End Dodd-Frank? Un­likely, but con­sumer agency in crosshairs

Daily Local News (West Chester, PA) - - BUSINESS - By Marcy Gor­don

Pres­i­dent-elect Don­ald Trump pledged in his cam­paign to throw out what he called sti­fling reg­u­la­tions, in­clud­ing the stricter fi­nan­cial rules that Congress built to pre­vent another cri­sis.

Now, as his tran­si­tion team as­serts it­self, an all­out re­peal of the 2010 Dod­dFrank law — Trump called it a “dis­as­ter” and a “disgrace” — seems un­likely. But ex­perts fore­see a grad­ual but po­ten­tially sig­nif­i­cant chip­ping away of key parts of the law.

“I don’t think it evis­cer­ates Dodd-Frank, but I think it takes away some parts,” James Cox, a Duke Univer­sity ex­pert on se­cu­ri­ties law, said of the Trump team’s ap­proach.

The tran­si­tion team’s stated goal is a stark one: “To dis­man­tle the Dod­dFrank Act and re­place it with new poli­cies to en­cour­age eco­nomic growth and job cre­ation.”

Repub­li­cans have long at­tacked Dodd-Frank and a cen­tral com­po­nent, the Con­sumer Fi­nan­cial Pro­tec­tion Bureau. The CFPB vastly ex­panded reg­u­la­tors’ abil­ity to po­lice con­sumer prod­ucts — from mort­gages to credit cards to stu­dent loans. Crit­ics say Dodd-Frank and the CFPB went too far to hin­der banks from mak­ing loans that peo­ple and busi­nesses need to spend and hire.

Yet many ex­perts say a re­lax­ing of Dodd-Frank’s rules — the most sweep­ing such changes since the De­pres­sion — could raise the like­li­hood of another cri­sis fed by high risk-tak­ing. Dodd-Frank lim­its many of the high-risk prac­tices that ig­nited the 2008 fi­nan­cial cri­sis and led to a re­ces­sion that wiped out $11 tril­lion in house­hold wealth. Tax­pay­ers were stuck bail­ing out Wall Street gi­ants and other fi­nan­cial firms.

Beyond the CFPB, other el­e­ments of Dodd-Frank that could be vul­ner­a­ble to a Trump-driven at­tack are:

• The Fi­nan­cial Sta­bil­ity Over­sight Coun­cil. The coun­cil, made up of top reg­u­la­tors, mon­i­tors the bank­ing sys­tem for any risks that could trig­ger another cri­sis. It can la­bel a com­pany as so big and en­twined with the fi­nan­cial sys­tem that its fall could im­peril the econ­omy. That la­bel then puts the com­pany un­der tighter over­sight. Crit­ics say the coun­cil, which makes de­ci­sions be­hind closed doors, wields ex­ces­sive power.

• Rules that crit­ics say es­pe­cially hurt re­gional and com­mu­nity banks that had lit­tle to do with the fi­nan­cial cri­sis. Their cost of com­ply­ing with the new rules is so high, crit­ics charge, as to im­pede their abil­ity to lend and help fuel eco­nomic growth.

• The Vol­cker Rule, which in most cases bars the big­gest banks from trad­ing for their own profit. The idea was to pre­vent high-risk trad­ing bets that could im­plode at tax­payer ex­pense. Many banks ar­gue that the Vol­cker Rule sti­fles le­git­i­mate trad­ing on be­half of cus­tomers and the banks’ abil­ity to limit risks.

If op­po­nents man­age to weaken those parts of Dodd-Frank, they could leave the law with much of its core in­tact yet with­out cru­cial el­e­ments. Among the el­e­ments left in place could be these:

• Stricter re­quire­ments for how much cap­i­tal large banks must hold to pro­tect against po­ten­tial losses and for what pro­por­tion of their hold­ings must be high qual­ity.

• Ex­panded over­sight and greater trans­parency in­volv­ing de­riv­a­tives, the risky fi­nan­cial tools that helped ig­nite the 2008 cri­sis.

• Scru­tiny of hedge funds, which had pre­vi­ously faced scant over­sight and now must re­veal in­for­ma­tion about in­vest­ments and busi­ness part­ners.

• Re­stric­tions on the mort­gage sys­tem to dis­cour­age risky lend­ing.

• The right of share­hold­ers to pro­vide a non­bind­ing vote on ex­ec­u­tive pay pack­ages.

Among the pro­vi­sions Cox thinks may be elim­i­nated is one that em­pow­ers the Se­cu­ri­ties and Ex­change Com­mis­sion to im­pose a stricter stan­dard for bro­kers when they pro­vide in­vest­ment ad­vice. Like in­vest­ment ad­vis­ers, bro­kers would have to put their clients’ in­ter­ests first.

All that said, no one is sure what crit­ics will man­age to achieve. Though Repub­li­cans con­trol the House, they’ll have only 52 seats in the 100-mem­ber Se­nate, well short of the 60 needed to de­feat fil­i­busters and ad­vance most leg­is­la­tion. Sen. Eliz­a­beth War­ren, the lib­eral Demo­crat and fiery critic of Wall Street, will likely lead the re­sis­tance through fil­i­busters.

War­ren was the ar­chi­tect of the CFPB, and Pres­i­dent Barack Obama tried to in­stall her as its first di­rec­tor but was blocked by her Repub­li­can op­po­nents.

For all the at­tacks on Dodd-Frank, most Wall Street banks al­ready have baked in many of its rules and aren’t clam­or­ing to un­wind them. They have, for ex­am­ple, built up cap­i­tal buf­fers against ma­jor po­ten­tial losses and are on track to meet reg­u­la­tors’ re­quire­ments ahead of dead­lines. And since Trump’s vic­tory, fi­nan­cial stocks have surged, partly in an­tic­i­pa­tion of an eas­ing of Dodd-Frank rules.

Still, the CFPB re­mains a bulls­eye for crit­ics, and among their tar­gets is the agency’s lead­er­ship struc­ture. Op­po­nents want to elim­i­nate a sin­gle di­rec­tor in fa­vor of a new five­mem­ber com­mis­sion. That would lessen the power of the di­rec­tor, who’s ap­pointed by the pres­i­dent.

Those crit­ics got a boost last month when a fed­eral ap­peals court ruled that the CFPB’s struc­ture was un­con­sti­tu­tional be­cause it al­lowed the pres­i­dent to fire the di­rec­tor only for cause. The court said the pres­i­dent must have author­ity to dis­miss the di­rec­tor at will.

Op­po­nents also want to put the agency’s fund­ing un­der Congress’ power rather than com­ing from the Fed­eral Re­serve as it does now.

What­ever hap­pens, the CFPB and the broader Dodd-Frank law are al­most sure to be mod­i­fied. The de­tails, though, re­main far from clear.

“We’ll see some sig­nif­i­cant changes to Dod­dFrank,” says Tom Quaad­man, a Cham­ber of Com­merce ex­ec­u­tive. “We’re not nec­es­sar­ily go­ing to see a whole­sale re­peal.”


Repub­li­can Pres­i­dent-elect Don­ald Trump speaks at a cam­paign rally Nov. 8 in Grand Rapids, Mich. Trump pledged in his cam­paign to throw out what he called sti­fling reg­u­la­tions, in­clud­ing the fi­nan­cial rules that Congress built to pre­vent another cri­sis. As the Trump tran­si­tion team as­serts it­self, an all-out re­peal of the 2010 Dodd-Frank law that strength­ened reg­u­la­tors’ over­sight seems im­prob­a­ble.

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