• Allon Advocacy

A Huge Week for Deregulation

We will take a break from politics this week to discuss a sudden increase in the pace of deregulation of the financial markets. (But that’s not to say that there aren’t plenty of political developments to discuss, including another special election win for the Democrats in a district that went solidly for President Trump eighteen months ago.)

Today marks the 10th anniversary of the near-failure of Bear Stearns; a turning point during the financial crisis that highlighted the systemic issues present in the financial markets underlying the stock market tumult. Until this point, it was unthinkable that Wall Street could exist without Bear Stearns, which sold itself to JP Morgan Chase on March 16, 2008 for $2 a share. Four days earlier the stock had been trading around $62. In the months ahead, Countrywide, Fannie and Freddie, Merrill Lynch, AIG, Lehman Brothers and IndyMac would all either be the recipients of bailouts or would declare bankruptcy. By the end of the crisis, the Bush and Obama administrations together would have created financial facilities worth more than $2 trillion to avert catastrophe.

Two years later, after the dust had settled, Congress passed the most sweeping financial reform bill enacted since the Great Depression. The Dodd-Frank Wall Street Reform and Consumer Protection Act was incredibly impactful. It created new regulatory agencies, like the Consumer Financial Protection Bureau and the Financial Stability Oversight Council, imposed heightened supervisory standards on large U.S. financial institutions and required margins or clearing for most over-the-counter derivatives trades. It mandated higher capital and liquidity levels for U.S. financial institutions All told, the federal financial regulatory agencies responsible for implementing Dodd-Frank have published more than 22,000 pages of new financial rules since Dodd-Frank became law in July 2010 to enact the bill’s mandates. Once fully implemented, Dodd-Frank looked something like this:

Makes sense now, right?

In the almost eight years since President Obama signed Dodd-Frank into law, political realities in Washington have stymied any significant changes to the underlying statute. Though Republicans took control of the House just a few months after Dodd-Frank became law, the Democrats retained control of the Senate for an additional two years, assuring that any GOP House-passed Dodd-Frank reform laws never saw the light of the day in the other chamber of the Congress. When Republicans seized the Senate majority in 2014, the threat of a veto from President Obama combined with the GOP’s less-than-60-vote majority in the Senate assured that no significant amendments to Dodd-Frank would become law. This week, though, we saw two major developments that could signal a major reshaping of the financial reform rules that were enacted by Congress following the Great Recession.

For the first time since Dodd-Frank passed the Senate in 2010, the chamber approved, in a bipartisan vote, sweeping changes to the bill meant to provide regulatory relief to small and mid-size regional banks. Moderate Democrats joined Senate Republicans to pass legislation that would exempt U.S. banks with less than $250 billion in total assets from Dodd-Frank’s enhanced supervisory standards. If enacted into law, the bill, which had languished in the Senate for the last several years, would maintain those standards for only the 10 largest banks in the United States. Though the Republican-controlled House of Representatives is ideologically aligned with the objective of the Senate bill – to decrease the regulatory burden on all but the largest U.S. financial institutions – the Chairman of the House Financial Services Committee, Rep. Jeb Hensarling (R-TX) has announced that he opposes the Senate bill because it does not go far enough in providing Dodd-Frank relief. While it’s unclear whether the moderate Democrats in the Senate who voted in favor of the bill this week would be willing to support legislation that further deregulates the U.S. market, there exists some possibility that they will be asked to vote on a bill at some point this year that does just that. With the mid-term elections looming, Democrats in red-leaning states will be eager to demonstrate to their voters that they are pro-growth, which could encourage at least some of them to be willing to go along with a broader bill.

The courts provided another key deregulatory milestone this week. A federal appeals court in New Orleans struck down the so-called fiduciary rule, a Department of Labor regulation promulgated during the Obama administration that sought to protect investors by requiring brokers who handle retirement accounts to make them act in the best interests of clients, rather than just insuring they are offered suitable products. Republicans have long argued that the Securities and Exchange Commission – not the Department of Labor – should have taken the lead on the rule, and the Trump administration had delayed its implementation to allow a GOP-led SEC to assert its leadership in this space. While a Supreme Court challenge seems likely, the SEC could very well now have a blank slate with which to start its work.


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