Why we need Dodd-Frank
(with teeth!)
I have written at
some length on several occasions, focusing on Trump’s efforts to gut or even
eliminate Dodd-Frank. It is hardly surprising, considering the amount of debt carried
by the Trump Organization. It is noteworthy that Trump’s two wastrel sons have sold
off assets to the tune of around $60 million (so far) to pay down some of that
debt, which is in the neighborhood of $650 million. The debt included $211
million from the state-owned Bank of China, which would have matured in the
middle of what could be Trump’s second term.(God forbid) You remember China -
The country which Trump criticized daily over the past ten years with various allegations
of financial malfeasance?
This is reflective
of the pattern of Trump’s adult life except that, unlike 25-30 years ago, there
is no daddy to illegally launder money and bail him out from one bad decision
after another. Trump’s real aversion to Dodd-Frank is more clearly understood
in the light of this 2017 quote: “We
expect to be cutting a lot out of Dodd-Frank, because frankly, I have so many
people, friends of mine that had nice businesses, they can’t borrow money,”
Trump said during a White House meeting with business leaders, many of
them from the same Wall Street financial institutions that had behaved so
abhorrently a decade ago. “They just can’t get any money because the
banks just won’t let them borrow it because of the rules and regulations in
Dodd-Frank.”
First, at the
time Trump was ranting about a “credit shortage,” banks were lending under the provisions
of Dodd-Frank to good credit risks, which Trump truly hasn’t been in the light of
five bankruptcies. The other lie, of course is the characterization of any
human as a “good friend” of Donald Trump. As we have seen over the past years, “friendship”
(or marriage) with Trump lasts only as it is beneficial to Trump or if the
other party can subordinate their pride to the chance of advancement by kissing
the Trumpian derriere. (It's French and means "ass")
In truth (a
concept with which Donald Trump has only a vague and passing familiarity) and contrary to claims of
tight credit in 2017, there are also hard data to refute the statement. At the height of the housing
bubble, (2008) largely spurred by market manipulations and false valuation which
Dodd-Frank sought to halt, total non-financial sector outstanding debt stood at
about $10.4 trillion. (yes, nine zeros). By 2016 and the Obama recovery under
Dodd-Frank restrictions, that number had increased to about $14 trillion, so
yes, Trump lied. (really?) Banks were,
and are, lending to responsible borrowers. Market Watch
in February, 2017 put it this way: “Business debt is growing about 6.5% per
year now, about half the 13% growth rate seen at the height of the insanity in
late 2007 and about twice as fast as the economy is growing.
Businesses are generally borrowing as much as they want. In the aggregate,
corporations can finance 100% of their funding needs for capital investments
from their cash flow and their retained earnings.”
So, what does
Dodd-Frank do that Trump and his investment banker cronies dislike?
In brief, Dodd-Frank Act is a comprehensive and complex bill which covers 16 major areas of reform. In simplest terms, the law places strict
regulations on lenders and banks in an effort to protect consumers and prevent
another all-out economic recession.
In contrast to what took place during the 2008 financial
crisis, American taxpayers will no longer be responsible for bailing out
Too-Big-To-Fail banks nearing bankruptcy. Remember TARP? Tarp, signed into law
by Bush 43 committed up to $700 billion in taxpayer money to bail out large
corporations, primarily commercial banks and insurers, which Bush characterized
as “too big to fail.” In reality the amount
loaned amounted to a bit less. Although early estimates for the total cost of
the bailout to the government were as much as $700 billion, TARP recovered
funds totaling $441.7 billion from $426.4 billion invested, earning a $15.3
billion profit or an annualized rate of return of 0.6%. This is largely because
The Obama administration with, one may add, bi-partisan support, while allocating $350 billion or so, channeled it where
needed, not as an attempt to make industrial policy by supporting some industries
while stiffing others.
Under Dodd-Frank,
however, Government and taxpayer bailouts have more or less been discontinued. Bank
creditors and shareholders are now responsible for maintaining their
institution’s solvency. This is of minimal concern to “normal” banks, however, but Trump’s “friends” (and
creditors!!) the large commercial banks, are now responsible for prudent management of their own debt and the safety of their
investments because there won’t be funds from Uncle Sugar next time.
Added to the “No
bailouts” language is a provision that the “Volcker rule” remains applicable. The
Volcker Rule forbids banks from making certain investments with their own
accounts. For example, banks can’t invest, own or sponsor any proprietary
trading operations or hedge funds for their own profit, with some few exceptions. Such operations caused much
of the great recession bubble collapse. Lehman Brothers actually went bankrupt, and their
operations so shady that they were refused protection in 2008 on the recommendation
of Bush 43 SecTreasury Paulsen. Bear-Stearns, with a decades long history of “sketchy”
operations was bought by Morgan/Chase with a government bailout loan.
Anyone who has
read “The Big Short” has more than a passing knowledge of the sharks in the mortgage
loan business who were the ground floor of shady mortgages, later bundled as investment grade instruments until the bottom
fell out. I have known several responsible lenders who acknowledge the ground
floor complicity of their less principled colleagues. Without taking several
pages, just grasp that a mortgage broker, once securing the buyer’s obligation, resells the loan to some larger financial institution, ergo makes commission without
any accountability should the loan default. Again, read the book for examples
of their shenanigans.
A peripheral casualty of Trump's efforts to reduce or eliminate
the scope of Dodd-Frank would be The Consumer Financial Protection Bureau
(CFPB). Established under Dodd-Frank, CFPB
was aimed at the preventing predatory mortgage lending (reflecting the
widespread sentiment that the subprime mortgage market was the underlying cause
of the 2008 catastrophe as outlined in the previous paragraph) and make it
easier for consumers to understand the terms of a mortgage before agreeing to
them. It deters mortgage brokers from earning higher commissions for closing
loans with higher fees and/or higher interest rates and requires that mortgage
originators not steer potential borrowers to the loan that will result in the
highest payment for the originator.
The CFPB also
governs other types of consumer lending, including credit and debit cards, and
addresses consumer complaints. It requires lenders, excluding automobile
lenders, to disclose information in a form that is easy for consumers to read
and understand; an example is the simplified terms now on credit card
applications.
Lest anyone actually be so naïve as to believe that large
commercial banks are, like Caesar’s wife, above reproach these days, here’s why
we need Dodd Frank:
Consider, as an example of the genre, Goldman Sachs, with a decades long history of marginal honesty. Controversies have, for most of the 20th and 21 centuries (so far) nipped at the heels of this multinational investment bank. The bank’s activities have generated controversy and litigation around the world. The firm’s involvement in global finance and politics has been questionable for some time. In a widely publicized story in Rolling Stone, investigative journalist Matt Taibbi characterized Goldman Sachs as a "great vampire squid" sucking money instead of blood, allegedly engineering "every major market manipulation since the Great Depression."
Wow! So now
that we’re watching them, they’ve probably cleaned up their act, huh? I’ll bet
Trump’s Treasury Secretary really has his eye on them. Not necessarily. Surprise!! Steve
Mnuchin worked for Goldman Sachs for 17 years prior to entering government “service.”
He left with around $58 million in stock and severance pay. Following that, he
ran several hedge funds which invested in at least two Trump projects. I think
we’re still being serviced much as the bull “services” the cow.
Mnuchin’s former
employer has been the subject of recent criminal investigations into its role
in the theft of at least $2.7 billion from the 1Malaysia Development Berhad, or
1MDB, sovereign wealth fund. After “guilty as hell” was plastered across the firm,
the bank confirmed a $3.9 billion deal with the Government of Malaysia to “resolve”
all the criminal and regulatory proceedings in Malaysia relating to (1MDB). Goldman/Sachs’
defense was basically “One our rogue guys in East Asia did it,” a skeptic might
opine that $3.9 billion says otherwise.
One may recall
that paying to settle without admission of obvious guilt, is consistent with a
number of Trump exploits as well, from housing discrimination and Trump “University,
to the Trump Foundation, porn stars and the list continues.
Do we need
Dodd-Frank? Yes, now more than ever.
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