Financial Shenanigans in the Age of Trump
In the “They
snuck it in while we weren’t watching” category, the big winner is….US
Commercial banks. The one paragraph item in question was relegated to the last
page of the world and national news section of the local rag, right beside the
notice that Chuck E, Cheese has declared bankruptcy. Of course, Mr. Cheese has
been bankrupt in numerous other ways, primarily having to do with good taste,
for decades.
The issue at
hand was what has been called the “Volker rule.” For those not intimately familiar with
commercial banking regulations (which once included the kid) the news rang no
bells …that is until I reflected upon recent history, like, say, the great
recession of 2009-13 and the words “commercial banks” rang a bell. First, the
sobriquet “Volker rule,” named for former “Fed Head” Paul Volker refers to
section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
which sets forth rules for implementing section 13 of the Bank Holding Company
Act of 1956..
The Dodd–Frank
Wall Street Reform and Consumer Protection Act (commonly referred to as
Dodd–Frank) is a United States federal law and an Obama initiative that was
enacted on July 21, 2010, primarily as an attempt to stave off, by legislative
fiat, further financial sector bleeding from risky use of clients’ money by
large commercial banks. The law’s intent was to overhaul and increase financial
regulation in the aftermath of the Great Recession. You remember, TARP, bailouts,
mortgage foreclosures, unemployment, all that “stuff?” It made changes affecting all federal
financial regulatory agencies and darned near every part of the nation's
financial services industry. Much of the act was consumer protection oriented.
This act was a
direct result of proposals by President Obama aimed at helping to prevent
another epic economic tanking based on malfeasance at high levels of the US
banking industry. Responding to widespread calls for changes to the financial
regulatory system, in June 2009 Obama introduced a proposal for a
"sweeping overhaul of the United States financial regulatory system, a
transformation on a scale not seen since the reforms that followed the Great
Depression". That pretty much sums up Dodd-Frank. The bill, based on his
proposal, was introduced in the US House by Congressman Barney Frank, and in
the Senate by Senator Chris Dodd. As one might expect, Most Congressional
support for Dodd-Frank came from members of the Democratic Party, but three
Senate Republicans voted for the bill, allowing it to overcome the Senate
filibuster.
One provision,
the afore-mentioned Volker rule, restricted banks from making certain kinds of
speculative investments. The act also repealed the exemption from regulation
for security-based swaps, requiring credit-default swaps and other transactions
to be cleared through either exchanges or clearinghouses.
Understand, these were provisions to protect
investors, borrowers, and financial product purveyors and their clients from the no holds barred banking practices
which had crept back in to the rodeo
which was the commercial banking industry after Depression era regulations had
been eased by Congress. The first Trump
administration eliminated most of the Volker Rule’s regulatory prohibitions and
provisions. Of course, lax supervision and little restraint is fine with the
big guys in banking but hazardous to most of the rest of us who have IRAs and
other retirement vehicles and accounts.
For the
uninformed, market manipulation, intentional or not resulted from the sheer
size of funds involved in questionable securities, chief among them being high
risk mortgages, bundled as viable and sound instruments. Proffered by agents
for the big commercial banking houses which bundled and sold these dogs, there
were easy customers aplenty, such as union pension funds, state employee
pension funds, or simply large fund managers, seeking safe (hopefully) and
profitable (primarily) places to put their money.
Added to the mix were credit default swaps.
This is bordering on a Grad school economics course, so I’ll just try to describe
credit default swaps (CDS) as “I’m buying insurance to pay me if your
investment tanks.” Think of it like this: Tom buys a racehorse with money
borrowed from Bob. He plans to pay for the horse with its winnings. I don’t
know either Tom or Bob, who lent him the money. Bob, the original lender might
buy insurance (a CDS) that pays off the loan if Tom defaults. Bob can then,
since he feels sure the horse is a winner, sell me that CDS. If the horse wins
the triple crown and Tom pays off the loan as promised, the lender, and I, whoever
bought the swap, is out the premium we paid the underwriter as well as I’m out
the money I paid the Bob, the original lender, to buy the swap.
However, should
the horse break a leg and never run, the owner of the credit default swap (me) will
(usually) collect the full value of the loan. Bob, however, gets the asset (the
horse), now worth only its glue value. This little gem of an idea is one of
many concepts to use money to make money which have no real product or service
whatsoever in the mix (derivatives). What it did do, was to entice such
insurance giants as AIG to insure these bets against the system with large
premiums involved, and investors to buy them.
When the
bundled mortgage housing bubble imploded, and the “tranches” of groups of
unsound mortgages were just paper, and worth nowhere close to the literally
trillions of dollars pinned on the illusion of their value, everyone lost.
Insurers lost, because the amount of massive defaulted credit they had insured
via CDS would have bankrupted several of them, so, the buyers of the CDS also
lost because the Insurer couldn’t pay (and they had paid the CDS sellers for
the swaps) and the sellers of CDS were left with almost worthless bundles of
impending foreclosures. By the end of
2007, the outstanding CDS amount was $62.2 trillion. For a bit of perspective,
that figure was over ten times the national debt!
Commercial
banks, like Bear, Stearns, Lehman Brothers and Merrill Lynch were in trouble. Lehman
Bros, with $600 billion in bonds outstanding went bankrupt. AIG, having insured
individuals world-wide against such defaults via by CDS was saddled with far
more claims than the dollars to pay them. As we know, the recovery was long and
painful, and many have pointed fingers, each at another, but one salient fact
remains uncontested: CDSs are not traded
on an exchange and there is no required reporting of these transactions to a
government agency. This has been called a “shadow banking system” by
economists. (Think “dark web,” if that helps) This situation is a direct result
of unregulated market capitalism. The 2010 financial crisis demonstrated the
lack of transparency in this huge “shadow market” which became a concern to
regulators as it could pose a systemic risk to the US economy if allowed to
function unchecked. This and other issues were prime concerns of the framers of
Dodd-Frank.
Oddly enough, as
a candidate, Donald Trump was the most self proclaimed anti–Wall Street
presidential candidate since FDR in the 1930s. He attacked Wall Street
relentlessly, directly, and explicitly throughout the 2016 campaign and
attacked his opponent, Hillary Clinton, nonstop as being “In the pocket of Wall
Street.” He even put the then-CEO of Goldman Sachs, Lloyd Blankfein, in his
last campaign ad as “one of the biggest threats to the people of the United
States!” So, the Donald must have been a fan of Dodd-Frank, huh? Not so much.
C’mon, we all know he’s a lying sack of shit, why should this be different?
Predictably, critics
of financial reform have claimed that the law and rules would kill banks'
revenue and profits, which would prevent them from lending and would in turn
kill economic growth and jobs. They did the same thing when FDR signed the
Glass-Steagall banking act 1933. Glass-Steagall was different in that its
principal regulatory function was to separate investment banking from retail
banking. Repealed in 1999 by another banking act, the Gramm‐Leach‐Bliley Act,
much of Glass -Steagall survives (separation of commercial and investment banking,
FDIC, etc.). Neither would have stopped greedy lenders like Wells - Fargo,
Washington Mutual or Indy Mac from making bad adjustable-rate mortgage (ARM) loans
to persons willing to borrow today without regard to the inevitable adjustable
rate increase next year. Republicans tend to push the blame onto Federal
initiatives urging the cessation of red-lining and other discriminatory
practices. Likewise, private mortgage brokers in (too) many cases simply threw
rational thought and responsibility to the winds, realizing that, the more
mortgages sold, the more commission and that the vast bulk of them would be
resold to banks before the ARM kicked in triggering, in a lot of such
instances, default.
Understand,
once a mortgage broker okays and finalizes a mortgage, they are on the hook for
that loan, but in today’s home loan world, most of these loans are then quickly
sold to a bank or other professional money lender who is now the recipient of
the buyer’s payments or the loser if the mortgage defaults. The mortgage broker
then has no further fiduciary responsibility (or risk!)
So, did Dodd-Frank and the Volker rule damage or stifle the
vitality of the commercial banking industry as some have predicted? Hardly. In
fact, in virtually every quarter since 2009, including throughout 2018 and the
first quarter of 2019, the biggest banks recorded or eclipsed record revenues,
profits, and bonuses while at the same time increasing lending.
Even so, at least 115 Dodd-Frank rules remained to be
completed when the Obama administration ended, including executive compensation
rules, securities-based swap rules, credit rating agency reform, and commodity
speculation rules.
Despite his constant
excoriation of Wall as a candidate, after taking office, the Trump
administration promptly set about dismantling the core pillars of financial
reform by a number of regulatory reductions or eliminations, some of them were:
Lowering capital requirements (easier, riskier commercial
loans, important to Trump, himself heavily leveraged)
Enabling more unregulated derivatives dealing (you know,
like the CDS that triggered the bubble damage)
Rolling back consumer and investor protections by reducing
prudential regulation of systemically significant banks (this is critical
because it takes Federal eyes off those banks not considered critical, which
now is almost every major “non-bank” as these commercial entities are sometimes
called.
Both GE capital
and AIG are examples of “too big to fails” which are now off the list. One,
AIG, not only failed spectacularly and engaged in egregiously irresponsible
conduct, but also required an unlimited bailout, which ultimately amounted to
$182 billion. The other was General Electric (GE), which, although with fewer
headlines and less egregiousness, would have gone bankrupt without being bailed
out as well. removing all of the “non-banks” from scrutiny is insane and even
bankers outside that unique arena have said so.
Neutering the
regulation of systemically significant nonbanks and the shadow banking system,
stopping enforcing the laws, is actually almost siding with the predators. Goodbye
Volker rule.
From 1929
through 2010 the US experienced a number of recessions. Some have been cyclic
adjustments with no singular or specific cause; several were adjustments from
wartime to peacetime employment. Three however, and two of these are 21st
century phenomena, were the result of a specific sector of the nation indulging
in irresponsible market operations based on that most base of motives - greed,
leading to runaway speculation. All three, the great Depression, the Dot-com
crash and the great recession are the result of individuals who rarely if ever
get their hands dirty, playing fast and loose with other people’s money or
betting other’s money on “what ifs.”
Trump favors
loosening responsible observation and regulation of these entities. His
sycophants echo that claim. History says he and they are wrong. History is
powerful proof that regulation and financial stability don’t stifle growth and
prosperity. That is why Dodd-Frank re-regulated the financial industry and why
the first Trump administration's deregulation is so reckless and dangerous. The
assault on the Volker rule was simply the latest insult.
As discussed, Trump did succeed in
weakening Dodd-Frank, especially the regulation and oversight of commercial
banks. As a result, in March 2023, Silicon Valley Bank was allowed to become
sufficiently mired in poor decisions regarding the spending of investors’ funds
that they ended up with low interest investments that left them unable to meet
depositor’s demands. This deregulation, specifically due to
Dodd-Frank’s emasculation, especially in the area of the Volker rule,
exempted banks with assets below $250 billion such as SVB, from “stress tests
and tougher capital and liquidity requirements, and in 2019 the regulatory
burden was further reduced for all but the largest banks. These decreases in
accountability and oversight allowed SVB to take the risks it did with other
peoples’ money.
Since Biden was now in office, the
predictable and ludicrous Republican response was to blame “Woke banking
practices” whatever that might even mean, for the results of Donald Trump’s
assault on reasonable and necessary government regulation. While commercial
banks and huge debtors such as the Trump Organization whine about it
(regulation), the real victims are powerless in many cases.
The housing bubble collapse between
2007 and 2012 resulted in more than twelve million foreclosures in the United
States. The crisis was caused by a number of factors, but the main contributor
was the substantial number of predatory and unaffordable subprime mortgage
loans given out in the early 2000s. This was escalated by lax banking rules
allowing high risk mortgages to be graded like currency. RIP Dodd Frank, we
hardly knew ye.
One wonders what further financial
shenanigans Trump might espouse and abet after he’s done gutting regulations in
other areas. One can only hope desperately for a blue tide in the 2026 House
and Senate elections.
