Trump extends the swamp by drowning regulation
The new president has filled his cabinet with generals, gazillionaires and Goldman Sach’s castoffs who have a religious zeal to repeal the Dodd Frank
It is better to stay quiet and have people wondering if you are a chump than to open your mouth and prove it. Trump has proved that he is a chump.
Newly elected politicians should pursue their policies once in power. A bar room bully who loves to rant is naturally going to take aim at the things that bug him most. This is bad politics. Not smart. Politically naive. You do not take on contentious issues that are peripheral to what you want to accomplish. Even as president, you must use your limited ammunition with care.
Controversy builds opposition and opposition builds enemies. And your enemies are not those who oppose you – they sit right behind you.
Senior Republicans will clear out Trump if they feel that he will lose them the mid-terms, just a short 18 months away. Presidents never stop campaigning.
President Trump has already signed several executive orders to repeal regulation. His latest great wheeze is to repeal Dodd Frank, the law that was intended to make clients safe from banks – and banks safe from themselves.
It further limits banks punting with ordinary client money on illiquid derivative investments. It was enacted for good reason but in a rush after the global financial crisis and, hardly surprisingly, has built serious enemies among bankers.
Trump has filled his cabinet with generals, gazillionaires and Goldman Sach’s castoffs who have a religious zeal to repeal the Dodd Frank.
We may be “shocked, shocked” (like Captain Renault in Casablanca) to hear Goldman described as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”.
But it does look like the rabbits are taking care of the lettuce. It is an irony that Goldman alumnus Henry Paulson saved the global financial system as Treasury Secretary in 2008 – but unfortunately Trump’s men are not the sharpest tools from the Goldman box. Far from draining the swamp; “Swampy Trump” is looking to fill it and add crocodiles.
Trump’s spokesman Gary Cohn still owns nearly US$300 million worth of Goldman shares; though he has offered to sell them. Why Goldman’s can’t place a pathetic US$300m of its own stock in an instant is not explained. The Financial Times has reported he was going to sell them, but that Goldman should be able to place them in the blink of an eye. So he’s doing this – and planning it all – while still retaining an economic interest.
(Note: The shares are up a third since the election).
Dodd Frank has not made it harder for banks to lend; the excellent St. Louis Fed shows lending is 31 per cent above the 2008 peak.
Dodd Frank launched a competitive compliance firestorm across the developed financial world. Regulation in America helped not only ordinary US citizens but also the world in tightening up global tax evasion and strangling organised crime.
Hong Kong, Singapore and Europe all have world standard regulatory environments as a result. It has also resulted in banks and bankers being snowed under by paperwork and a j’accuse mindset permeating dealing rooms.
It costs banks a fortune. It has deskilled and destroyed good people’s careers for as Warren Buffett said, “If a cop follows you for 500 miles, you’re going to get a ticket.”
Financial regulation is in need of reform. Politicians give no guidance and blame the regulator. Regulators sweat the small stuff and bank compliance departments gild the lily to cover their arses. Genuine creativity has been stifled.
Many banks have stepped back from making markets, creating illiquidity and volatility in assets like junk bonds and leveraged loans (that frankly grown-up banks should be able to handle).
Regulation has become too tough on the little guy and too easy on the senior bankers. Make it painful to sit in the C suite; that is why they are paid the big bucks.
Success is never recorded by non-events. Recent volatility in oil prices, currencies, financial contagion in Europe, or freezes in high-risk credit have not made headlines because banks are forced to be prudent.
Dodd Frank limits the inappropriate use of complex derivatives, usury, improper foreclosure, and payday loans, and increases transparency. And, horrors-upon-horrors, it applies a rule whereby investment advisers must act in their client’s best interests.
In good times, banks don’t know when to stop and regulators are right to protect the ordinary citizen.
Attacking regulation is a worthy cause but it must be focussed on considered reform, not repeal.
By putting “America’s billionaires First”, Swampy is likely to throw the baby out with the bathwater. If the authorities in Hong Kong, Singapore and Europe remain strong we may well see a less credible US become a regulatory soft touch – and that won’t put America’s people First.
Richard Harris is a veteran investment manager, banker, writer and broadcaster