Repealing Dodd-Frank: What’s the Likely Fallout?

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Wharton's Peter Conti-Brown and University of Michigan Law School's Michael Barr discuss the repeal of Dodd-Frank

In a move that generated widespread concern last week, President Donald Trump signed an executive order that aims to repeal the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Even Dodd-Frank’s strongest supporters acknowledge that parts of the law could be tweaked to remove excessive financial regulation and made simpler. But they worry that in the process of such reforms, much of what is good in Dodd-Frank will be undone.

The Trump administration’s vehicle to repeal Dodd-Frank is the Financial Choice Act, a failed 2016 bill being reintroduced by Republican Congressman Jeb Hensarling, who is chairman of the House Financial Services Committee. The bill gets its new traction from Trump’s presidential order, signed on February 3, which lists seven so-called “Core Principles” to regulate the U.S. financial system. The order directs the treasury secretary to consult with the heads of the member agencies of the Financial Stability Oversight Council and report within 120 days if existing laws and regulations support those principles.

According to Michael Barr, University of Michigan Law School professor and a key architect of the Dodd-Frank Act, the Choice Act would imperil the interests of the middle class, retirees and investors. “It just seems like a recipe for a huge disaster,” he said. “[Dodd-Frank] put in place real guardrails against re-creating the kind of financial crisis we saw in 2008. It is inexcusable that the administration has targeted the most vulnerable people in our society to be the ones that bear the brunt of their ideological push.”

Wharton professor of legal studies and business ethics Peter Conti-Brown does not expect an easy passage for the Choice Act. He said he is intrigued by the game plan of the administration in its pushback against Dodd-Frank. Describing the Republicans in Congress as “a coalition that includes rightwing Rust Belt populism that is hostile to international trade, for example,” he noted that they “should similarly be profoundly skeptical” of most provisions of the Choice Act. “It would be very hard to sell to those who voted for radical change … and call for an end to protections for average workers, consumers and investors.”

“It just seems like a recipe for a huge disaster.” –Michael Barr

Barr and Conti-Brown discussed the likely legislative path and consequences of unwinding Dodd-Frank on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Gains from Dodd-Frank

Barr faulted the argument that Dodd-Frank hinders the growth of the banking industry or the economy. He said the U.S. financial system is “incredibly healthy” in comparison to both its state in 2008 and its counterparts in other countries. He credited that to Dodd-Frank and its requirements for higher capital and safeguards for investors and consumers.

Barr listed several gains from Dodd-Frank for the U.S. financial system. One is the creation under the act of the Consumer Financial Protection Bureau (CFPB), which he said has already returned $11.7 billion to people “who were taken advantage of” in the financial system. Another is the ability to implement an orderly winding down of big firms that get into financial trouble without taxpayer-funded bailouts. Others included regulation of shadow banking practices such as payday lending; measures to protect retirement savers from abuse; disclosure requirements on derivatives and for oil companies on their payments to foreign governments; and the ability for people to report complaints of errant practices.

“All of these things are now at risk,” Barr said. “That’s not about increasing lending, but about giveaways to the financial sector.”

Flawed Objectives?

Both Barr and Conti-Brown also took issue with a proposal in the Choice Act titled “Eliminating Excessive Government Intervention in the Capital Markets” that seeks to repeal the department of labor’s fiduciary role in overseeing the conduct of brokers and dealers. “Changing [that] fiduciary role is pretty breathtaking,” said Conti-Brown. “It says you can go and find whatever financial advisor you want — including ones who have conflicts, but those advisors have to disclose those conflicts.” He viewed that as a means to allowing financial advisors to profit by selling products at the expense of unsuspecting consumers. “Selling that politically is impossible, but they are steamrolling it, and that is stunning.”

Barr emphasized the basic intent of the labor department’s fiduciary role. “We should be looking out for the interests of workers and retirees, not for the interests of the people who are selling them products,” he said. “The whole financial system is based on trust. If you can’t trust the basic advice that you are getting in your retirement savings, where does that leave you?” He described that proposal as “an ideological assault” — not one that is empirically-based — on the idea of caring about workers and retirees.

“It would be very hard to sell to those who voted for radical change … [to] call for an end to protections for average workers, consumers and investors.” –Peter Conti-Brown

Conti-Brown said the political strategy in seeking to remove the labor department’s fiduciary role is unclear. He also did not see it as “a sop to Wall Street,” pointing out that many Wall Street firms have voluntarily embraced the fiduciary standard.

Barr also attacked the plan to repeal Dodd-Frank’s provision requiring oil companies to disclose their payments to foreign governments. He wondered how removing that provision and allowing oil companies to make secret payments to foreign governments “is in the interests of anybody in the U.S. other than oil and gas companies.” He also criticized another move to have the Securities and Exchange Commission stop requiring companies to disclose the gap between CEO salaries and the median salary of their employees.

In addition, Conti-Brown criticized the proposal in the Choice Act to grant payday lending a five-year exemption from regulations if a state or a tribe seeks such a waiver. “That is only about making sure payday lending stays in the shadows and consumers don’t get the federal protection that the law says they should have,” he said.

Where Dodd-Frank Could Be Tweaked

To be sure, Dodd-Frank could do with some changes, said Barr. One change he favored was relief for community banks from some onerous provisions of the act. However, the Trump administration is using that relief measure as an excuse for introducing other changes that have “nothing at all” to do increasing small business lending, he said. “It has everything to do with unleashing parts of the financial sector that brought the U.S. to its knees in 2008.”

“The whole financial system is based on trust. If you can’t trust the basic advice that you are getting in your retirement savings, where does that leave you?” –Michael Barr

Conti-Brown noted that some disputes tend to be partisan in nature. He cited the controversy over whether the bankruptcy code needs reforms to empower judges to resolve complex financial institutions, or whether such issues should be left to regulators. While Dodd-Frank opted for regulators, many Republicans felt judges should be in charge, he added. “That is a substantive debate, but 90% or more of what the Trump administration and the Republican Caucus are proposing to do to Dodd-Frank doesn’t look like those substantive debates,” he said.

Likely Path of Reforms

Conti-Brown recalled the legislative process that went into the introduction of Dodd-Frank was “vastly complicated” and that it consolidated 16 different acts under one overarching statute. Going forward, he said attention needs to be focused on two aspects. One is on what the Trump administration attempts to do in its retrenchment of the regulatory regime that took shape in the six-and-a-half years since Dodd-Frank’s passage. The other is on what the administration can achieve legislatively with its “sometimes unlikely allies in the Republican caucus,” he said.

Barr expected the administration’s efforts to unwind Dodd-Frank will be “a long, hard slog” for everybody involved. “What we have seen so far is the opening set of salvos in a long-running war.” Conti-Brown said he expected the Democrats to put up stiff resistance and paint the proposals as a betrayal of campaign promises and talk about how they will hurt the middle class. He also thought Republicans also “should be right to be wary of the wholesale repudiation of those kinds of middle class values and protections.”

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