The battle begins over Dodd-Frank

Rick Swafford, The Capsa Group, LLC (a Rodefer Moss affiliate) CEO, weighs in with his take on the battle over Dodd-Frank:

Rick_Swafford_2010.jpgThe Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, commonly referred to as "Dodd-Frank", was named for two now-retired members of Congress: Sen. Chris Dodd, D-Ct., and Rep. Barney Frank, D-Mass. The act was written and passed in response to a crisis, the wave of financial institution troubles that were a catalyst for the Great Economic Downturn that began in 2008. The legislation added a series of new regulatory offices and agencies as well as a lengthy and complex list of new requirements on lending institutions and other organizations.

Banks, for example, were in something of a bind after sub-prime mortgages, bad loans, and risky ventures became publicly known, whether or not a particular bank was part of the problem. Regulators in the wake of Dodd-Frank had new muscle to flex against bank lending practices, which made banks much more conservative in their lending. Capsa Group (Transparent).pngMeanwhile, banks were being blamed for not lending enough money to help get the economy moving again.

There is much political discussion as a “dismantling” of the legislation's legal and regulatory requirements on a wide range of individuals and organizations with a role in how Americans’ money is invested and managed.  

President Donald Trump has said he wants to “do a number” on Dodd-Frank, which he calls a “disaster.” He believes the law’s regulatory burdens and restrictions have hampered the ability of banks to lend money, stifled entrepreneurship and hampered investment, all of which contributed to generally low GDP growth for years.

However, the other side of the discussion is that the legislation's reach is necessary to avoid a return to the days of “too big to fail” banks and financial institutions. Critics of dismantling the legislation raise concerns of financial institutions again taking overly aggressive risk and making bad loans that jeopardized the American economy and potentially, that of the entire world.

On Feb. 3, 2017, President Trump signed an executive order titled “Presidential Executive Order on Core Principles for Regulating the United States Financial System.” It lists six "Core Principles":

  1. empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
  2. prevent taxpayer-funded bailouts;
  3. foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
  4. enable American companies to be competitive with foreign firms in domestic and foreign markets;
  5. advance American interests in international financial regulatory negotiations and meetings;
  6. restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

The executive order directs the Secretary of the Treasury to consult with the leaders of the Financial Stability Oversight Council and report back within 120 days:

“which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles. That report, and all subsequent reports, shall identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.”

The wording, couched in positive terms, means that the legislation is in the White House’s crosshairs as a government policy that can “inhibit” abiding by the administration’s core principles. Presidents typically get all of some of what they want, and President Trump wants change.

Three factors impacting a potential dismantling of Dodd-Frank are:

  • Fear of failing: If these regulations are successfully diminished or dismantled, and increased lending and investment result in greater economic growth, Republicans will benefit politically.

    However, if there’s a lag time in growth, or worse, another downturn of any significance to which fingers can be pointed at financial institutions, Republican officeholders will be left only with the weak claim that the regulation cutbacks didn’t go far enough or haven’t been in place long enough. Both may be true, but Americans want results, now. For politicians, the fear of being blamed for something that goes wrong is more powerful than hoping to eventually be rewarded for a good decision.  
“House Democratic Leader Nancy Pelosi vowed Monday to take the case to the public to try to build opposition to any effort to eliminate or water down protections designed to prevent a repeat of the 2008 financial crisis.”

If Democrats try to explain the details of the legislation, they’ll be talking to themselves, particularly if President Trump’s changes result in increased business activity, jobs, and income growth.

However, if Democrats harp on consumers being endangered by change or repeal of the legislation – and no danger appears – they will be seen as politicians doing what politicians typically do. The Democrats’ advantage is that they can assign any banking problem – fairly or unfairly - to Republican interference with Dodd-Frank, and it’ll be up to Republicans to explain why it isn’t true. As the saying goes, when you’re explaining, you’re losing.

  • Bipartisanship in your dreams: The best way to go about making changes to Dodd-Frank is for Democrats and Republicans to figure out what each can live with, and make changes accordingly.

Unfortunately, bipartisanship in these high-profile situations is rarely in the cards: the potential political advantages are too great for the Democrats to give up, and many Republicans don’t trust Democrats to deal fairly. On the other hand, there is nothing apparent that would give the Democrats reason to trust the Republicans to deal fairly.

The White House, if determined, will go forward using executive orders and administrative changes, despite their limitations in terms of dramatically changing the congressionally-passed law, or President Trump can put pressure on Republicans to come along or face political hazards among their base.

The Dodd-Frank regulations are entrenched in the political and financial system. Such laws aren’t dispensed with easily or quickly, particularly when the most ardent proponents and opponents are cemented into their positions and constituencies such as financial institutions, consumer groups, and others, are ready to fight – publicly or privately – for their interests.

Swords have been sharpened on all sides of the debate, and at this point it doesn’t look like anyone is seeking the oft-discussed, but rarely found, “common ground.” Prior to the election there was a growing consensus on both sides of the aisle to exempt the smaller institutions.

This would be community banks with smaller balance sheets that were not part of the problem. The exemptions discussed ranged from those institutions with less than $5 billion up to even $20 billion in assets. This would be a practical and expedient way to deal with the issue allowing for an easier population of banks to regulate and having the regulators focused on where the greater risk of abuse and economic impact would lie.

However, when does practical and expedient rule these days?

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