Donald Trump campaigned on taking the axe to what he sees as the main impediments of America’s growth prospects.
During the campaign, two industries were cited as being ripe for deregulation: banking and energy.
But judging by the sheer number of banking executives Trump has tapped for cabinet positions, it’s banking’s sprawling regulatory regime that’s likely first on the chopping block.
What Trump said on the campaign trail versus what he’s saying now – and what his cabinet picks are likely telling him – will have a huge impact on how this goal is achieved, and what – if any – upside there is for investors.
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Here’s how I see “Government Sachs” playing it…
21st Century Glass-Steagall: Bringing Back the Firewall
Before he was elected, candidate Trump’s website said, “It’s time for a 21st Century Glass-Steagall.”
In other words, Trump wanted to somehow revert to the 1930s-era legislation that separated investment banks and trading operations from the commercial banks where depositors actually parked their savings.
The Financial Services Modernization Act of 1999, which tore down the last remaining vestiges of the old Glass-Steagall Act (principally to smooth the way for the illegal 1998 Citibank and Travelers Insurance merger), was spearheaded by the Treasury secretary at the time, Robert Rubin. The former Goldman Sachs CEO would earn over $100 million when he subsequently joined Citigroup.
Trump even wanted his call for a 21st century Glass-Steagall to be a plank in the Republican Party’s 2016 platform. It wasn’t.
In August, Trump called for a moratorium on new bank regulations. His supporters said it wasn’t at odds with his call for a revamped Glass-Steagall, but a signal that overregulation was different than prudent regulation.
After berating Hillary Clinton on the campaign trail for taking money from the likes of Goldman Sachs and being in the pocket of big banks, once elected he quickly changed his tune.
His post-election website said: “The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”
President-elect Trump appointed Republican Paul Atkins, a former Securities and Exchange Commissioner and deregulation advocate, to lead his Financial Services Policy Implementation team.
Soon after, Trump tapped former Goldman Sachs alum Steven Mnuchin as Treasury secretary and current Goldman President and COO Gary Cohn as director of the National Economic Council.
Stephen Bannon, Trump’s chief strategist, and Anthony Scaramucci, his principal Wall Street backer, are both Goldman alums.
President-elect Trump’s website no longer mentions Glass-Steagall.
It’s an idea that has staying power, though.
Killing Dodd-Frank Might Be Easier Said Than Done
The Dodd-Frank Act, passed largely along party lines in 2010, established hundreds of new rules and regulations covering financial services companies and banks.
Since its passage, it has been attacked relentlessly by House Republicans who believe the legislation went too far and that new regulations slowed America’s economic recovery.
Republican legislators have introduced dozens of bills to repeal parts of Dodd-Frank, and have attempted to eliminate it entirely. Besides oversight hearings to criticize regulators for overreach, Republicans have refused to approve appointments of top regulators and threatened budgets of the Securities and Exchange Commission and the Commodities Futures Trading Commission, hampering development of Dodd-Frank rules.
Another tactic used by Republicans to slow or kill new regulations amounts to calling for studies of the “costs” of regulatory compliance, which can take years.
The Donald, as he used to be called in his New York circles, will be appointing new heads of the SEC and the CFTC. He’s also expected to appoint new members of the Federal Reserve Board of Governors and may call for the resignation of Chair Janet Yellen – though that would be an unprecedented move.
Dodd-Frank also created the new post of vice chair of supervision at the Federal Reserve, the internal group that oversees the largest banks. That post remains unfilled; however, Daniel Tarullo, the Fed’s regulatory champion, has been effectively overseeing supervision of the country’s biggest banks. Trump will likely appoint someone more big-bank friendly than Tarullo.
Most of the financial services regulatory changes sought by Republicans are embedded in the Financial CHOICE Act, drafted by Rep. Jeb Hensarling (R-TX), chair of the House Financial Services Committee, who was under consideration for the Treasury secretary job.
The act would gut Dodd-Frank by:
- Reducing the number of banks under its supervisory umbrella;
- Ending the special failed-bank resolution mechanism;
- Gutting the Consumer Financial Protection Bureau;
- Forcing regulatory agencies to be funded specifically by congressional appropriations;
- Requiring detailed cost-benefit analysis of proposed regulations;
- And repealing the Volcker Rule, which prohibits proprietary trading and places bank limits on investments in hedge funds and private-equity funds.
But Trump’s deregulatory push isn’t going to be all smooth sailing, even for the president-elect’s “Government Sachs” team.
Even though Republicans have a majority in both houses of Congress, they are short of the 60 votes needed to pass major legislative reforms like the Financial CHOICE Act in the Senate. And not all Republicans will be onboard the deregulation train.
Sen. Susan Collins (R-ME), for one, voted for Dodd-Frank in 2010 and isn’t about to start cutting it up now.
But I think there’s a way forward…
Here’s the Route Trump Should Take
The government may be changing, but this hasn’t: Big banks are still distrusted and hugely unpopular with the voting public.
Continuing scandals like the recent Wells Fargo fiasco, revelations that big banks have been fixing the price of silver, more settlements based on charges of mortgage fraud, foreign-exchange price fixing, and interest rate manipulation aren’t as prevalent as they were a few years ago, but are still in the news on a regular basis.
The public’s going to be reminded by Democrats and regulatory watchdogs that overzealous deregulation in the form of the Depository Institutions Deregulation and Monetary Control Act of 1980 (which led to the country’s huge savings and loan crisis), and the Financial Services Modernization Act of 1999 (which led to the mortgage crisis and the insolvency of most of America’s giant banks), is what happens when bank lobbyists get to rewrite the rules for their masters.
If the champions of deregulation win the day, there’s likely to be a tremendous tailwind pushing the economy and bank profits through the roof. But… we’ve been up to that mountaintop before – and we know that it’s no mountain, but a cliff.
There’s a third path here, one that runs between business-throttling overregulation and a complete bankers’ free-for-all.
If the Trump Team reduces costly and overly burdensome regulatory and compliance regulations to straightforward rules and laws – backed up by the promise of prison sentences for executives and fraudsters instead of hitting shareholders in their pockets for wrongdoing, the United States can get on fostering “the principal business of the American people,” which President Calvin Coolidge said “is business.”
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