Saule Omarova’s Plan to Remake the Financial System

Saule Omarova’s Plan to Remake the Financial System

What would it look like if we subordinated finance to the public interest?

Saule Omarova is sworn in before the Senate Banking, Housing, and Urban Affairs Committee on November 18, 2021. (Jim Watson/AFP via Getty Images)

When Saule Omarova—President Joe Biden’s pick for comptroller of the currency, the top bank watchdog—withdrew her nomination in December 2021, the industry rejoiced. An unholy alliance of banking lobbyists, centrist Democrats, GOP officials, and right-wing news outlets had orchestrated a nasty smear campaign against the Cornell Law School professor. Because Omarova was born in the Soviet Union and received a scholarship named after Lenin, they characterized her years in academia as part of a communist fifth-column plot to overthrow capitalism. “I don’t know whether to call you professor or comrade,” Republican Senator John Neely Kennedy said during her nomination proceedings.

A quick glance at Omarova’s CV, however, should’ve provided some comfort to the Republicans and centrist Democrats who raised concerns about her bipartisan bona fides. Omarova was born in western Kazakhstan and went to college in Moscow before coming to the United States to obtain her PhD and JD. She spent six years working at the white-shoe banking law firm Davis Polk & Wardwell and then served as a special advisor to George W. Bush’s Department of the Treasury. Later, she taught at UNC Chapel Hill and Cornell University, where she did research on the history and structure of the financial system while exploring ideas for ensuring its stability and overhauling particularly risky parts. In recent years, Omarova has proposed policies such as a public banking option through the Federal Reserve and a National Investment Authority to provide public equity for public projects—policies, it should be noted, that are beyond the scope of the comptroller’s authority.

Her nomination was a compromise pick to appease moderates (stints on Wall Street and in the Bush administration) and progressives (academic research on reform proposals), but she was shot down with fanfare.

“The withdrawal of Professor Saule Omarova’s nomination for comptroller of the currency following ICBA, community bank, and bipartisan Senate opposition exhibits the importance of community banks to Main Street communities and local economic growth,” said Rebeca Romero Rainey, president and chief executive of the Independent Community Banks of America, in a statement celebrating the decision. 

The ICBA claimed that Omarova’s ideas represented an existential threat to community banks’ business model. Ironically, it was a crisis at a community bank earlier this year—the collapse of Silicon Valley Bank—that not only reaffirmed Omarova’s suggestion for a public banking option but brought some of her more radical ideas to a wider audience.

Two weeks after the bank’s implosion, Omarova appeared on Bloomberg’s Odd Lots podcast to discuss the event. On community banks in general, her comments were measured. “They are the epitome of a private bank being truly aware of what the businesses, households, and individuals in any particular community need in terms of financing,” Omarova said. “To the extent that community banks are that kind of bank, we should promote their existence, support them, and facilitate their operations.” What happened at Silicon Valley Bank, however, revealed regulatory failings that needed to be addressed:

The problem is structural, because we’ve made many policy decisions along the way that reward large, diversified banks that conduct businesses and provide financial services farther and farther away from the traditional extension of long-term loans held on their own banking books. These banks have moved into areas like investment advisory, investment banking, and dealing and trading in various derivatives instruments, among others.

Such was the case with Silicon Valley Bank, which had taken over $140 billion in new deposits from tech startups during a pandemic bull run and a period of low interest rates. To make that money work, SVB bought up Treasury and mortgage bonds. It was betting that interest rates would remain low—a bet that unraveled as the Federal Reserve hiked rates multiple times in response to inflation. At the same time, SVB offered venture capital, sweetheart mortgages for industry insiders, winery investments, and other dubious schemes as part of a diversification strategy. 

Silicon Valley deposit holders—seemingly unaware that while the Federal Deposit Insurance Corporation only insured accounts up to $250,000, they would almost certainly get most of their money back once the bank’s assets were auctioned off—threw tantrums in public while petitioning policymakers in private to insure their deposits in full. Which they did. The failed bank was placed under FDIC control, and the government moved to not only guarantee all deposits at SVB but offer the same lifeline to all similar lenders in the event of a larger banking crisis.

This great victory for investors and bankers affirmed yet another insight by Omarova. Bank deposits are already publicly backed: banks accrue their assets because of charters granted by the government, their deposits are insured below a certain amount with public funds as a last resort, and even amounts uninsured over the $250,000 cap can be broken up in ways that protect them. So why all the pretense? Why are we letting for-profit institutions like banks structure our financial system around the myth that money is a private good? 

If money is a public good, then we should design the financial system accordingly. We could regulate private banks like utilities—making sure they are not abusing public backing to pursue excessive returns while externalizing the costs and putting the larger system at risk. Or we could cut out the middlemen entirely and provide this public good through public institutions—through, say, Federal Reserve bank accounts. 

Omarova has spent years thinking about how our money systems could be reformed in ways like these. Her work has much to say about the banking system, financial innovations, public finance, social policies, corporate governance, and larger questions about the ends the economy can or should serve. Tying it all together is a simple argument: so long as financial institutions are allowed to operate with extraordinary public subsidy and impunity, they will continue to socialize losses and privatize gains in increasingly destructive ways. What would it look like if we brought the financial sector to heel and subordinated it to public oversight and public interest? And what kind of public projects could we pursue if we had financial institutions built to genuinely advance them?

 

The major thrust of Omarova’s research concerns how various private and public entities are formed, contested, and deployed to create our financial system—and the myriad flaws that define it. Her proposed alternatives stem from deep knowledge of what’s missing from our current policies and how they can be improved.

In 2009, Omarova published “The Quiet Metamorphosis” in the University of Miami Law Review. The article examined how big banks successfully pressured the Office of the Comptroller of the Currency (OCC) to alter its interpretation of the National Bank Act of 1863 and allow them to trade derivatives, a major contributing factor to the 2008 global financial crisis. From the 1980s on, the OCC increasingly adopted expansive interpretations of the business of banking in response to proposals and requests from industry lobbyists, eventually permitting commercial banks to “diversify.” Banks transformed from deposit-takers and lenders into “a new breed of financial ‘superintermediaries,’ or wholesale dealers in pure financial risk.” It was Omarova’s hostility to this development—and not her youth in the Soviet Union—that scared the banking lobby when she was nominated to head the OCC.

“One of the critical questions in this respect is whether this type of business should get the benefit of having access to federally insured retail deposits and other channels of federal subsidies available to traditional banks,” Omarova writes in the paper. “More broadly, the fact that these institutions are increasingly becoming ‘too big to fail’—or, arguably, ‘too big to save’ in times of a major crisis—requires serious rethinking of how to contain moral hazards inherent in their sprawling business activities.”

Omarova built on this point in her 2013 article “Merchants of Wall Street,” which looked at how the biggest banks watered down or eviscerated the regulations separating banking services from commercial activities. The OCC’s expansionary interpretation of the business of banking helped create a regulatory environment where the largest financial institutions were able to breach the boundary between commerical and investment banking by trading physical commodities and energy, echoing the transformation of derivatives markets. 

“Is it in the public interest to allow financial intermediaries in general—and [systemically important financial institutions] in particular—to engage in commercial business activities related to physical commodities and energy trading, a critically important sphere of economic activity?” Omarova asks. “Or does the mixing of finance—as opposed to just banking—with this particular form of commerce create unique risks from the perspective of systemic stability and the integrity and efficiency of today’s interconnected markets?” For those of us whose lives do not revolve around turning everything into a profitable exchange, it’s not immediately clear why a bank should do anything other than banking—especially when each time it does, a crisis seems to quickly follow.

Yet in the years since the last crisis that nearly brought down the global economy, banks have grown bigger and bigger, entering new industries while clearing the old hunting grounds. In a 2019 article called “The ‘Too Big to Fail’ Problem,” Omarova argued that we often fixate on failures (the “‘F’ factor”) and bailouts, partly because they exemplify “the fundamental unfairness of the situation in which a firm that fully enjoyed the benefits of being a free market participant when things were going well repudiates the basic rules of the free market when its business decisions bring it to the brink of collapse.” The “‘B’ factor,” bigness, receives much less attention. On a superficial level, it refers to balance sheets, but in reality size is “mainly a proxy for an individual firm’s structural power and functional significance within a market.” TBTF solutions tend to settle on bailouts of individual firms, with the aim of strengthening the larger system. But if a banking crisis reveals dysfunction that threatens the system as a whole, a better response might include creating more public entities or institutions that take on or prohibit roles captured by private firms. 

Bankers might respond that the overextended structure of finance is actually a boon—it not only tidies up the sector by bringing its pieces into larger and greedier hands, but allows for technological innovations that take advantage of this consolidation. Omarova’s research shows that the hunt for new speculative activities has been part of a larger quest to free banking from regulatory supervision that reins in risky behavior that might otherwise be stupendously profitable. In “New Tech v. New Deal,” Omarova examines the political arrangements that shaped who allocated capital, generated risk, or bore risk under the New Deal order, along with the dynamics that led to the abandonment of this order in favor of speculative assets and services. For Omarova, the development of new products and services such as cryptocurrencies should be seen as part of the industry’s long-standing fight to free itself from regulation and liability.

As rules have been abandoned, the risks have increased. A financial market “that keeps growing bigger, faster, more complex, and therefore more vulnerable to sudden and contagious shocks cannot rely on the ‘invisible hand’ to steer it away from trouble,” Omarova writes. It requires public agents “capable of acting not in pursuit of purely profit-making goals but in the collective interest of all market participants.”

Omarova’s body of work tells a clear story about how financial firms have utterly undermined regulations that prohibited certain risky activities. These developments have led to the creation of a host of financial products and services that are “empowering private actors to engage in virtually unconstrained financial speculation” and could usher in more destabilizing crises. But at the same time, the reckless behavior of these financial firms can be used to open up space for “much more direct and proactive public involvement in managing the flows of capital in financial markets.” Regulation does not need to end at curtailing systemically risky activities. It can be used to undermine key dynamics that strengthen, insulate, or enrich firms while shifting the balance of power in finance between private and public—to throttle profit-seeking parasites and empower public entities to redesign the role finance plays in our economy. 

 

The passage of the Inflation Reduction Act has revived arguments in the United States about industrial policy and the broader issue of how capital is allocated. In this magazine, Kate Aronoff argued that the design of the IRA—which primarily offers subsidies to private firms and consumers—“means letting the public sector shoulder the risks of an energy transition while the private sector reaps the rewards.” Many of the IRA’s limitations stem from the way it enlists the private sector to provide the capital needed to fund new development.

We need to tackle climate change urgently, but how we fund green technology is crucial. Omarova’s work offers models for an alternative means of investment. In her 2022 article “The National Investment Authority: A Blueprint,” she advocates for a public investment option in the United States. It could be used to ensure backing for green energy projects without private support while at the same time guaranteeing high wages for workers. It could be used to help insulate the country from supply-side shocks, like the one we experienced during the COVID-19 pandemic. Or it could be used to direct capital toward goods, services, sectors, and markets in ways that reduce inequality. Additionally, in moments of crisis, the NIA, instead of BlackRock or some other asset manager, could negotiate and coordinate the provision of emergency credit, assume equity positions in near-bankrupt firms, and reorganize these firms in alignment with a public development strategy.

The structure of the NIA is relatively simple. At the top sits the NIA Governing Board, an independent federal agency staffed by presidentially nominated, congressionally approved members that design and ensure the implementation of a National Investment Strategy. The National Infrastructure Bank will be the primary lending arm, functioning as a development bank unconstrained by profitability concerns and instead focused on funding infrastructure or industrial projects in which private creditors are uninterested. Paired with this credit arm is the National Capital Management Corporation, which will function as a public BlackRock.

In addition to creating a more democratic vehicle for investment, the National Investment Authority could have important political effects. On one level, a public option would undermine the political power of the reactionaries who are driving the direction of our technological development. On a deeper level, it would allow us to coordinate capital in ways that markets are not amenable to—including funding socially necessary products or services with up-front costs that deter private investment. 

Omarova imagines the NIA playing a role in capital markets analogous to the one that central banks play in money markets: it would participate in the market and provide stability, but also take the reins when needed. It could shift investment during recessions or booms when private actors won’t, and look to longer-term horizons to prevent problems like supply shocks. It would be able to assume a variety of roles, such as an infrastructure bank, an equity fund, and an asset manager. 

“The government needs to use its unique advantages as a market actor to maximize the benefits to the public and achieve its key public policy,” Omarova writes. “In practice, this explicit prioritization of the public interest over private profits requires more flexible mechanisms for funding infrastructure projects based on their potential to produce the desired public policy outcomes, rather than their projected commercial returns. Allowing conventional private market incentives to dominate public decisions of this magnitude is simply not an option.” In other words, finance is too important to be left to the private sector.

Omarova draws direct parallels between the NIA and the New Deal–era Reconstruction Finance Corporation, which “systematically supplied massive amounts of credit and equity capital to banks, big and small businesses, and public agencies at a time when private credit was scarce.” It facilitated the creation of numerous institutions still integral to the U.S. economy today, including Fannie Mae, the Small Business Administration, and the Export-Import Bank. An NIA modeled after it could go even further. It could not only help rebuild American infrastructure with green objectives in mind, but it could also take up “domestic supply chains, advanced ‘clean’ energy technologies, quality healthcare and housing, and other forms of social infrastructure” that are currently neglected or left to the whims of the private sector.

Since withdrawing her nomination in late 2021, Omarova has continued to argue about how the funding model of the Biden administration’s policies could shape their outcomes. In an essay published this March—co-authored with Todd N. Tucker, director of Industrial Policy and Trade at the Roosevelt Institute—Omarova emphasizes that industrial policy only holds promise if “seen holistically, and not just as a way to onshore the making of particular widgets.” Any meaningful industrial policy needs to take on a financial sector that has grown divorced from the real economy and prioritized speculation above production. “Industrial policy should be thought of as helping to prevent dangerous overgrowth of those sectors that generate potentially significant public harms, that exacerbate existing (or create new) structural imbalances in the economy, or that otherwise undermine the overall effort at rebuilding domestic production,” Omarova and Tucker write. 

The authors use the crypto bubble as a prime example of harmful speculative activity, but the problem is more general. A significant chunk of the digital economy is built on lucrative products and services with well-documented public harms—including social media platforms, app-based labor platforms, on-demand delivery services, rental platforms, retail logistics empires, corporate surveillance services, and, increasingly, efforts to serve the military-industrial complex. All are products of a system designed to privately secure excessive returns, regardless of the social costs. 

The alternative is to “harness the power of finance as a tool of industrial revival,” as Omarova and Tucker argue. “That requires more direct and smarter public action inside financial markets.” One idea they propose is to offer institutional investors a public equivalent of the asset managers that litter Wall Street and Silicon Valley. In search of high long-term returns to pay out to retirees, pension funds have been pushed to park larger and larger sums of money with venture capital chasing speculative tech investments. At least two dozen state and local pension funds were directly exposed by Silicon Valley Bank’s mismanagement of funds and lost over $255 million. A public option for institutional investors would allow them to secure more stable returns while supporting projects of social value.

 

By killing Omarova’s nomination out of fear of what she might do as comptroller, the banking sector may have inadvertently given space to her more radical proposals for overhauling our financial system. Earlier this year, in a New York Times op-ed, Omarova suggested the government take a “golden share” in systemically significant banks, giving it specific rights that would allow it to gain insight into operations, discipline bank management, intervene to propose or block certain actions, and generally help manage the risk financiers have assumed at great cost to the public.

The spectacle of the nomination fight, and the banking crisis in Silicon Valley earlier this year, have come at a time when people are searching for ideas about the public purpose of various institutions and economic activities. What role should finance play in building out public goods and services? What role should the public play in technological development? What sort of activities should be legal, illegal, heavily curtailed, or experimented with?

The new openness to industrial policy offers an opportunity to pursue bolder strategies to rid us of the parasites that dominate our political and economic system. A National Investment Authority that could lend or guarantee private debt, set up a public equity fund, pursue development goals with an infrastructure bank, and rescue institutional investors from the hunt for excessive returns would help starve the beasts that loom over Palo Alto, and the horde that profits from the destruction of our planet.


Edward Ongweso Jr. is a Brooklyn-based writer who focuses on finance, labor, and tech. He’s the finance editor at Logic(s) magazine and co-host of This Machine Kills, a podcast about the political economy of technological innovation.