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Ten Years After the Crisis, Banks Win Big in Trump’s Washington

Thomas Hoenig

(Bloomberg) – In early February, with the Treasury secretary testifying about wild gyrations in the stock market and the Federal Reserve leveling unprecedented penalties against Wells Fargo & Co., it may have felt like 2008 again, with the financial system under siege. In reality, banks are booming, at least in Washington.

As the 10th anniversary of the financial crisis approaches, many of the restrictions put in place to rein in Wall Street risk-taking are quietly being unwound. The Senate is considering legislation that would remove dozens of major banks from stepped-up oversight. The bill has broad Republican support and has been endorsed by 11 Democrats. In recent months a handful of the federal agencies that supervise financial companies have taken steps to revise two complex rules—one restricting trading and one requiring extra capital—that banks have long complained cost them millions of dollars in profits.

Other requirements are also being eased, including the stress tests the government uses to measure banks’ abilities to withstand economic shocks. Conducted by the Fed, the tests were widely credited with restoring public confidence in the financial system after the 2008 meltdown.

Banks and their once-embattled Washington advocates are cautiously acknowledging their return to good graces after years of fighting against what they argued was regulatory overreach. “It just feels good,” says Wayne Abernathy, an executive vice president for the American Bankers Association. Things “are looking up for the customers of the banks, looking up for the economy, and for the banks as well,” he says.

Some of those who helped develop the crisis-era safeguards, however, are worried that policymakers and the banking community are forgetting history. “We’re at serious risk of recreating the conditions that led to the last financial crisis,” says Michael Barr, a former Treasury official who helped craft the 2010 Dodd-Frank Act, which ushered in a host of new limits on Wall Street. Now dean of the Gerald R. Ford School of Public Policy at the University of Michigan, Barr says the 10-year milestone should be “a time to reflect on the need for strong guardrails in the system—not a time for taking those apart.”

Paving the way for the rollback is a slate of Trump-installed appointees now running the regulatory agencies. Mick Mulvaney, the acting chief of the Consumer Financial Protection Bureau, in January directed agency staff to exercise “humility and prudence” and not assume the companies that the agency investigates are “the bad guys.” Most of the officials watching over banks in the Trump administration have extensive ties to the financial industry. Treasury Secretary Steven Mnuchin worked at Goldman Sachs Group Inc. and later organized a group of investors to buy the lender that became OneWest Bank. Mnuchin brought Joseph Otting, former OneWest chief executive officer, to Washington to run the Office of the Comptroller of the Currency, an independent bureau of the Treasury Department that supervises national banks. Jelena McWilliams, whose nomination to run the Federal Deposit Insurance Corp. is pending in the Senate, is chief legal officer of Fifth Third Bancorp in Cincinnati. By comparison, most of the financial industry regulators named by President Obama were government veterans or academics.

The most important watchdog for the biggest lenders is Randal Quarles, the Federal Reserve’s vice chairman in charge of bank supervision. A banking attorney and ex-Carlyle Group partner, Quarles gave a revelatory speech to industry lawyers at the Ritz-Carlton in Washington on Jan. 19, surprising many by saying that the entire regulatory scheme is now up for reevaluation. He spoke of “tailoring” requirements to a bank’s size and “reducing complexity”—buzzwords lobbyists often equate with easing regulation. “Now is an eminently natural and expected time to step back and assess,” he said.

The Fed is already addressing one big Wall Street complaint by giving banks more time to submit their so-called living wills, the detailed plans that are meant to map out a bank’s best route through bankruptcy. These sprawling documents had been required every year; now it will be every two.

Quarles also committed to revising two of the industry’s most disliked regulations. First up: a rule known as the leverage ratio, which limits how much banks can rely on borrowed money. The idea is to ensure they have enough capital to protect against losses and aren’t overextended like they were in 2008 when credit markets froze. Second on the list is a proprietary trading ban known as the Volcker Rule. Banks contend its requirements are so confusing that it hinders their ability to help clients buy and sell securities.

Critics say it’s no surprise many of the changes are taking place at the regulatory agencies where public input is rare and much of the business is conducted behind closed doors. The chaos that is Trump’s Washington—from the taunting of Kim Jong Un on Twitter to the latest classified revelations in the Russia probe—make it even less likely that changes to stress tests or capital rules will garner attention. “If you are clever, you do the stuff under the radar,” says William Black, a longtime federal financial regulator who’s now an associate professor of economics and law at the University of Missouri-Kansas City.

FDIC Vice Chairman Thomas Hoenig is also concerned about the developments. A political independent appointed by Obama at the behest of Senate Republicans, Hoenig has long supported bank trading restrictions and bulkedup capital. He points out that banks are getting more profitable, even with all the additional regulations. After 40 years of watching booms and busts, Hoenig says they all follow the same pattern. There is an “arrogance” that the party “will never end,” he says. “And it always does.”

Hoenig himself was quietly vanquished by the White House in January with a bureaucratic sleight of hand. In a little-noticed move the day before the Senate Banking Committee was set to hold a hearing on the nomination of McWilliams, Trump’s pick for FDIC chief, the White House withdrew her nomination. It was then immediately resubmitted but with a small change. McWilliams had originally been nominated to fill an open position on the agency’s five-member board; her new nomination is to fill Hoenig’s seat. Her confirmation would ensure he can’t stick around past the beginning of April—and will serve to silence the voice of Wall Street’s last, most vocal critic among Washington regulators.

BOTTOM LINE – With extensive ties to the financial industry, officials within the Trump administration are dismantling many of the safeguards put in place after the 2008 banking crisis.

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