Congress and the Fed Weaken the Safeguards Put in Place After the Financial Crisis
We’re eight years out of a banking crisis that threatened to render the entire world financially flat.
Only a series of emergency moves, bailouts and other means that this Trump administration would reject out of hand saved the planet from pretty certain financial destruction when banks and investment houses used overly risky investment instruments that were generally beyond their own understanding.
It was in response to this that our government passed the Dodd-Frank bill that set up various financial measures banks would have to use, that created the (Paul) Volcker rule to stop banks from using risky investment techniques and that generally sought to put some limits on banks.
All those phrases like “too big to fail” came out of this legislation that was intended to rein in financial over-exposure by banks whose fortunes would have to fit within the constraints.
But with the arrival of a Republican administration, and Trump in particular, the main idea has changed from social safety to rugged individualism and the end of regulation.
So in recent weeks, Congress moved to exempt smaller, commercial banks from some aspects of Dodd-Frank based on the thought that smaller, more rural banks need freedom to invest in their communities and less federal-level regulation about how they balance their books. I am not an expert in banking laws and I am quite willing to believe that Dodd-Frank responded with too broad a brush to what were real problems eight years ago. Still, I’d feel better if the full law had remained in effect.
But now, it is the Volcker rule, the main event, that federal regulators now are proposing to dump. This involves the bar against allowing the biggest banks to trade, sell, re-sell or bet for and against investments. At points in 2008, banks were offering stock-like profits if mortgage money would go up or down, sometimes betting against their own clients’ investments.
Expertise aside, this makes me nervous. No banker ever went to jail or faced prosecution since 2008 for putting the world at economic risk with instruments that they did not fully understand. Now this proposal would strip away any attempt to try to limit banks. As The New York Times described it, federal bank regulators unveiled a sweeping proposal to soften the Volcker Rule, a cornerstone of the 2010 law that was enacted after the financial crisis to rein in risky trading. The change would give Wall Street banks more freedom to make their own complex bets—activities that can be highly profitable but also leave them more vulnerable to losses. The rule was put in place to prevent banks from making unsafe bets with depositors’ money. It has been criticized by Wall Street as too onerous and harmful to the proper functioning of financial markets. The Federal Reserve proposed easing several parts of the rule, and four other regulators are expected to soon follow suit, kicking off a public comment period that is expected to last 60 days.
“The loosening of the Volcker Rule is part of a coordinated effort underway in Washington to relax rules put into place after 2008. Big banks, emboldened by President Trump’s deregulatory agenda and a more favorable political climate in Washington, have begun pressing for changes to several post-crisis rules, including the Volcker Rule,” said The Times.
In addition to the exemptions for smaller commercial banks, in recent weeks, Trump also has signed laws rescinding a consumer rule aimed at preventing discrimination by auto lenders. The Fed and the Office of the Comptroller of the Currency recently proposed easing limits on how much the largest banks can borrow and the Fed also proposed changes to the stress tests that banks must undergo each year to determine whether they can withstand an economic downturn. The Consumer Fraud Protection Agency director, Mick Mulvaney, has also halted new investigations and prevented the agency from collecting certain data from banks.
In other words, we’re betting that growth will cover all other social problems. I don’t understand what has changed for banks and bankers, the desire for more profit, the housing industry or any of the other factors that gave rise to the real issues of 2008. Why do we all want to believe in Business now when we were led to the economic brink by the very same people just a few years ago?
The changes would alter how much time the banks have to spend proving they are following the Volcker Rule and give them more leeway to determine which types of trades comply. Now, banks must prove that each trade serves a clear purpose that goes beyond a speculative bet by showing regulators specifically how each trade either meets customer demands or acts as a hedge against specific risks. That had curtailed trading in a variety of assets like derivatives, corporate bonds and other complex financial instruments.
Color me skeptical. Bankers have not earned my trust.
Featured image: In the film ‘The Big Short’ was about how Wall Street bankers ruined the economy with toxic investments they themselves didn’t understand.