Yves here. While Prins is correct to call out the Trump administration’s enthusiasm for financial deregulation, it’s not as if the Democrats have a great track record on that front. As we chronicled at nauseating length, Dodd Frank was weak and designed to be weakened further via having many provisions kicked over to further study before being finalized, which allowed lobbyists to have a second go at diluting them, and better yet, when public and press interest in the crisis abated. One important force for strengthening regulations came about by accident, via Danny Tarullo at the Fed taking on bank regulation and being determined and sharp-elbowed about it. Another was Gary Gensler at the CFTC, who was not expected to be a reformer.
By contrast, Mary Jo White at the SEC was widely seen as not interested in enforcement, with Commissioner Kara Stein regularly opposing White’s mere gestures. Yes, White did some more enforcing that her replacement Jay Clayton is doing…but she had to at least feign taking a Democratic party, “we’re not really in the banks’ pocket” posture, as opposed to the Republicans being open about it.
The CFPB has also been underwhelming under Obama. Obama chose Richard Cordray, who from his days as Ohio attorney general was a known “all hat, no cattle” type. He was late to implement a payday lending rule, and by virtue of it not becoming effective until after Trump took office, it was reversed. The CFPB’s biggest accomplishment is arguably its complaints database, but even then, it did not use it to maximum advantage. The Los Angeles Times, and following them, the Los Angeles prosecutor, identified the Wells Fargo fake account abuses. As regular readers know, when the press reported on the scale of the violations, the CFPB, which acted as the lead regulator on the sanctions, was criticized for not going after Wells executives.
By Nomi Prins, whose new book, Collusion: How Central Bankers Rigged the World (Nation Books), will be published this May. Of her six other books, the most recent is All the Presidents’ Bankers: The Hidden Alliances That Drive American Power. She is a former Wall Street executive. Special thanks go to researcher Craig Wilson for his superb work on this piece. Originally published at TomDispatch
There’s been lots of fire and fury around Washington lately, including a brief government shutdown. In Donald Trump’s White House, you can hardly keep up with the ongoing brouhahas from North Korea to Robert Mueller’s Russian investigation, while it already feels like ages since the celebratory mood over the vast corporate tax cuts Congress passed last year. But don’t be fooled: none of that is as important as what’s missing from the picture. Like a disease, in the nation’s capital it’s often what you can’t see that will, in the end, hurt you most.
Amid a roaring stock market and a planet of upbeat CEOs, few are even thinking about the havoc that a multi-trillion-dollar financial system gone rogue could inflict upon global stability. But watch out. Even in the seemingly best of times, neglecting Wall Street is a dangerous idea. With a rag-tag Trumpian crew of ex-bankers and Goldman Sachs alumni as the only watchdogs in town, it’s time to focus, because one thing is clear: Donald Trump’s economic team is in the process of making the financial system combustible again.
Collectively, the biggest U.S. banks already have their get-out-out-of-jail-free cards and are now sitting on record profits after, not so long ago, triggering sweeping unemployment, wrecking countless lives, and elevating global instability. (Not a single major bank CEO was given jail time for such acts.) Still, let’s not blame the dangers lurking at the heart of the financial system solely on the Trump doctrine of leaving banks alone. They should be shared by the Democrats who, under President Barack Obama, believed, and still believe, in the perfection of the Dodd-Frank Act of 2010.
While Dodd-Frank created important financial safeguards like the Consumer Financial Protection Bureau, even stronger long-term banking reforms were left on the sidelines. Crucially, that law didn’t force banks to separate the deposits of everyday Americans from Wall Street’s complex derivatives transactions. In other words, it didn’t resurrect the Glass-Steagall Act of 1933 (axed in the Clinton era).
Wall Street is now thoroughly emboldened as the financial elite follows the mantra of Kelly Clarkston’s hit song: “What doesn’t kill you makes you stronger.” Since the crisis of 2007-2008, the Big Six U.S. banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley — have seen the share price of their stocks significantly outpace those of the S&P 500 index as a whole.
Jamie Dimon, chairman and CEO of JPMorgan Chase, the nation’s largest bank (that’s paid $13 billion in settlements for various fraudulent acts), recently even pooh-poohed the chances of the Democratic Party in 2020, suggesting that it was about time its leaders let banks do whatever they wanted. As he told Maria Bartiromo, host of Fox Business’s Wall Street Week, “The thing about the Democrats is they will not have a chance, in my opinion. They don’t have a strong centrist, pro-business, pro-free enterprise person.”
This is a man who was basically gifted two banks, Bear Stearns and Washington Mutual, by the U.S government during the financial crisis. That present came as his own company got cheap loans from the Federal Reserve, while clamoring for billions in bailout money that he swore it didn’t need.
Dimon can afford to be brazen. JPMorgan Chase is now the second most profitable company in the country. Why should he be worried about what might happen in another crisis, given that the Trump administration is in charge? With pro-business and pro-bailout thinking reigning supreme, what could go wrong?
Protect or Destroy?
There are, of course, supposed to be safeguards against freewheeling types like Dimon. In Washington, key regulatory bodies are tasked with keeping too-big-to-fail banks from wrecking the economy and committing financial crimes against the public. They include the Federal Reserve, the Securities and Exchange Commission, the Treasury Department, the Office of the Comptroller of the Currency (an independent bureau of the Treasury), and most recently, under the Dodd-Frank Act of 2010, the Consumer Financial Protection Bureau (an independent agency funded by the Federal Reserve).
These entities are now run by men whose only desire is to give Wall Street more latitude. Former Goldman Sachs partner, now treasury secretary, Steven Mnuchin caught the spirit of the moment with a selfie of his wife and him holding reams of newly printed money “like a couple of James Bond villains.” (After all, he was a Hollywood producer and even appeared in the Warren Beatty flick Rules Don’t Apply.) He’s making his mark on us, however, not by producing economic security, but by cheerleading for financial deregulation.
Despite the fact that the Republican platform in election 2016 endorsed reinstating the Glass-Steagall Act, Mnuchin made it clear that he has no intention of letting that happen. In a signal to every too-big-not-to-fail financial outfit around, he also released AIG from its regulatory chains. That’s the insurance company that was at the epicenter of the last financial crisis. By freeing AIG from being monitored by the Financial Services Oversight Board that he chairs, he’s left it and others like it free to repeat the same mistakes.
Elsewhere, having successfully spun through the revolving door from banking to Washington, Joseph Otting, a former colleague of Mnuchin’s, is now running the Office of the Comptroller of the Currency (OCC). While he’s no household name, he was the CEO of OneWest (formerly, the failed California-based bank IndyMac). That’s the bank Mnuchin and his billionaire posse picked up on the cheap in 2009 before carrying out a vast set of foreclosures on the homes of ordinary Americans (including active-duty servicemen and -women) and reselling it for hundreds of millions of dollars in personal profits.
At the Federal Reserve, Trump’s selection for chairman, Jerome Powell (another Mnuchin pick), has repeatedly expressed his disinterest in bank regulations. To him, too-big-to-fail banks are a thing of the past. And to round out this heady crew, there’s Office of Management and Budget (OMB) head Mick Mulvaney now also at the helm of the Consumer Financial Protection Bureau (CFPB), whose very existence he’s mocked.
In time, we’ll come to a reckoning with this era of Trumpian finance. Meanwhile, however, the agenda of these men (and they are all men) could lead to a financial crisis of the first order. So here’s a little rundown on them: what drives them and how they are blindly taking the economy onto distinctly treacherous ground.
Joseph Otting, Office of the Comptroller of the Currency
The Office of the Comptroller is responsible for ensuring that banks operate in a secure and reasonable manner, provide equal access to their services, treat customers properly, and adhere to the laws of the land as well as federal regulations.
As for Joseph Otting, though the Senate confirmed him as the new head of the OCC in November, four key senators called him “highly unqualified for [the] job.” He will run an agency whose history snakes back to the Civil War. Established by President Abraham Lincoln in 1863, it was meant to safeguard the solidity and viability of the banking system. Its leader remains charged with preventing bank-caused financial crashes, not enabling them.
Fast forward to the 1990s when Otting held a ranking position at Union Bank NA, overseeing its lending practices to medium-sized companies. From there he transitioned to U.S. Bancorp, where he was tasked with building its middle-market business (covering companies with $50 million to $1 billion in annual revenues) as part of that lender’s expansion in California.
In 2010, Otting was hired as CEO of OneWest (now owned by CIT Group). During his time there with Mnuchin, OneWest foreclosed on about 36,000 people and was faced with sweeping allegations of abusive foreclosure practices for which it was fined $89 million. Otting received $10.5 million in an employment contract payout when terminated by CIT in 2015. As Senator Sherrod Brown tweeted all too accurately during his confirmation hearings in the Senate, “Joseph Otting is yet another bank exec who profited off the financial crisis who is being rewarded by the Trump Administration with a powerful job overseeing our nation’s banking system.”
Like Trump and Mnuchin, Otting has never held public office. He is, however, an enthusiastic proponent of loosening lending regulations. Not only is he against reinstating Glass-Steagall, but he also wants to weaken the “Volcker Rule,” a part of the Dodd-Frank Act that was meant to place restrictions on various kinds of speculative transactions by banks that might not benefit their customers.
Jay Clayton, the Securities and Exchange Commission
The Securities and Exchange Commission (SEC) was established by President Franklin Delano Roosevelt in 1934, in the wake of the crash of 1929 and in the midst of the Great Depression. Its intention was to protect investors by certifying that the securities business operated in a fair, transparent, and legal manner. Admittedly, its first head, Joseph Kennedy (President John F. Kennedy’s father), wasn’t exactly a beacon of virtue. He had helped raise contributions for Roosevelt’s election campaign even while under suspicion for alleged bootlegging and other illicit activities.
Since May 2017, the SEC has been run by Jay Clayton, a top Wall Street lawyer. Following law school, he eventually made partner at the elite legal firm Sullivan & Cromwell. After the 2008 financial crisis, Clayton was deeply involved in dealing with the companies that tanked as that crisis began. He advised Barclays during its acquisition of Lehman Brothers’ assets and then represented Bear Stearns when JPMorgan Chase acquired it.
In the three years before he became head of the SEC, Clayton represented eight of the 10 largest Wall Street banks, institutions that were then regularly being investigated and charged with securities violations by the very agency Clayton now heads. He and his wife happen to hold assets valued at between $12 million and $47 million in some of those very institutions.
Not surprisingly in this administration (or any other recent one), Clayton also has solid Goldman Sachs ties. On at least seven occasions between 2007 and 2014, he advised Goldman directly or represented its corporate clients in their initial public offerings. Recently, Goldman Sachs requested that the SEC release it from having to report its lobbying activities or payments because, it claimed, they didn’t make up a large enough percentage of its assets to be worth the bother. (Don’t be surprised when the agency agrees.)
Clayton’s main accomplishment so far has been to significantly reduce oversight activities. SEC penalties, for instance, fell by 15.5% to $3.5 billion during the first year of the Trump administration. The SEC also issued enforcement actions against only 62 public companies in 2017, a 33% decline from the previous year. Perhaps you won’t then be surprised to learn that its enforcement division has an estimated 100 unfilled investigative and supervisory positions, while it has also trimmed its wish list for new regulatory provisions. As for Dodd-Frank, Clayton insists he won’t “attack” it, but thinks it should be “looked” at.
Mick Mulvaney, the Consumer Financial Protection Bureau and the Office of Management and Budget
As a congressman from South Carolina, ultra-conservative Republican Mick Mulvaney, dubbed “Mick the Knife,” once even labeled himself a “right-wing nut job.” Chosen by President Trump in November 2016 to run the Office of Management and Budget, he was confirmed by Congress last February.
As he said during his confirmation hearings, “Each day, families across our nation make disciplined choices about how to spend their hard-earned money, and the federal government should exercise the same discretion that hard-working Americans do every day.” As soon as he was at the OMB, he took an axe to social programs that help everyday Americans. He was instrumental in creating the GOP tax plan that will add up to $1.5 trillion to the country’s debt in order to provide major tax breaks to corporations and wealthy individuals. He was also a key figure in selling the plan to the media.
When Richard Cordray resigned as head of the Consumer Financial Protection Bureau in November, Trump promptly selected Mick the Knife for that role, undercutting the deputy director Cordray had appointed to the post. After much debate and a court order in his favor, Mulvaney grabbed a box of Dunkin’ Donuts and headed over from his OMB office adjacent to the White House. So even though he’s got a new job, Mulvaney is never far from Trump’s reach.
The problem for the rest of us: Mulvaney loathes the CFPB, an agency he once called “a joke.” While he can’t unilaterally demolish it, he’s already obstructed its ability to enforce its government mandates. Soon after Trump appointed him, he imposed a 30-day freeze on hiring and similarly froze all further rule-making and regulatory actions.
In his latest effort to undermine American consumers, he’s working to defund the CFPB. He just sent the Federal Reserve a letter stating that, “for the second quarter of fiscal year 2018, the Bureau is requesting $0.” That doesn’t bode well for American consumers.
Jerome “Jay” Powell, Federal Reserve
Thanks to the Senate confirmation of his selection for chairman of the board, Donald Trump now owns the Fed, too. The former number two man under Janet Yellen, Jerome Powell will be running the Fed, come Monday morning, February 5th.
Established in 1913 during President Woodrow Wilson’s administration, the Fed’s official mission is to “promote a safe, sound, competitive, and accessible banking system.” In reality, it’s acted more like that system’s main drug dealer in recent years. In the wake of the 2007-2008 financial crisis, in addition to buying trillions of dollars in bonds (a strategy called “quantitative easing,” or QE), the Fed supplied four of the biggest Wall Street banks with an injection of $7.8 trillion in secret loans. The move was meant to stimulate the economy, but really, it coddled the banks.
Powell’s monetary policy undoubtedly won’t represent a startling change from that of previous head Janet Yellen, or her predecessor, Ben Bernanke. History shows that Powell has repeatedly voted for pumping financial markets with Federal Reserve funds and, despite displaying reservations about the practice of quantitative easing, he always voted in favor of it, too. What makes his nomination out of the ordinary, though, is that he’s a trained lawyer, not an economist.
Powell is assuming the helm at a time when deregulation is central to the White House’s economic and financial strategy. Keep in mind that he will also have a role in choosing and guiding future Fed appointments. (At present, the Fed has the smallest number of sitting governors in its history.) The first such appointee, private equity investor Randal Quarles, already approved as the Fed’s vice chairman for supervision, is another major deregulator.
Powell will be able to steer banking system decisions in other ways. In recent Senate testimony, he confirmed his deregulatory predisposition. In that vein, the Fed has already announced that it seeks to loosen the capital requirements big banks need to put behind their riskier assets and activities. This will, it claims, allow them to more freely make loans to Main Street, in case a decade of cheap money wasn’t enough of an incentive.
The Emperor Has No Rules
Nearly every regulatory institution in Trumpville tasked with monitoring the financial system is now run by someone who once profited from bending or breaking its rules. Historically, severe financial crises tend to erupt after periods of lax oversight and loose banking regulations. By filling America’s key institutions with representatives of just such negligence, Trump has effectively hired a team of financial arsonists.
Naturally, Wall Street views Trump’s chosen ones with glee. Amid the present financial euphoria of the stock market, big bank stock prices have soared. But one thing is certain: when the next crisis comes, it will leave the last meltdown in the shade because our financial system is, at its core, unreformed and without adult supervision. Banks not only remain too big to fail but are still growing, while this government pushes policies guaranteed to put us all at risk again.
There’s a pattern to this: first, there’s a crash; then comes a period of remorse and talk of reform; and eventually comes the great forgetting. As time passes, markets rise, greed becomes good, and Wall Street begins to champion more deregulation. The government attracts deregulatory enthusiasts and then, of course, there’s another crash, millions suffer, and remorse returns.
Ominously, we’re now in the deregulation stage following the bull run. We know what comes next, just not when. Count on one thing: it won’t be pretty.