Donald Trump wants to dismantle Dodd-Frank, the legislation enacted after the financial crisis. Source: Getty Images
President-elect Donald Trump has plans to kill the Dodd-Frank Act. The landmark legislation passed in 2010, in the wake of the worst financial crisis since the Great Depression, strove to reform the problems and risky behavior that sent the economy down in flames.
While Trump has talked about dismantling financial regulation like Dodd-Frank, he’s also perplexed the banking industry with advisors who support reinstating Glass-Steagall, which prevents banks that have your checking and savings accounts from getting into the investment industry. But if Trump really wants to repeal Dodd-Frank, and unshackle banks from stiff regulations, could he actually do it?
According to NYU Stern professor of economics Lawrence White, perhaps, but don’t hold your breath.
“My guess is there will be modification,” he told Yahoo Finance. “Outright repeal probably doesn’t happen… Financial regulation is complex, arcane, and involves a lot of different regulated parties. Each of them have their own lobbying groups, each of them have their own interests and those don’t always coincide.”
Dodd-Frank, to the unfamiliar, chiefly limited risks banks could take and added consumer protection. Under the act, banks need to have more capital against the risks they take, like how a casino is required to keep its vault filled with actual cash to cover losses. They also can’t speculate with customer money that doesn’t benefit the customers, something known as the “Volcker rule.” At the consumer level, Dodd-Frank created the Consumer Financial Protection Bureau, a popular agency that addresses consumer complaints about predatory and troubling financial practices.
A Dodd-Frank replacement would need to unite all the different sectors of the financial industry—each with different wants, needs, lobbyists, trade associations, and regulators. It’s a very difficult and time-consuming process, and according to White, Dodd-Frank passed in just two years because of special circumstances.
“Dodd-Frank passed relatively quickly because we’d gone through a near-death experience,” says White. “We came very close to a meltdown of our financial system in September of 2008, and that plus a new Obama administration with a Democratic Congress all coalesced to passing Dodd-Frank in 2010.”
Today, there’s no fire to make anyone rush. “There’s no scarring experience within our immediate past, just lots of people in the financial sector unhappy with various pieces of Dodd-Frank.” People, White stresses, who don’t necessarily agree with each other.
History offers a guide on how slow the process is. “The idea of repealing Glass-Steagall was talked about in the mid-1970s,” says White. “There were legislative proposals in the early 1980s, but it took until 1999 for the change actually to happen.” This story is repeated over and over again. The 1994 elimination of state and federal restrictions on the branching of banks across state lines started back in the 1970s during a period of general deregulation.
“To me, these are very instructive historical examples where people are saying it’s a slam dunk,” says White. “In the case of the repeal of Glass-Steagall, it took literally decades.”
Another instructive example, says White, is recent. The federal government essentially took over Fannie Mae and Freddie Mac, put them into “conservatorships,” in 2008, in order to make them solvent. “Absolutely no one at the time would have predicted that eight years later Fannie and Freddie would still be in conservatorships,” White says. Though there’s been a consensus for years on this issue, conflicting interests have kept the stalemate cold.
How it might start
The Trump transition team’s website, GreatAgain.gov, reiterated his plans. “Following the financial crisis, Congress enacted the Dodd-Frank Act, a sprawling and complex piece of legislation that has unleashed hundreds of new rules and several new bureaucratic agencies. The proponents of Dodd-Frank promised that it would lift our economy,” the website says. “The big banks got bigger while community financial institutions have disappeared at a rate of one per day, and taxpayers remain on the hook for bailing out financial firms deemed ‘too big to fail.’”
If something does happen, what exactly that will look like would be murky even if a traditional Republican had triumphed in the election. There is no detail about how Trump sees Dodd-Frank’s chief goals—Wall Street reform and risk management—only statements about economic growth and too many rules.
In September, Rep. Jeb Hensarling, a Republican from Texas, introduced legislation to replace Dodd-Frank called the “Financial Choice Act.” (It’s worth noting Hensarling receives significant campaign contributions from banks and the financial industry.) “Hensarling has been more proactive, interested, and vocal about doing something about Dodd-Frank than anyone in the Senate,” says White. “So I could imagine [Trump’s promise] starting with Hensarling.”
Again, though, the bill, currently in Congressional subcommittee, may not look anything like what might actually pass. “As things become more concrete, that’s when all those interested parties with conflicting interests come out. Then it’s a question of: can they find a way to compromise—or do they become stalemated or deadlocked,” says White. “In that case, everyone shakes his or her head, mutters and life goes on.”
A full rehashing of financial policy may be unlikely, but significant regulatory shake-ups are still possible—and perhaps likely. After a Supreme Court decision this year gave the president power to yank the Consumer Financial Protection Bureau director, it’s hard to imagine current director and consumer champion Richard Cordray making it further than a week into Trump’s presidency.
In Hensarling’s proposal, the CFPB would be declawed, renamed, and given a new SEC-like structure of board members, instead of a director. According to White, that’s likely to happen given a successful Dodd-Frank dismissal.
But President-elect Trump doesn’t need to wait for that. Instead, he could loosen things up instantly and spay consumer protection regulation simply by appointing a director who values anti-regulation more than consumer protection.
Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumerism, tech, and personal finance. Follow him on Twitter@ewolffmann.
