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 21^st 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.