Among the most appalling aspects of the financial collapse nine years ago was that no matter how reckless and predatory big financial institutions had been, they had grown so big and so interconnected that the federal government found itself forced to prop them up to avoid failures that would wreck the economy. The resulting bailouts, which included billions of dollars in bonuses for executives responsible for the fiasco, provoked deep public anger and became a rallying cry for populists on the right and the left.
To reduce the risks from too-big-to-fail institutions, Congress in 2010 passed the Dodd-Frank financial oversight bill. But ever since, even as the stock market soared, wages stagnated and the victims of predatory lenders continued to struggle, Wall Street’s champions have demanded an end to Dodd-Frank’s regulations.
Step by step, the Trump administration has made it clear that it is on their side, that Wall Street need have no real concern about Dodd-Frank’s provisions and that the lessons of the financial crisis will be ignored.
The Treasury Department is about to release the second in a series of reports on Dodd-Frank. The first one called for weakening constraints on banks, including loosening restrictions on their traders and backing off how much loss-absorbing capital banks are required to hold.
The next report is expected to propose lighter regulation for financial firms other than banks, by restricting the government’s ability to designate insurance companies, corporate lending subsidiaries and other firms as too big to fail, a label that subjects a company to additional rules and higher capital requirements.
The rollback would be blind to history. Non-banks proved as unstable as banks in the crisis. After the collapse of Lehman Brothers, Wall Street’s other big investment houses survived by converting into federally insured banks, and raking in bailouts, cheap loans from the Fed and federal guarantees. The insurer American International Group required a $182 billion bailout, and GE Capital needed $139 billion in federal backing to borrow money to stay afloat. Federal deposit insurance was temporarily extended to money market funds to prevent a catastrophic run on the financial system.
Weakening the regulation of institutions that are not banks would weaken a regulatory process that is already too restrained. The only such companies designated as too big to fail now are A.I.G. and Prudential Financial, both behemoth insurers. Federal regulators rescinded a too-big-to-fail designation for GE Capital in 2016 after the firm downsized. A court rescinded another too-big-to-fail designation, for MetLife, in a dubious finding last year. Similarly, regulators decided not to designate huge asset managers like BlackRock and Fidelity as too big to fail, a close call that could prove unwise.
The anti-Dodd-Frank reports by the Trump Treasury do not on their own change law or regulations. But they send a signal to Wall Street that the administration opposes tough federal supervision and regulation, a stance that is also reflected in Mr. Trump’s pro-Wall Street choices to head various financial regulatory agencies.
Financial corporations are being given the nod to re-establish their unholy alliances, in which vast interconnections through lending, borrowing, derivatives and other transactions spread and amplify risks throughout the financial system — while regulators look the other way. The greater the risk, the greater the potential return for bank executives and traders. For everyone else, heightened risk means greater economic peril, including threatened destruction of jobs, pay, savings, home equity and career opportunity.
The Republican-controlled Congress is too jammed up to move ahead with legislation to weaken Dodd-Frank. But that won’t be necessary, since the administration is doing a good job of dismantling the regulations on its own.
— The New York Times, Sept. 8, 2017