In another of President Donald Trump’s early actions to make America great again, he signed two executive orders rolling back the controversial Dodd-Frank financial reforms of 2010 and dismantled the “Fiduciary Rule” that requires retirement account advisors to always act in the best interest of their customers.
While both actions might seem counter-intuitive when it comes to protecting consumers, this was actually the right thing for Trump to do for many reasons.
For years, economists have blamed the Dodd-Frank regulations for acting as a drag on the overall economy, complaining that they apply too many conditions to lenders and prevent businesses from borrowing needed capital. They’ve also restricted consumer choices in banking products.
Gary Cohn, the White House National Economic Council (WHNEC) director, said, “We have the best, most highly capitalized banks in the world, and we should use that to our competitive advantage. But on the flip side, we also have the most highly regulated, overburdened banks in the world.”
With Trump’s executive orders, Cohn said, “Americans are going to have better choices, and Americans are going to have better products because we’re not going to burden the banks with literally hundreds of billions of dollars of regulatory costs every year. The banks are going to be able to price products more efficiently and more effectively for consumers.”
Although Trump’s orders are not a complete repeal of Dodd-Frank (that would require Congressional approval), it’s expected that these orders, along with further potential orders affecting other regulations, could save the financial sector $1.7 billion in costs and 1.2 million man-hours in time to comply with the burdensome rules, many of which deal with how and which records need to be kept about which transactions.
Specifically, the regulations of Dodd-Frank that were enacted within the final 60 days of the Obama administration can be rolled back under the Congressional Review Act, which provides for reviews of last-minute rules implemented in the previous session of Congress.
Republicans see Dodd-Frank as a Democratic takeover of the U.S. financial system in the same way that Obamacare was a takeover of the health care system. Dodd-Frank was originally the handiwork of Democratic Senator Elizabeth Warren of Massachusetts from the period when she formerly worked in academia.
One of the key provisions of Dodd-Frank was to create the Consumer Financial Protection Bureau (CFPB). The CFPB is directed by a person appointed by the president and confirmed by the Senate. But the problem is that once they’re confirmed, this director is then not accountable to anyone in government as the heads of most other departments are.
It’s true that there are other independent agencies within the government, such as the FCC and the SEC, but until the CFPB came along, all independent agencies had multiple commissioners, making them internally accountable, or at least to their boards. But the CFPB has no such rules, which is why the Supreme Court is set to rule on its constitutionality after a lower court declared the part of Dodd-Frank establishing the CFPB illegal in late 2016.
A new Supreme Court justice will likely have a big say in the matter since until now, it was expected that with only eight sitting justices, a Supreme Court decision regarding the case would likely result in a split verdict.
Regardless of which way the Court rules, at the very least, the Trump administration would like to replace the current director of the CFPB, Richard Cordray, an Obama appointee; an overhaul of the agency would make that possible. The CFPB is responsible for regulating credit cards and mortgages, and WHNEC Director Cohn has said changes at the top of the agency are necessary as “personnel is policy.”
In addition to reworking the CFPB, the Trump administration would like to reform the mortgage-related government-sponsored enterprises (GSEs) the Federal Home Loan Mortgage Corporation, better known as Freddie-Mac, and the Federal National Mortgage Association, better known as Fannie-Mae.
Both of these GSEs have been under control of the government’s Treasury Department since the economic crisis of 2008. Steve Mnuchin, President Trump’s pick for Secretary of the Treasury, believes the two GSEs should be made more private and less reliant on government funding and authorization.
The administration would also like to revise rules regulating the Federal Stability Oversight Council (FSOC), an agency responsible for labeling non-banks (such as insurance companies) “Systemically Important Financial Institutions” (SIFIs), meaning that these entities would be considered by the government to be “too big to fail.”
This means that their approaches to risk would likely be much more cavalier than they otherwise would be as they would assume the government would bail them out in the event of any crisis. It also means that they’re subject to higher capital holding requirements and must have emergency plans in place in preparation for financial disasters. WHNEC Director Cohn stated simply, “We don’t think non-banks should be SIFIs.”
Previously, some insurers had considered divesting their different subsidiaries to avoid acquiring the SIFI label. Insurer MetLife had gone to court to have its SIFI label rescinded, but the Treasury Department under President Obama appealed the judge’s ruling, which found in MetLife’s favor.
Ian Katz, the director of the policy analysis group at financial planner Capital Alpha, says, “I expect that by 2018, give or take a little bit, [other insurers] AIG and Prudential will have their SIFI designations rescinded.”
Regards,
Ethan Warrick
Editor
Wealth Authority
