President Trump is focusing early on rolling back regulation, and on Friday he took another good step with directives to peel back Dodd-Frank and the Labor Department’s fiduciary rule. Democrats are predicting another financial crisis, but it’s possible to build a sturdy system that also allows for more risk-taking to serve economic growth.
Start by repealing rules that add costs without making the system safer, such as the fiduciary rule that Labor imposed last year under the guise of protecting savers. The rule requires brokers to act in the “best interest” of clients, though many investors will be harmed. The rule will make investment advice too expensive for many small investors as brokers eliminate commissions and instead charge fees. Plaintiff attorneys are circling, ready to slap brokers with class-action lawsuits if stock prices fall.
Small investors may also find themselves at the mercy of robo advisers that may have a hard time discerning their client’s best interest. Want to know whether to boost your investment in health stocks if ObamaCare is repealed? Ask Alexa. Robert Litan and Hal Singer have estimated that depriving small investors of human advice could cost clients $80 billion in a downturn. Mr. Trump ordered Labor to review and perhaps rewrite the rule that was scheduled to take effect in April.
The President also directed a review of the 2,300-page Dodd-Frank law that has turned banks into regulated utilities. Gary Cohn, who runs Mr. Trump’s National Economic Council, told the Journal that Dodd-Frank’s costs and complexity have restrained bank lending. Democrats wrote Dodd-Frank with enough ambiguity so the feds could regulate as they please. But this means a new government can ease those burdens without Congress.
Take the Financial Stability Oversight Council (FSOC), which has the power to designate “systemically important financial institutions.” SIFIs must comply with onerous regulations but carry an implicit taxpayer guarantee.
Big banks that accept taxpayer-insured deposits are obvious SIFI candidates, but the Obama FSOC also tagged AIG, MetLife and Prudential Financial as SIFIs. These insurers are burdened with bank-style regulations that don’t fit their business model. MetLife sued to rescind the arbitrary designation, and a federal judge has ruled in its favor. The Trump Administration could drop the government’s appeal and settle with MetLife in a way that exempts insurers from the SIFI label.
Also in need of review is the Volcker Rule, which had the sensible goal of barring high-risk trading at taxpayer-insured banks. But regulators needed four years to finalize the abstruse 950-page rule that includes 2,800 footnotes. One iron rule of government is that the more complex a regulation, the easier to find loopholes.
Dodd-Frank’s fatal flaw is assuming that regulators who failed to prevent the last crisis will foresee and prevent the next one. All they need are more rules and more power. But financial manias happen precisely because everyone assumes the good times will last forever.
The better way to prevent a panic is to have simple but firm rules along with high capital standards that make banks better able to endure losses in a downturn. That’s the philosophy behind House Financial Services Chairman Jeb Hensarling’s proposed financial reform, and it’s the direction the Trump Administration should take even without legislation.
But will it? The President signed his directives Friday after meeting with bank executives, and he didn’t help himself politically by praising the “great returns” BlackRock has earned. The point is to help the larger economy, not bank profits.
As a Goldman Sachs alum, Mr. Cohn has a particular burden not merely to relax regulations that are the bane of big banks while doing little to relieve the burden on their smaller competitors and tech start-ups. J.P. Morgan’s Jamie Dimon and Goldman Sachs’s Lloyd Blankfein have argued against a wholesale repeal of Dodd-Frank, which has given these large incumbents a competitive advantage.
Although Mr. Cohn said the U.S. has the highest bank capital standards in the world, they aren’t as high as they should be. The trade he could offer Wall Street is less burdensome regulation in return for higher capital standards. The banks would then be freer to lend money while taxpayers have more protection against the next bailout. This would have the added political benefit of blunting the inevitable Democratic attacks that Messrs. Cohn and Trump are trying to help Wall Street.
Click here to view the article on WSJ.com.
Why is the government refusing to repay money it had no right to take in the first place?For six months Secretary Jack Lew’s Treasury Department has been acting as if it never lost a court case to MetLife and still won’t return the $4.6 million it owes to MetLife shareholders. On March 30, federal Judge Rosemary Collyer rescinded the Financial Stability Oversight Council’s designation of MetLife as a systemically important financial institution. The day after the decision, Federal Reserve staff who had been camped out in the insurer’s offices vacated the premises. The Fed also told the New York Department of Financial Services, MetLife’s primary regulator, that the central bank would not participate in an upcoming supervisory meeting. The Fed understood that it had no legal authority to continue regulating MetLife, so it ended its oversight. But Treasury’s
Federal regulators won’t forgive MetLife for beating them in court, and the arguments are now arriving in the government’s appeal in the D.C. Circuit Court of Appeals. Readers might want to know about the hilarious amicus brief offered by the two authors of the Dodd-Frank financial law that started it all.
There has been a little something for everyone in the latest news from the ongoing battle between the financial sector and federal regulators. The Federal Reserve rejected five of the eight largest banks’ plans for orderly liquidation in a crisis — their “living wills” — a move that signaled to Wall Street’s critics that the institutions are still “too big to fail.” Goldman Sachs agreed to a $5 billion civil settlement with the Justice Department, admitting that it had misled certain buyers of its mortgage-backed securities during the housing bubble a decade ago. Meanwhile, regulators took a hit, as a U.S. district judge in Washington ruled that insurance giant MetLife had been improperly designated a “systemically important” institution subject to tighter federal control.
It’s been a rough few weeks for President Obama’s signature reform of American finance. Across Washington deep cracks are appearing in the foundations of the Dodd-Frank law Mr. Obama enacted in 2010.
Treasury Secretary Jack Lew and his media bodyguards are still pouting over his courtroom defeat in the MetLife case. They’re traumatized because a federal judge had the nerve to suggest that when financial regulators deem a company to be a “systemic risk,” the feds must present evidence and follow their own rules.
Treasury Secretary Jack Lew must be doing the Whip and the Nae Nae around his office after seeing this week’s news out of MetLife. But taxpayers won’t feel like dancing if Mr. Lew continues to enjoy such broad powers to remake American finance.
THE OBAMA administration released the full text of the Trans-Pacific Partnership trade agreement at 4 a.m. on Nov. 5 — and it did not take long for critics to pass judgment. Having previously (and hyperbolically) taken the administration to task for negotiating the 12-nation deal in secret, they promptly denounced the actual text as a job-destroying sellout to corporations that threatens the environment, human rights and health. “In the end the TPP was worse than we thought it would be,” Rep. Mark Pocan (D-Wis.) declared, in a news release issued within eight hours of the 4,500-page document’s release.
Welcome to Washington, where the customer is never king. Now financial regulators are saying that the benefits of their rules don’t have to outweigh the costs for consumers or taxpayers. Luckily, at least one big U.S. company is fighting the bureaucracy on behalf of lower prices and less taxpayer risk.
MetLife sued the federal Financial Stability Oversight Council (FSOC) Tuesday to overturn the life insurer’s designation as a “systemically important financial institution.” This could be the best news taxpayers have had since the financial panic.