Who Has Bad Judgment?-- Wall Street Version

Zach Carter is one of Huff Po's most perceptive reporters and yesterday he warned his readers that while we were all distracted by the clown show Trump had finally delivered one on big campaign promise-- not for his voters, of course, but for his Wall Street donors-- he pretty much gutted Dodd-Frank. "Trump," he reminded us, "campaigned on conflicting promises about big banks. One minute, he was going to stick it to the corrupt financial insiders who had wrecked the middle class. The next, he’d vow to liberate our benevolent princes of capital from crushing regulations Obama had cruelly imposed." Pushed by the traditional GOP swamp creatures all around him-- from Pence, Ryan, Priebus and Hensarling to Mnuchin, Ross and Cohn-- the Trump Regime has been all about deregulation.

Last week, a council of top regulators quietly met to discuss the future of the Volcker rule-- the most important structural change Obama established for the financial system. A few days later, a freshly installed Trump official went further, threatening to defang the rule “unilaterally” by “reinterpreting” its entire purpose.

The rule is basically dead, Keefe Bruyette & Woods analyst Brian Gardner wrote in a note to clients last Monday: “Examiners can start giving banks the benefit of the doubt regarding compliance with Volcker almost immediately.”

The Volcker rule was conceived as an update to the Depression-era Glass-Steagall law, which banned traditional banks from engaging in risky, high-stakes securities ventures, which became the domain of investment banks, hedge funds and other firms that didn’t rely on federal support. Until its repeal in the 1990s, Glass-Steagall put an end to many conflicts of interest that had plagued banking during the Roaring Twenties, and prevented government subsidies from flowing into speculative securities schemes, which made it harder for big crazy asset bubbles to accumulate.

Glass-Steagall was as powerful as a sledgehammer, but only slightly more precise. The Volcker rule tried to draw a finer distinction. Instead of banning banks from the securities business outright, it only barred proprietary trading. Banks were no longer allowed to make reckless bets for their own accounts, but other types of trading to help clients meet legitimate market needs would be permitted. Done right, the Volcker rule would have been a technocratic improvement on Glass-Steagall, providing all the benefits of its New Deal predecessor without its costs.

It reflected the broader approach Obama and congressional Democrats took with Wall Street reform, treating the financial crisis as a mechanical malfunction best corrected by expert regulators who could write specific rules for nuanced situations. The economic system, they believed, could not be properly repaired with blunt instruments or lines in the sand.

Twenty-first-century banking is indeed a nasty thicket of money and numbers. But the financial crisis was more than a technocratic breakdown. It was an abuse of power. And the 2010 Dodd-Frank law didn’t really try to reshape the political dynamic between Wall Street and Washington. A handful of financial titans retained control over multitrillion-dollar institutions tasked with socially essential functions. They were not prosecuted for fraud, they continued to lobby both Congress and federal agencies with ferocity, and their firms continued to provide lucrative jobs for political operatives from both parties. Against this mountain, Obama set the willpower of individual regulators.

It didn’t work. Consider the Volcker rule, which ran into trouble almost immediately. “One of the world’s largest banking firms” enlisted the Podesta Group-- a lobbying powerhouse founded by Democratic power brokers John and Tony Podesta-- to water down the rule in Congress. The Podesta Group still boasts about the effort on its website, under “Wins.”

“The client’s desired language on the ‘Volcker Rule’ was passed into law,” reads the page, titled “Challenging Wall Street Reform To Defend Jobs.” The lobbying barrage continued at the regulatory agencies, whose final version of the rule stretched to 300 pages of loopholes, exemptions and special considerations. Bank lobbyists succeeded in delaying the implementation of key elements of Volcker for years. Now the beast is being put out of its misery by Trump appointees with close ties to the financial industry, demonstrating that Wall Street’s political clout remains as strong as ever. Volcker’s destroyers will include former bank lawyer Keith Noreika, along with Treasury Secretary Steve Mnuchin, a Goldman Sachs alum, and Securities and Exchange Commission Chairman Jay Clayton, who served as Goldman’s bailout attorney.

A similar fate will soon follow for the derivatives regulations and other rules written during the Obama years. Even capital requirements, the simplest and last line of defense against bad bank behavior, are under assault following the resignation of Federal Reserve Governor Daniel Tarullo. We will never know if Obama’s tweaks and adjustments would have prevented or ameliorated another financial crisis. Today, big banks are bigger than they were before the crash, and are returning to pre-crash levels of oversight. The potential for financial turmoil under an erratic president is just as strong as the potential for foreign policy dislocation.

The one element of Dodd-Frank that will likely survive the Trump presidency is also the only aspect that seriously restructured the power relationship between government and finance. The new Consumer Financial Protection Bureau is important not because it involves a host of complicated new rules-- stealing from customers was illegal before, during and after the crisis-- but because it changes the way these protections are enforced. Prior to Obama, consumer banking products were regulated by five different agencies that competed with each other for “assessment” fees paid by the banks they regulated. This gave banks political power over their regulators-- an agency that was too tough on consumer protection risked losing its banks, and the funding they brought, to another regulator.

Obama scrapped this regime in favor of a single consumer finance overseer, the CFPB, and charged lifelong consumer advocate Elizabeth Warren with setting up the agency and hiring critical personnel. This established a new power center in Washington capable of challenging not only big banks, but also broken bureaucracy. When Obama’s Education Department turned a blind eye to student loan abuses, the CFPB took action. It has returned over $11 billion in ill-gotten bank gains to customers since its inception.

So the next meltdown probably won’t be caused by consumer fraud. Other than that, we’re pretty screwed.

As we mentioned a couple of weeks ago, the corrupt nest of thieves headed by Texas crook Jeb Hensarling-- the House Financial Services Committee-- has almost been entirely bought off by the banksters. Millions and millions of dollars in bribes have gone to corrupt Republicans like Hensarling ($7,372,690), Ed Royce ($6,931,797), Steve Stivers ($4,192,037), Patrick McHenry ($3,949,286), Peter King ($2,761,274), Sean Duffy ($2,376,646) and Blaine Luetkemeyer ($2,371,565) and to corrupt Democrats on the committee as well-- Jim Himes ($5,545,212), Gregory Meeks ($3,120,688), DavidScott ($2,770,894), Charlie Crist ($2,474,349), John Delaney ($2,100,202) and Kyrsten Sinema ($1,662,043).

There's no doubt the House is going to pass the legislation the bank lobbyists have written for Hensarling, destroying as many consumer protections as they can, especially the CFPB. But even McConnell admits that the greed and avarice of the banksters and the bribed House members won't get the legislation through the Senate for Señor Trumpanzee to sign. McConnell told Bloomberg News "I’d love to do something about Dodd-Frank, particularly with regard to community banks but that would require Democratic involvement. I’m not optimistic... So far, my impression is the Democrats on the banking committee believe that Dodd-Frank is something akin to the Ten Commandments."

Despite McConnell’s remarks, helping community lenders hasn’t been the main sticking point in negotiations between Republicans and Democrats. Ohio Senator Sherrod Brown, the banking panel’s top Democrat, has said he supports relaxing rules for the smallest banks. But Democrats have been vocal in resisting any changes to Dodd-Frank that they say will aid Wall Street, such as scrapping Volcker Rule trading restrictions and weakening the Consumer Financial Protection Bureau.

On Tuesday, Brown pushed back on McConnell’s contention that Democrats are blocking efforts for a bipartisan compromise.

“The Senate Republican leader seems to have forgotten the harm Wall Street’s greed and reckless behavior caused to millions of working families and taxpayers,” Brown said in a statement. “If this were really about community banks, we might have come to an agreement years ago. Republicans are once again using them as leverage to help a rogue’s gallery of special interests.”

[Senate Banking Committee chair Mike] Crapo has previously said efforts to revise Dodd-Frank would be slow as most major bills require 60 votes to pass the Senate, and Republicans hold just 52 seats. The House is moving faster, with that chamber’s Financial Services Committee approving legislation earlier this month that would alter many of the law’s key provisions. House Speaker Paul Ryan has said he wants the legislation to move to a floor vote as soon as possible.

Absent action by Congress, McConnell said rolling back Dodd-Frank will fall to the Trump administration. After a slow start, President Donald Trump has made progress in recent weeks in filling the agencies that oversee Wall Street with his own appointees.

Trump, who has called Dodd-Frank a “disaster” that has made it difficult for businesses to get loans, signed an executive order in February requiring regulators to examine financial rules. The Treasury Department is scheduled to issue a report on the findings next month, kicking off what the administration has promised will be a broad rewrite of regulations implemented under Dodd-Frank.

Unless the situation in Congress changes, we will be “stuck with whatever the administration thinks it can do on its own to modify the impact of Dodd-Frank,” McConnell said.