Wall Street re­form

How Trump could dis­man­tle

The Washington Post Sunday - - BUSINESS - BY RE­NAE MERLE NEW YORK

For years, Wall Street has com­plained that re­stric­tions placed on the in­dus­try af­ter the fi­nan­cial cri­sis went too far and were too costly. Those con­cerns didn’t gen­er­ate much sym­pa­thy — un­til now.

Pres­i­dent Trump has opened the door for sweep­ing changes to the way fi­nan­cial in­sti­tu­tions — big and small — are reg­u­lated. He signed an ex­ec­u­tive or­der call­ing for a re­view of the laws that gov­ern the U.S. fi­nan­cial sys­tem in an open­ing bid to up­end the Dodd-Frank Act, the fi­nan­cial over­haul passed in 2010.

Banks and other fi­nan­cial in­sti­tu­tions are dust­ing off their wish lists in hopes of trim­ming, if not killing, some of the most costly por­tions of the law. The coun­try’s big­gest banks will spend $100 bil­lion over the next five years com­ply­ing with reg­u­la­tions, said Mike Mayo, a bank­ing an­a­lyst with CLSA, a bou­tique in­vest­ment firm.

“Dodd-Frank was en­acted to pre­vent an­other fi­nan­cial cri­sis,” Mayo said. “And it was done quickly and with pur­pose, but it was not done ef­fi­ciently for the in­dus­try.”

Of course, dis­man­tling the leg­is­la­tion will not be easy. It took more than a year to pass and is com­posed of hun­dreds of reg­u­la­tions is­sued by more than half a dozen agen­cies. Some pieces of the bill re­quired the ap­proval of sev­eral fed­eral agen­cies and would be

cum­ber­some to re­visit. Af­ter hir­ing thou­sands of peo­ple to help di­gest the new rules, some big banks say they are not look­ing for an­other time-con­sum­ing change.

Large fi­nan­cial in­sti­tu­tions now must hold onto more cap­i­tal, a mea­sure of a bank’s abil­ity to ab­sorb losses, and en­dure yearly “stress tests” to prove that they could sur­vive eco­nomic calamity. But that hasn’t stopped some from get­ting big­ger any­way. JPMor­gan Chase now has nearly $2.5 tril­lion in as­sets, up from about $2.2 tril­lion in 2008. Wells Fargo has grown even faster, now hold­ing $1.9 tril­lion in as­sets com­pared with $1.3 tril­lion in 2008.

“We’re not ask­ing for whole­sale throw­ing out of Dodd-Frank,” Jamie Di­mon, chief ex­ec­u­tive of JPMor­gan Chase, said at a fi­nan­cial ser­vices con­fer­ence in De­cem­ber. James Gor­man, chief ex­ec­u­tive of Morgan Stan­ley, told CNBC re­cently, “I’ll be very clear about this: I’m not a fan of get­ting rid of Dodd-Frank.”

Rather than start­ing over, in­dus­try lead­ers say, they would rather tweak the frame­work Dod­dFrank cre­ated. Some of those changes will re­quire con­gres­sional ap­proval, but oth­ers may be eas­ier to ac­com­plish through the busi­ness-friendly reg­u­la­tors Trump is ex­pected to ap­point than by en­dur­ing a bruis­ing bat­tle in Congress. Small com­mu­nity banks, for ex­am­ple, are hop­ing reg­u­la­tors will more ex­plic­itly ex­empt them from cum­ber­some rules de­vel­oped for Wall Street gi­ants.

“There is a lot that can be done with new per­son­nel,” said a se­nior fi­nan­cial in­dus­try of­fi­cial, who like oth­ers in this ar­ti­cle spoke on the con­di­tion of anonymity to talk frankly.

Even in­sid­ers won­der what is ahead. Here is a guide to the ar­eas of Dodd-Frank most likely to be rolled back dur­ing the Trump ad­min­is­tra­tion:


Dodd-Frank touches nearly ev­ery as­pect of the way banks op­er­ate. But one of the most con­tro­ver­sial ones has long been what is known as the Vol­cker Rule, which aims to pre­vent large, fed­er­ally in­sured banks from making risky fi­nan­cial bets. Fi­nan­cial in­sti­tu­tions that make loans and col­lect con­sumer de­posits, such as check­ing and sav­ings ac­counts, shouldn’t be tak­ing on the same type of risks that hedge funds and pri­vate-eq­uity firms may, sup­port­ers of the rules say. Lim­it­ing those ac­tiv­i­ties helps keep the fi­nan­cial sys­tem safer, they said.

But prob­lems be­gan to mount as reg­u­la­tors tried to dis­tin­guish be­tween spec­u­la­tive ac­tiv­i­ties, known as “pro­pri­etary trad­ing,” which the rule in­tends to limit, and other types of ac­tiv­i­ties such as “mar­ket-making,” in which banks buy and sell se­cu­ri­ties to clients, or hedg­ing, in which banks at­tempt to off­set risk in their hold­ings.

The bank­ing in­dus­try says the rule, which is named af­ter Paul Vol­cker, for­mer chair­man of the Fed­eral Re­serve, is too com­plex and has been im­prop­erly ap­plied to small com­mu­nity banks.

Di­mon fa­mously crit­i­cized the rule, say­ing reg­u­la­tors would need a psy­chi­a­trist to help de­ter­mine whether a trade was pro­pri­etary.

Di­mon once fa­mously warned that “for ev­ery trader, we are go­ing to have to have a lawyer, com­pli­ance of­fi­cer, doc­tor to see what their testos­terone lev­els are, and a shrink — what is your in­tent?”

“The in­tent be­hind the Vol­cker rule is a good one,” Mayo said. “The ex­e­cu­tion is rid­dled with red tape, com­plex­ity and lawyers.”

But there is an­other fac­tor: A 2014 re­port by the Of­fice of the Comp­trol­ler of the Cur­rency, a fi­nan­cial reg­u­la­tor, found that the rule would cost na­tional banks as much as $4.3 bil­lion to im­ple­ment as they would have to sell some in­vest­ments at a loss. That doesn’t in­clude the bil­lions that banks would po­ten­tially lose by not be­ing able to make these bets, in­dus­try of­fi­cials say.

Some Repub­li­cans want to ditch the pro­vi­sion all to­gether, which would re­quire leg­is­la­tion and is likely to spark a fierce fight with Democrats. But Steve Mnuchin, a for­mer Gold­man Sachs banker who Trump has nom­i­nated to be trea­sury sec­re­tary, ap­pears to be lean­ing to­ward com­ing up with a com­pro­mise.

“I sup­port the Vol­cker Rule, but there needs to be proper def­i­ni­tion around the Vol­cker Rule so banks can un­der­stand what they can do and what they can’t do,” Mnuchin told the Se­nate Bank­ing Com­mit­tee last month.


One of the sig­na­ture achieve­ments of the Dod­dFrank law was the cre­ation of a new agency: the Con­sumer Fi­nan­cial Pro­tec­tion Bu­reau. Since its cre­ation, the CFPB has crafted hun­dreds of new rules for mort­gage lenders, banks, credit card com- pa­nies and other fi­nan­cial in­sti­tu­tions.

It has also re­peat­edly found it­self in the crosshairs of Repub­li­cans in Congress.

“The CFPB is ar­guably the most pow­er­ful, least ac­count­able agency in U.S. his­tory,” Rep. Jeb Hen­sar­ling (R-Tex.), head of the House Fi­nan­cial Ser­vices Com­mit­tee, said in a Wall Street Journal col­umn. “The agency de­fines its own pow­ers and can launch in­ves­ti­ga­tions with­out cause, im­pos­ing vir­tu­ally any fine or rem­edy, de­void of due process.”

The CFPB is led by one per­son, Richard Cor­dray, and is funded through fees col­lected by the Fed­eral Re­serve. That lim­its Congress’s abil­ity to pro­vide over­sight of the agency. If the CFPB was led by a bi­par­ti­san com­mis­sion and funded by a con­gres­sional ap­pro­pri­a­tion in­stead, for ex­am­ple, law­mak­ers could use that process to ex­ert pres­sure on the agency to fo­cus on dif­fer­ent types of cases.

Out­rage at the agency has cul­mi­nated in ef­forts by Repub­li­cans to urge Trump to fire Cor­dray be­fore the end of his term next year. (Hen­sar­ling has pro­posed find­ing a way to de­fund the agency.) Democrats have mounted ag­gres­sive ef­forts to save Cor­dray’s job, but adding to the CFPB’s prob­lems is a fed­eral ap­peals court de­ci­sion last year that found the agency’s struc­ture un­con­sti­tu­tional. That de­ci­sion is be­ing ap­pealed.

While some in­dus­try of­fi­cials and Repub­li­cans would like to get rid of the agency al­to­gether, that ap­pears un­likely. “This is a tricky one, there is a lot of bi­par­ti­san sup­port for the [CFPB]; there is no sup­port to abol­ish the place,” said the se­nior fi­nan­cial in­dus­try of­fi­cial. But “there is def­i­nitely some sup­port for do­ing some gov­er­nance” re­form to change how it is run.


Dodd-Frank also in­cludes mea­sures tar­get­ing the way cor­po­rate ex­ec­u­tives are paid. They are among the rules most de­spised by the busi­ness com­mu­nity and have al­ready faced in­creased scru­tiny.

The leg­is­la­tion, for ex­am­ple, re­stricts the abil­ity of banks to hand over large bonuses to ex­ec­u­tives who made risky bets on the mar­kets — and gives them the right to claw them back af­ter the fact.

In­dus­try of­fi­cials have com­plained the rule is con­fus­ing and doesn’t rec­og­nize the changes big banks have al­ready made to their bonus struc­tures. But, again, get­ting rid of this pro­vi­sion would re­quire an act of Congress and would meet a lot of re­sis­tance from Democrats.

In an­other case, Trump’s act­ing Se­cu­ri­ties and Ex­change Com­mis­sion chair­man Michael Pi­wowar is al­ready act­ing. Pi­wowar has or­dered a re­view of a rule that went into ef­fect last month that re­quires com­pa­nies to dis­close how much their CEOs earn com­pared to their em­ploy­ees. The rule could re­veal a po­ten­tially em­bar­rass­ing dis­par­ity be­tween the pay­days of mil­lions of work­ers and their top bosses. It is fa­vored by la­bor groups but is called un­nec­es­sary by the busi­ness com­mu­nity.

“The point of this ra­tio is sim­ply to ad­vance an agenda that says ex­ec­u­tive com­pen­sa­tion is too high and em­bar­rass peo­ple,” said Bill McLu­cas, a se­cu­ri­ties lawyer with WilmerHale, who spent eight years as SEC en­force­ment chief.


A change may also be com­ing for a pow­er­ful group cre­ated by the Dodd-Frank Act: the Fi­nan­cial Sta­bil­ity Over­sight Coun­cil, or FSOC. It is com­posed of the lead­ers of the coun­try’s pri­mary fi­nan­cial reg­u­la­tors, in­clud­ing the SEC and Fed­eral Re­serve, and is led by the trea­sury sec­re­tary. The coun­cil is tasked with iden­ti­fy­ing and at­tempt­ing to ad­dress risks to the fi­nan­cial sys­tem be­fore they can dam­age the econ­omy.

But bank­ing in­dus­try of­fi­cials have com­plained that the FSOC is opaque and op­er­ates a “blunt in­stru­ment,” ac­cord­ing to one fi­nan­cial in­dus­try of­fi­cial. The panel is too fo­cused on de­vel­op­ing new rules rather than stream­lin­ing the ones al­ready put in place, an­other said. Rather than do­ing away with the FSOC, some in­dus­try of­fi­cials want to see it change its fo­cus and ex­plain its de­ci­sion-making more ex­plic­itly.

“There is a sense in the in­dus­try that it should be eas­ier to un­der­stand what they are do­ing and why they are do­ing it,” said David Por­tilla, a part­ner at De­bevoise & Plimp­ton, who served as a se­nior pol­icy ad­viser to the FSOC in 2012 and 2013. “The ad­min­is­tra­tion could re­fo­cus FSOC on stream­lin­ing reg­u­la­tions rather than in­creas­ing reg­u­la­tory bur­dens as it has been.”

Among the FSOC’s most con­tested pow­ers is to des­ig­nate a com­pany as a “sys­tem­i­cally im­por­tant” fi­nan­cial in­sti­tu­tion — in­for­mally called “too big to fail” — and wor­thy of ad­di­tional scru­tiny be­cause it could pose a grave risk to the econ­omy in a cri­sis. In 2014, the panel added AIG, Pru­den­tial, Gen­eral Elec­tric’s fi­nanc­ing arm and MetLife to that list. None is a bank, but each is so large and com­plex, the coun­cil found, that if it failed it posed a dan­ger to the fi­nan­cial sys­tem.

MetLife sued, ar­gu­ing that the FSOC did not prop­erly as­sess the in­surer’s fi­nan­cial strength, not­ing that the com­pany does not en­gage in the type of risky be­hav­ior that could rat­tle the econ­omy. Last year, a fed­eral dis­trict judge sided with the New York-based firm. The case is be­ing ap­pealed, but the Trump ad­min­is­tra­tion could drop it or take other steps to loosen reg­u­la­tions of these firms.


Dodd-Frank was de­signed pri­mar­ily to rein in large Wall Street firms. But small and medium-size com­mu­nity banks say they have been crushed un­der new reg­u­la­tory bur­dens since the fi­nan­cial cri­sis.

A lot of com­mu­nity banks are in ru­ral ar­eas that Trump won, said Paul Mer­ski of In­de­pen­dent Com­mu­nity Bankers of Amer­ica. They are now look­ing to the Trump ad­min­is­tra­tion for re­lief, he said. “We kind of got swept up by the Wall Street melt­down,” Mer­ski said.

The changes smaller banks want vary, but come down to a sim­ple prin­ci­ple: They shouldn’t face the same sort of rules as mega­banks such as Gold­man Sachs or Bank of Amer­ica.

“Reg­u­la­tion shouldn’t be one size fits all,” Mer­ski said. “You shouldn’t have the same reg­u­la­tory bur­dens on a com­mu­nity bank, which has a sim­ple busi­ness model, that you have in a tril­lion-dol­lar in­sti­tu­tion. If a com­mu­nity bank fails, it is not go­ing to bring down the fi­nan­cial sys­tem.”

These banks, for ex­am­ple, want to raise the $50 bil­lion as­set thresh­old at which banks face tougher over­sight. That should be raised to $250 bil­lion, in­dus­try of­fi­cials say. Also, the CFPB is con­sid­er­ing a new rule re­quir­ing banks to com­ply with the same re­port­ing re­quire­ments when making a small-busi­ness loan as they do with a mort­gage, Mer­ski said. That ex­tra pa­per­work, and the threat of fac­ing pros­e­cu­tion or a fine if it is not filed cor­rectly, will scare some banks away from making small-busi­ness loans, he said.

“If this could be stopped it would help a lot of peo­ple,” Mer­ski said. “Banks op­er­ate on a small mar­gin, ev­ery penny of ad­di­tional staff you have to hire” to keep up with new reg­u­la­tions hurts.


One of the clear­est lessons of the fi­nan­cial cri­sis is just how dif­fi­cult it is to put a large, com­pli­cated fi­nan­cial in­sti­tu­tion through bank­ruptcy. Un­der Dodd-Frank, trou­bled banks that are too com­pli­cated for the reg­u­lar bank­ruptcy process would fall un­der the “Or­derly Liq­ui­da­tion Author­ity.” This pro­vi­sion gives a reg­u­la­tor the abil­ity to de­clare a com­pany’s fail­ure risky to the fi­nan­cial sys­tem and take over. The Fed­eral De­posit In­sur­ance Corp. would run the process rather than a judge and could lend the com­pany funds and take other steps to pre­vent its fi­nan­cial prob­lems from bleed­ing to the rest of the fi­nan­cial sys­tem.

This pro­vi­sion also gives reg­u­la­tors the abil­ity to col­lect fees from banks to re­coup any costs in­curred in un­wind­ing the fi­nan­cial in­sti­tu­tion. That way tax­pay­ers would not be stuck pick­ing up the bill.

But crit­ics say the process is cum­ber­some and ob­ject to the col­lec­tion of fees from other banks. In­stead, they say, this pro­vi­sion of Dodd-Frank should be elim­i­nated and the U.S. bank­ruptcy code should be up­dated to han­dle more com­pli­cated cases.

“What mat­ters more than any­thing, at this point, is that we fig­ure out an ap­proach to res­o­lu­tion that is not just a hope, and which will in fact re­duce sys­temic fall­out,” said Kurt Schacht of CFA, an as­so­ci­a­tion of in­vest­ment pro­fes­sion­als. “We are con­cerned we are not there yet” un­der the Dod­dFrank Act.

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