Donald Trump’s Presidential campaign was filled with a lot of bold talk about “draining the swamp” and fighting against lobbyists. He attacked Hillary Clinton for her supposed cozy relationship with banks, and talked about how he’d stand up to Wall Street on behalf of the little guy.
That was then.
Now, he wants to grant banking lobbyists’ every wish. While the first few days after the election have brought little clarity on most topics (maybe he won’t repeal the Affordable Care Act after all, or maybe he will), Trump has made one very specific promise – to repeal the Dodd-Frank Act. While this is a terrible idea for many, many reasons, one of the most prominent is that it will take us back to a system that enables banks to get exactly what they want: federal protection from their own customers and a ‘get out of jail free’ card from a completely co-opted regulatory agency (the Office of the Comptroller of the Currency, or OCC) with a long history of kowtowing to banking lobbyists.
One of the most important provisions of Dodd-Frank is that it protects state consumer protection laws against being wiped away (“preempted”) by federal law. When Congress passed Dodd-Frank in 2010, the extensive hearings held by lawmakers left no mistake that one of the principal causes of the 2008 financial crisis was the difficulty consumers had in holding lenders accountable when they engaged in deceptive practices. Before Dodd-Frank, federal laws didn’t do anything to protect those consumers. Prior to the law’s passage, the agency that had the principal power to regulate banks kept acting, instead, to preempt state consumer protection laws, which tend to be much stronger and more protective of consumers who are being cheated.
Simply put, before 2008, a federal agency was enabling banks to cheat consumers, and blocking those banks’ customers from fighting back. And that’s why Dodd-Frank included numerous provisions designed to make it much harder for federal regulators to wipe away state laws.
The rampant fraud that cost people their homes, and also cheated millions of investors from their savings, was encouraged and abetted by a corrupt system where government regulators worked hand-in-hand with banks.
That’s the model the Trump Administration is poised to take us all back to.
It is a sickening prospect. The federal regulatory agencies that existed prior to Dodd-Frank didn’t do much regulating. Not surprisingly, the banks loved them. The reality for consumers, however, was a dysfunctional and disastrous dynamic in federal banking regulation. Essentially, under the system before Dodd-Frank, the banks got to pick who was going to regulate them. If a bank called itself a “federal thrift,” for example, it could be regulated by the notoriously inept Office of Thrift Supervision. If it decided to call itself a state chartered bank, it could be regulated by state banking agencies. Or, if it preferred to call itself a “national bank,” it would be regulated by the industry-friendly regulator at the OCC.
The catastrophic subprime hell that led to millions of foreclosures beginning in 2008 was enabled, and in part caused by, terrible decisions made by the people who ran the OCC during the George W. Bush administration.
If you saw the excellent film The Big Short, you can understand why returning to this model is downright frightening. (And if you didn’t see the film, you should.)
Now, if they get their way, the banks will want to go back to that exact same ‘Wild West’ system where they pick their own regulator. But giving the banks’ lobbyists what they want is not really consistent with Mr. Trump’s claim that he will be the one to “drain the swamp.” You simply can’t do that and keep the banks honest.
“Who cares who they picked?” you might say. Well, the regulators cared, because the regulators’ budgets came from user fees paid by the banks. As a result, one large bank could have immense power over its chosen regulator.
As the financial crisis of 2008 approached, user fees from Bank of America, for example, constituted 12 percent of the OCC’s budget. So if Bank of America had decided to pick another regulator, the OCC’s bottom line would have been impacted so significantly that it would have had to fire one out of every eight people in the building! So, not surprisingly, OCC had a huge incentive to side with the banks rather than be a fierce lion for consumers.
Was the resulting system on the up and up, or did it start to become corrupt? The data shows the real answer: The OCC weighed in on 60 court cases between 1994 and 2006 where consumers who felt they had been cheated were suing banks. The OCC (dependent on bankers’ good will for its budget) sided with the banks in 58 out of the 60 cases.
But wait; the OCC did even more for big banks. The agency issued regulations erasing state consumer protection laws, and replaced them with . . . nothing. Talk about a sweet deal for the banks. Under federal law, there is really nothing that prohibits banks from deceiving or misleading consumers. Many state laws, however, are great at it. So when the federal regulators engaged in this energetic race to the bottom, that made it much easier for banks to confuse and mislead consumers.
By the time Dodd-Frank was passed, the majority of Americans were confused about the terms of many of the loans they entered into. People got credit cards expecting 6% interest (based on ads making a big deal out of teaser rates), and ended up paying 18% or, sometimes, over 30% interest. People got sucked into mortgages promising low rates in the early years, and then wound up quickly paying far more. The principal enabler of that misleading advertising by banks — a practice that played a huge role in leading to millions of Americans losing their homes, when the bubble burst — was crappy regulators wiping away protective state laws.
Dodd-Frank did a ton to clean this up. Instead of regulators who existed to serve the banks, it created a new regulatory body that existed only to protect consumers – the Consumer Financial Protect Bureau. In just one example of the CFPB’s enormous impact, it subsequently caught, and stopped, Wells Fargo in the middle of creating two million fraudulent accounts for consumers who didn’t want them. As a result, the agency has recovered more than $11 billion for cheated consumers.
Now, all of this hard work and success on behalf of consumers is in real jeopardy. If a Trump Administration moves forward with its plan to repeal Dodd-Frank, the country will move backwards, to a time when there were few protections for consumers, and the rules were all written by banks.
Less than one week after the election, Mr. Trump appears to be siding with big banks in their campaign to resurrect a corrupt system that crash the economy in 2008. Instead of “draining the swamp,” Trump’s proposal would rebuild it.
That hardly seems like the way to make America great again.
