AIG American International Group Inc

By Andrew Ackerman 

WASHINGTON--When Hillary Clinton and Bernie Sanders square off tonight at a debate in Wisconsin, expect more attention to an unlikely source of friction between the leading Democratic presidential candidates: a 15-year-old law barring regulation of complex financial instruments at the heart of the 2008 financial crisis.

For weeks, Mrs. Clinton has criticized the Vermont senator for backing the 2000 Commodity Futures Modernization Act, which prohibited U.S. policy makers from regulating derivatives. The measure deregulated the types of mortgage-related swaps and other derivatives that backfired during the crisis, contributing to the collapse of Lehman Brothers Holdings Inc. and the near-collapse of firms like American International Group Inc.

"You're the one who voted to deregulate swaps and derivatives in 2000, which contributed to the overleveraging of Lehman Brothers, which was one of the culprits that brought down the economy," Mrs. Clinton said at a Democratic debate last week.

Derivatives, including swaps, are used by banks and other firms to hedge--or speculate--on everything from moves in interest rates to the cost of fuel.

Mr. Sanders, who has made breaking up the biggest U.S. banks a top policy goal, has yet to directly respond to the criticism, saying nobody has fought harder against Wall Street-backed legislation in Congress than he has.

Now one of his top aides says the senator's "yes" vote in 2000 was a mistake, and he blames the administration of President Bill Clinton, Mrs. Clinton's husband. The Clinton administration was aggressively supporting the legislation at the time, and Mr. Clinton signed it into law. The former president, however, now says he, too, received bad advice.

"It was a mistake to listen to the Clinton administration's economic advisers who were so successful in pushing for this bill that only four members of Congress voted against it," said Warren Gunnels, a policy adviser to Mr. Sanders. He was referring to a stand-alone House vote on the bill in October 2000, when Mr. Sanders was a member of the House of Representatives. A similar version of the bill eventually cleared both chambers of Congress two months later after it was added to must-pass legislation funding the federal government.

The fight over the 15-year-old legislation is the latest illustration of how deep divisions over Wall Street have come to define the presidential campaigns of the two leading Democratic candidates. Mr. Sanders, citing what he sees as greed and irresponsibility on Wall Street, has put forth proposals that would reshape American finance, promising to break up the biggest banks in his first year in office.

Mrs. Clinton has taken a more surgical approach. Her campaign has developed more than two dozen ideas that form a web of regulation, prosecution and taxation aimed at deterring what she considers bad behavior.

Though once considered a long-shot candidate, Mr. Sanders finished the Iowa caucuses in a dead heat with Mrs. Clinton, and he decisively beat the former secretary of state in the New Hampshire primary this week. The nominating contest now moves to South Carolina and other southern states with large minority populations where Mrs. Clinton's campaign is banking on a revival.

Mr. Gunnels said the criticism of Mr. Sanders's record is "disingenuous" because the 2000 law had the backing of not only Mrs. Clinton's husband but also Gary Gensler, a Treasury Department official at the time who was intimately involved in advancing the bill through Congress. Mr. Gensler is now the chief financial officer of Mrs. Clinton's campaign.

"As soon as Sen. Sanders learned how bad this bill was he worked to repeal it," said Mr. Gunnels. Mr. Sanders also led the opposition to Mr. Gensler's 2009 nomination to head the Commodity Futures Trading Commission--which gained authority to regulate swaps after the crisis--because of Mr. Gensler's role in spearheading passage of the 2000 law, Mr. Gunnels said.

Most Democratic lawmakers and liberal groups later cheered Mr. Gensler's bare-knuckle approach to rule-making--a surprising turn for the former Goldman Sachs Group Inc. executive and one-time champion of deregulation. Despite that reputation, Mr. Gensler has long been a target of Mr. Sanders, largely over high-profile CFTC rules designed to curb bets on oil, gold and other commodities that Mr. Sanders believes didn't go far enough to limit speculation. A federal court eventually sent the rules back to the CFTC, ruling the agency didn't do enough to justify their burdens.

For Mrs. Clinton, raising concerns about Mr. Sanders's voting record allows her to deflect criticism that her own relationship with Wall Street is cozy. She has accepted millions in donations and speaking fees from large firms, but says she never changed a view or a vote because of a contribution.

"I'm not impugning your motive because you voted to deregulate swaps and derivatives," she said of Mr. Sanders at last week's debate. "People make mistakes and I'm certainly not saying you did it for any kind of financial advantage. What we've got to do as Democrats is to be united to actually solve these problems. And what I believe is that I have a better track record and a better opportunity to actually get that job done."

Write to Andrew Ackerman at andrew.ackerman@wsj.com

(END) Dow Jones Newswires

February 11, 2016 16:02 ET (21:02 GMT)

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