physical assets on the other side that complement them, the volatility of the portfolio is lower than the volatility of one of its components. when a regulator comes in, it turns out you have these jurisdictional boundary lines, so it is often the case that the default swaps will be regulated guy, and there will be an unstable portfolio because they cannot take into account the operation. what happens is this regulatory provincialism tends to reason ie -- the chimed in with peter is because what we now do is have another regulatory hothouses, and generally speaking it is getting limited information, it will make the systematic mistake with the volatility of the portfolios, which means when it comes to regulations, it is likely to get them wrong. smart regulation. we do a fine job. i would like to open the session to questions from the audience. question,sk your identify who you are and where you are from. and make it a question. first of all, here in front. i'm a banking consultant in washington and active with the federalist society. following up on professor wilmar's comment, i have a simple question for the panel. what should be the federal government's response, should a funding crisis and contagion even dropped in the shadow banking world, and given the requirements of market to market accounting, trigger substantial capital losses in fdic insured banks, in turn triggers the costly failure of some of those banks? again, a very simple question. [applause] prof. wilmarth: my simpleminded response is, we have to change the status quo. the status quo is unacceptable. that's what we are facing. if we do not change it, is it a magic bullet to get that short-term money back inside banks? not a magic bullet, but you know where it is, and you can regulate it, and you can respond to it, and you can charge deposit insurance premiums to offset it. we do not know what a lot of these claims are. the regulators do not know the whole scope of the repo market. credit default swaps, lots of luck. that is the problem with 2008. had $80ot know that aig billion of credit default swaps, and were going to bring down many financial institutions. billion, of the bailout for aig was paid through directly as 100% coverage on their credit default swaps to institutions, including everyone you can name in the united states and europe, thehey had not done that, market would've collapsed. some of those institutions would have been in serious trouble. , to be clearut about what happened. mr. wallison: there is so much to disagree with. all of his faith in regulation is remarkable when you understand that the banks that got into trouble, as arthur was talking about, were all heavily regulated, and the regulators were inside them every day. so, still, they did not know what was going on. what happens with regulation is people believe, like arthur does, that regulation stops result, it, and as a put more money in banks, or make wentinvestments in banks if they were aware of what the risks were, instead of relying on the regulators, they wouldn't. [laughter] >> if you look at the exposures of aig, and take goldman sachs as an example, all insects had 18% of its capital at risk in the failure of aig. 18%. that is a large number, but not close to insolvency. going back to peter's point about the lack of connectedness. that 18% number does not count what goldman purchased as a hedge against the inability of aig to pay off. if you take that into account, the exposure, is that surprising? put all, you do not your exit one basket. i think goldman understands that idea. if aig had not been saved by the fed, goldman what it been fine. --er counterparties objecttein: one of the -- one of the other things to -- dotand about goldman, you know all the technical stuff? the basic point i'm trying to make, this is a simple thing, the alternative, you're going to get a kind of foreclosure. the financial markets are organized in a way which allows instantaneous foreclosures. that also protects things. you have to protect goldman in order to get out of aig. market, this is a twofold answer. what happened in 1988, which can happen again, you are trying to market to market those good securities, you the abilityors -- to say i'm going to keep my assets off of the market in a bad. of time. it is that inability to delay which forces them into markets, which lowers the price even farther, at which point the cycle starts to complete. is aad of thinking this regulated institution, think of it as a signal -- single owner of an asset, -- in that case, you fundamentally want to change the market to market. judge bea: in the back, a question. institutions, it seems to me once they have been designated as the federal government taking control of the internal governance away from the shareholders, and to me you takinge government control away from people's private property interest in the company that they own shares in. changing that would improve a lot of the things. you talkin: did i hear about taking? [laughter] mr. epstein: the answer about this, taking is half of the problem. the second half of the problem is whether or not when the government takes it gives you some kind of compensation so that shareholders regard themselves as better off than before. if you are running a sensible kind of bailout program with a inject money into the situation, you get liquidity and take back the interest, that is fine. that was arguably the situation you had with fannie and freddie with the 2008 september bailout, when they did a temper sent dividend on preferred stock money that was put in. when they switched the terms of conversation so the amount you get, and you get nothing ever, you should be happy because if you had nothing we would not take it from you anyhow, which is the government's position. is, you have to look at both sides of the problem. what happens in many of these cases, most notably with the gse, nothing was given to the shareholders when this thing was confiscated. it was so terrible about this, if you look politically on this bipartisan willingness to steal on both the republican and democratic side. i have written about this for years on behalf of these hedge funds. i'm amazed at the casual arguments people make, saying we this as milking every dollar that they have. judge bea: another question. >> i would like to ask the panelists, if you had a magic wand that you could wave over dodd-frank, which parts would you amend or repeal. what, if anything, is realistic to expect is likely to happen with regards to dodd-frank? prof. scott: there is a bipartisan bill introduced this week which basically tries to reduce the burdens of dodd-frank , limit them in some cases banks under 200 $50 billion, and in other cases smaller banks. i would say there is a good chance it will pass. that will be it. majoritysuch a narrow of the republicans in the senate in such disagreement among those republicans that i think any willical fix to dodd-frank not pass. in terms of -- i would scrap dodd-frank and start over. [applause] mr. wallison: in the extent they go into the activities, that is a real danger. to stopy are able entire markets from operating, or entire industries from operating because they do not like the way they are operating. that probably will not happen. it could well happen in the next administration if it turns out to be from the left. mr. epstein: the one i particularly hate, which is self-contained and separate, is durbinrban amendment -- amendment. it allowed essentially people to charge the debit cardholders a transaction fee. that is separate. the consumer protection board has killed off all sorts of innovation in this banking section. the reason why it may be irreparable, and his odious in many cases, but is separable from the rest of the statute. prof. wilmarth: among other internationalose capital requirements. it makes no sense whatsoever. doingre the ones who are what i believe banks are supposed to be doing. there the lifeblood of our small and medium-sized communities. if we want to start a culture we need these banks. i hope that can be accomplished if nothing else. i don't think the villain of the piece is all dodd-frank. a big villain resides outside the united states. the two major regulations that really in fact it economic growth are capital and liquidity requirements. those did not originate in dodd-frank. they came out of the financial stability board. how we deal with international organizations going forward in terms of providing regulatory relief is crucial. this is not only an issue about dodd-frank. judge bea: next question. since 1972i have been a money manager in the equity markets. as a general proposition, i would say the big decline is always caused by something different. bubble. as a money manager always looking for the next thing, everything you said is great, i have studied it. i don't know if any of you have looked at what jamie dimon said is a fraud. it is small now and growing rapidly, that is bitcoin. bubbles like the to the in holland. have any of you look at it? do you have a sense of the danger it poses to the capital markets? administrative regulating the growth of bitcoin? >> my feeling is any market you have where people's money just disappears, and nobody has any explanation, that looks like a ponzi scheme. would be ato bitcoin ponzi scheme. i have yet to see where these payoffs are coming from. everybody is promised payoffs, but where do they come from? it is not even clear who was behind it. -- andfrankly wondered this is not an area of my expertise -- why it has not been looked into. it is a matter of some perplexity to me that a market like this, which no one is vouching for, no one is regulating, no one is overseeing, and you have already .ad collapses mr. wallison: our economy is great because of innovation. if people lose money on something like bitcoin because they speculated on it and they have lost, if it is a ponzi scheme than there is a criminal violation there. let's not get into the business of regulating innovation. if's let it work out, and people lose money, that is their problem. [applause] there is no real accountability. they have all had similar problems, regulatory failure in this country is more frequent than it is in canada, where they have never had these problems. the danger you have about this, if you want to apply it to bitcoin, you have to apply it to everything else. at that point it may be that we are start going back to having only gold bullion to run our exchange markets. judge bea: >> question. you decry the tragedy of the federal government having to million to bailout bank of america. 2008erstand your take on is different from the other panelists. we can take as a matter of judicial notice that there is a strong push coming out of congress to readdress income inequality by asking financial institutions to make loans to people who would otherwise not be qualified. fha losses are astronomical in comparison of other forms of loans. the government spends plenty of money on behalf of the taxpayers for its own problems. onld you take a position that form of lending? do you decried at socially induced lending along with your prof.concerns -- wilmarth: getting people into homes they cannot afford makes no sense at all. we have millions of people in homes they could not afford, then homes foreclosed. they lost everything. they lost their credit ratings. they were ruined for years. this is a horribly misplaced policy. that subsidizing housing at the point where people cannot afford what they are getting themselves into, i agree fully. i think that was a terribly misguided policy. i also don't disagree that both the government and the largest banks, there is plenty of responsibility to go around between them. unfortunately, the biggest banks found that subprime lending was apparently a very profitable thing to do. time, but itshort was not for the long-term. i have a one-word answer, it is called rent. on that optimistic note, i have the book over here. can we think our panelists? [applause] judge bea: thank you very much. [captions copyright national cable satellite corp. 2016] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit ncicap.org] >> attorney general jeff sessions today in washington dc. they discussed judicial nominations for the upcoming administration. this is 30 minutes. [applause]