After spending the campaign trail promising to weaken or repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act, President Donald Trump signed two executive orders aimed at giving more financial freedom to Wall Street banks.
The two executive orders were signed on Feb. 3, 2017. According to ABC, one of the two executive orders tasked the U.S. secretary of the treasury with investigating any possible changes that could be made to the Dodd-Frank. The second is meant to delay the fiduciary rule, which requires financial advisors to put their clients’ interest over their own profits.
Weakening or repealing the Dodd-Frank will allow banks to spend their funds more freely, possibly leading to the return of high-risk practices that caused the 2008-09 recession.
Dodd-Frank was introduced during former President Barack Obama’s term. Prior to the recession, Wall Street was under much fewer regulations, allowing bankers to knowingly conduct high-risk transactions that put the financial well-being of their clients into question. These transactions eventually led to the shutting down and merging of several investment banks, most notably Bear Stearns and Lehman Brothers.
Aside from putting more regulation on Wall Street, the Dodd-Frank was meant to keep U.S. families financially safe. According to a statistic cited by Forbes, 5 million families lost their homes to foreclosures since the crisis began. The National Center for Policy Analysis, however, places that number at 10 million. Banks knowingly approved loans and mortgages that their clients could not afford, causing them to rack up debt and lose their homes.
The Volcker Rule, which is part of Dodd-Frank, “prohibits banks from owning, investing, or sponsoring hedge funds, private equity funds, or any proprietary trading operations for their own profit,” the CNBC website states.
However, the rule does make an exception for some trading if it is final to the banks’ operations.
There are several entities tasked with ensuring that the regulations set forth by the Dodd-Frank are followed. Most notably, the act created the Financial Stability Oversight Council, which searches for possible risks that could threaten the financial industry. The U.S. Commodity Futures Trading Commission is also tasked with improving pricing in the derivatives marketplace and lowering the financial risks taken by U.S. citizens, its website states. The Commission is also responsible for creating standards for swap dealers and increasing transparency when trading swaps.
In the end, it was the taxpayers who helped the banks escape the crisis. Thus, the act was put in place partially to ensure that they would not have to spend more tax money on rescuing large banks.
During his campaign, Trump repeatedly brought up the idea of weakening the Dodd-Frank. During a 2015 interview aired on Fox News, The Wall Street Journal reports Trump said, “We have to get rid of Dodd-Frank. The banks aren’t loaning money to people that need it … the regulators are running the banks.”
In several interviews, Trump said that the Dodd-Frank made it impossible for small and medium-sized business owners to lend the money they need to expand their businesses. However, it is impossible to figure out what Trump wants to do with the regulations—weaken them or wipe them off completely.
In an interview with CNNMoney, Federal Reserve Chair Janet Yellen said that the financial crisis showed the need to have regulations such as the Dodd-Frank put in place. She also credited the regulations as leading to a “safer and sounder financial system.”
“Our financial system, in consequence, is safer and sounder,” Yellen said. “I wouldn’t want to see the clock turned back.”
Dodd-Frank helped regulators regain some confidence in big banks. With the Dodd-Frank weakened or repealed, there is a possibility that banks will return to some of their lax loan practices, such as lowered loan requirements.
On the flip side, however, the 2009 financial crisis taught regulators what warning signs to look out for to prevent another meltdown. It is highly likely that if banks were to return to some of their pre-financial crisis practices, regulators would be able to see the warning signs and quickly take action.
Ending the fiduciary role poses plenty of risks for U.S. citizens who invest in the stock market through financial advisors. With the rule in place, advisors are required to offer investments that are in the client’s best interests. Without this rule in place, there is nothing that stops advisors from offering their clients stocks that only benefit the advisor’s pocket. This creates a great risk for people who wish to invest in the stock market without understanding how it operates.