I discussed several banking and finance targets for an incoming Trump administration back in November, after the extraordinary presidential election win by the establishment outsider. I highlighted three targets back then: The Volcker Rule, Financial Stability Oversight Council, and the Consumer Financial Protection Bureau.

Here we are in February, and by executive order and associated executive memorandum, President Trump directs the Secretary of the Treasury to consult with the heads of the members of the Financial Stability Oversight Committee on the efficacy of the existing laws in meeting what are to be known as the “Core Principles”.

Here are the Core Principles verbatim from the EO:
(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
(b) prevent taxpayer-funded bailouts;
(c) 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;
(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;
(e) advance American interests in international financial regulatory negotiations and meetings;
(f) make regulation efficient, effective, and appropriately tailored; and
(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

Unlike the immigration executive order restricting/banning travel from seven Muslim countries, this order is not as blunt, direct and overt. It is uncharacteristically restrained in fact, after the electioneering and post-win statements of intent from the then President-elect, or Republican financial reformists.

This executive order may still be jumping the gun however, as it directs the Secretary of the Treasury to perform this consultation, and Steve Mnuchin, the president’s nominee for the position, has not yet cleared the Senate confirmation process (though at the time of publication he had advanced through to a final vote in a Republican-controlled Senate).

That said, with the Great Recession still hurting many Americans, the prospect of a fresh wave of deregulation, with the dismantling of protections meant to avert a repeat, and all while bank share prices soar in anticipation, perhaps this news needed to be lost in the white noise surrounding immigration?

There are two aspects to Dodd-Frank, enacted by the Obama administration as the Dodd-Frank Wall Street Reform and Consumer Protection Act. The first set of rules are core to financial regulation, and at the time were held up as a set of practical protections in the aftermath of the 2008 world economic collapse. The second set of rules are a lot more controversial however, and these are simply what got jammed into Dodd-frank because they could.

A good example of the latter is Section 1502, which was initially touted as being a low cost means to put dealers in conflict diamonds and minerals out of business. It wound up costing $4BN to setup and $200 million a year in compliance, and all it has done is create a paper chase of zero value to the US economy, but is not responsible for putting a single conflict diamond dealer out of business.

That is a good candidate to be repealed.

Now we get to what many readers will be much more familiar with, The Volcker Rule, which prohibits so-called proprietary trading by tax-payer backed banks. Even Paul Volcker, the eponymous rule proponent and former Fed chairman, has called for a simpler version, but in any event the long game played by the major Wall Street banks appears to be paying off. Almost all of them applied for five-year deferments from the Rule, and now it looks like it may be axed if President Trump has his way (and as I predicted).

Or will it?

Enter Steve Mnuchin, the almost Secretary of the Treasury once he is past the final Senate vote.

Nominee for Secretary of the Treasury – Steve Mnuchin, The Volcker Rule Savior?

Mnuchin is a former Goldman Sachs banker, turned Hollywood movie producer, hedge fund manager, and purchaser of failed lender, IndyMac, which was rebranded as OneWest and sold to CIT Group in 2015.

A Wall Street Master of the Universe if ever there was one, and who better to kill a financial protection thought by many to stifle banking growth and financial profitability, while raising liquidity levels to the extent banks won’t lend?

Except Mnuchin believes the Volcker Rule should stay, albeit in a changed form, and certainly not thrown out as the baby with the bath water.

Both in the press, and during his confirmation hearings, Mnuchin has stated he does not agree with a return to Glass-Steagall, but neither does he want to ax the Volcker Rule. That said, he does believe that the Volcker Rule has a tendency to create a liquidity log jam in the financial markets as it hampers the ability to buy and sell bonds during times of financial stress (and this is supported by the Federal Treasury study conducted in 2015).

When asked about this during confirmation questioning, Mnuchin replied, “That is absolutely something I would look at.”

Steve Volcker testifying on Volcker Rule in Senate

Instead, Mnuchin appears to be moving to a “21st Century Glass-Steagall” but without elaborating on just what that may look like. Mnuchin believes imposing Glass-Steagall on a modern Wall Street is not likely to work, stating this, “would have very big implications to liquidity and capital markets.”

I believe his reticence here is well played.

This softly-softly approach may be a sop to Republicans getting behind The Financial Choice Bill led by House Financial Services Chairman Jeb Hensarling. Hensarling et al want the Volcker Rule replaced entirely because it is overly complex. Hensarling’s bill would also see the demise of the Consumer Financial Protection Bureau (also one of the targets we discussed back in November), but Mnuchin again seems to be advocating for a softer approach. He is on the record as wanting to keep the watchdog, which is credited with cracking down on shady lending practices, such as those that got Wells Fargo into trouble last year.

The fact the CFPB was setup by Elizabeth Warren must have some Republicans positively foaming at the mouth with the prospect of tearing it up. Mnuchin on the other hand, simply wants its funding transferred from the Federal Reserve to Congress (which will probably strangle its funding). On this, Mnuchin seems to be simply appearing to avoiding getting needless blood on his hands and doing a Pontius Pilate imitation.

[A leaked memo from Hensarling outlines his cabal’s plans to dismantle Dodd-Frank – see report here]

The Demise and Rise of Community Banking?

There is something more to consider though, and this affects Main Street not so much Wall Street.

Mnuchin’s testimony included:

“My biggest concern is this regulation is killing community banks,” and later adding that he wants to make sure “we don’t end up in a world where we only have four big banks.”

Community banking has been decimated over the last decade, with many pointing the fingers at Dodd-Frank, but truthfully, the demise of community banking has a much older history. Nevertheless, there are very strong arguments that regulation has hurt community banking and lending to the small business community which has historically been the engine of job creation and wealth for Main Street and middle-class America.

Is This The End of Dodd-Frank, The Volcker Rule, and the Consumer Financial Protection Bureau?

Yes and No.

Dodd-Frank will be changed – some of it deservedly so (Section 1502 for instance), and the rest will be political and news fodder at least until the next financial crisis. It is rampantly clear that the Trump administration wants Dodd-Frank changed, whether substantively or for draining the swamp appearance’s sake. At least with Mnuchin at the Treasury helm, we’ll have someone who understands the working, financial levers of Wall Street and Main Street. Hopefully we will not be totally denuded of the protections, they’ll just be called something different and hopefully more effective.

The Volcker Rule may actually stay, but in a stripped down version and perhaps closer to what Paul Volcker advocates for. If this is the case, I’m glad to have predicted wrongly last November, but my error will be thanks to Mnuchin and not the president, and certainly not Hensarling et al.

Finally, the Consumer Financial Protection Bureau – I think it is indeed doomed. Keeping the CFSB, but making its funding reliant on Congress is just a slow death and Elizabeth Warren has already been gagged once this week. Of all the things on the chopping block here, something is going to be offered up as a sacrificial offering the CFSB fits the description very nicely.

And finally, finally…

The Financial Stability Oversight Committee (FSOC) is still a likely candidate for being culled in my opinion, but it is very interesting the executive order directs the Secretary of the Treasury to consult with the heads of its member constituents…

Financial politics just got very interesting indeed.

Meanwhile, my fundamental prediction from last November was that there will be a great deal of change for banking and financial compliance, and in this I was 100% correct, but then we all knew that was going to be the case didn’t we…

The question will be, “How are you going to deal with it?”

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