Financial Deregulation Bill ‘Guts’ Dodd-Frank
Republican Senators – with 12 Democratic co-sponsors – are pushing through a financial deregulation bill that with dismantle the post-financial crisis Dodd-Frank regulations, in the name of helping community banks. But this is just a pretext, says former financial regulator Bill Black
GREG WILPERT: It’s The Real News Network. I’m Greg Wilpert coming to you from Quito, Ecuador. This week, the US Senate is debating the Economic Growth, Regulatory Relief, and Consumer Protection Act. With all the drawback, financial oversight over banks with less than 250 billion dollars in assets, currently the Dodd-Frank Financial Reform Law only exempts banks with less than 50 billion dollars in assets. This means that all, but the 12 largest banks in the US would be deregulated. Republican Senators, with the support of 12 Democratic co-sponsors, argued that the deregulation is necessary to give small community banks and credit unions relief from red tape and that this would reinvigorate small communities. Senator Elizabeth Warren, however, warned that passing the law would be a disaster.
SENATOR WARREN: You know, it’s like clockwork. Things get better and the economy’s looking good, and the lobbyists flood Congress to say deregulate, turn these guys loose. Then, like clockwork, the risk starts to build up, things explode and who’s left holding the bag? The American taxpayer.
GREG WILPERT: Joining me to make sense of this new deregulation effort is Bill Black. Bill is a White Collar Criminologist, former Financial Regulator and Associate Professor of Economics and Law at the University of Missouri–Kansas City. He’s also the author of The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.
BILL BLACK: Thank you.
GREG WILPERT: So, Republicans and Democrats who support the Economic Growth, Regulatory Relief, and Consumer Protection Act argue that it will reduce red tape for the struggling community banks. First, are community banks even struggling and second, how would the bill help them and if not, what does the bill actually do?
BILL BLACK: Some community banks, in fact, are struggling and they’re struggling for two very good reasons. One, it’s so difficult to compete with the massive banks, which have all kinds of advantages. That’s inherent and the community banks have been disappearing through mergers at the rate of a hundred plus institution a year for decades. The second thing is, when you do have regulations that require reporting, it is in fact more expensive per unit to comply when you’re a smaller institution. And Dodd-Frank did add a lot of compliance requirements, not all of which by any means are going to be removed by this act.
So, the big banks have figured out that this is a clever thing. Let’s use the small banks, which a, are much more politically attractive, and b, actually have a little bit of an argument on some things, as our pretext for getting deregulation of us. So, you mentioned in the introduction that they’re going to deregulate whole categories of things. Actually, they’re going to deregulate some things that are quite dangerous for every bank, including the largest banks in the country. They’re doing that by allowing you to count investments in municipal bonds as liquidity. Liquidity is your cash availability. It’s the thing we found in crises that it kills institutions the quickest and we know that municipal bonds, when there is a crisis, become extremely illiquid. So, calling them liquidity is a really, really stupid thing and they’re going to do that for the largest, absolute largest banks.
Then, or again, the absolute largest banks are going to do a special reduction in your capital requirement if you’re a custodial bank, that means you hold funds for other countries. Then they’re going to do a whole bunch of deregulation for any bank of 250 billion in assets or smaller under the rubric of small institutions. Now, the 12th largest bank in America doesn’t have 250 billion dollars in assets. So, they’re going to deregulate key aspects that are critical for safety of all but 11 banks in the United States of America and claim that they’re doing it for small banks. This is amazing chutzpah on all of these things. And on top of that, this is just the first wave, of course, President Trump promised on the campaign trail to destroy all of Dodd-Frank. He has regulators in place who every day under the radar are gutting the regulations and making sure that the regulations that do exist aren’t enforced. So, banks are already having a field day.
Now, Democrats, in particular in the Senate, of course, stayed absolutely rock steady against Trump when he wanted to gut Obamacare, when he wanted to do this obscene taxes but this is Wall Street. And Wall Street doesn’t have as much power over the Democrats as the Republicans, but it has extraordinary power such that a significant block of Democrats in the Senate and assuredly in the House are going to support this effort to begin what they absolutely know is going to be the total gutting of Dodd-Frank protections.
GREG WILPERT: Yes, I read somewhere that as many as 70 Senators might even end up supporting the bill but Senator Warren in a press conference yesterday, also pointed out that the new bill exempts banks from oversight that back in 2008 had actually contributed to the financial crisis, such as Country-Wide. That is, they had less than 250 billion dollars in assets, yet contributed significantly to the near collapse of the banking sector during that crisis. Has nothing been learned since that crisis? I mean, how can it be that they go back on this and recreate that problem essentially?
BILL BLACK: Well, I’ll see you that crisis and raise you one. In the savings loan debacle, a Nobel Laureate in Economics, George Akerlof and Paul Romer, who until recently was Chief Economist to the World Bank, wrote that economists didn’t realize because they lacked any theory of fraud, that deregulation was bound to create widespread fraud and a crisis. Now, we know better if we learn the lessons of this crisis, we need not recreate it. In other words, I’m endorsing Senator Warren’s point, we have good economic times, the banking lobbyists run absolutely all powerful, they gut effective regulation, we have a crisis.
There’s a legislative response after that crisis, as there was in 1989 with the FIRREA legislation about the savings and loan debacle, as there was with the passage of Dodd-Frank, but then come good times again, very conservative, anti-regulatory people hold the White House and key positions in the House and the Senate, and the first thing the industry does is gut regulation. Why? Because it makes the CEOs so wealthy to run these frauds and predation. It’s not necessarily good for the banking industry, as we saw, but it is extremely good for the most senior leaders and they are the ones, of course, who hire and fire the lawyers and the lobbyists, and effectively hire and fire key members of Congress.
GREG WILPERT: Also, Federal Reserve Chair, Jerome Powell, has expressed support for this bill and Democrats seem to be using him as cover for their support. Are we now seeing what Jerome Powell is really like, that he’s actually a deregulator? What do you think?
BILL BLACK: Oh, he always was a deregulator. I mean, it’s not like he hid that. He is a conservative, generally anti-regulatory person. It’s simply compared to every other recent Trump appointee, he’s less obscene than others, but in their heart, these guys are all very pro industry. They’ve never been a regulator in their lives and they will die never having been a regulator in their lives.
GREG WILPERT: Another issue that this deregulation effects is not just issues of systemic risk, but also regulations that have to do with fair lending practices to make sure that banks do not engage in discriminatory lending, such as red lining. Does this type of deregulation have anything to do anymore with struggling communities and banks? I mean, how can this be explained or justified?
BILL BLACK: Yes. It’s not just the denial of loans, which is what red lining is but massive predation in which blacks and Latinos in particular, but also women to some extent, are charged significantly higher interest rates than other folks. All of those things are violations of a law or regulation and are unethical and harmful in the long run, obviously, to society. We know they played an enormous role in the 2008 financial crisis and in scandals in the United Kingdom, and other places as well.
Now, the logic of this actually is pretty inapplicable. The logic of this is the provision you’re talking about, kicks in if you make under 500 loans a year of these mortgage kind of loans. Well, if you make fewer than 500 such loans a year, the reporting requirement is really easy to comply with and that means, of course, that these institutions, these banks we’re talking about, the very small community banks, are often very small and in rural areas and tiny towns where frankly discrimination on the basis of race, and ethnicity, and gender are often at their most brazen. That’s where we often particularly need the ability to have the data. This bill is very clever. It denies us the data to even know that there’s a problem. If you can’t prove there’s a problem, then people can get away with discrimination and let’s remember, the President of the United States was cited, found by Federal investigation to have discriminated in housing against blacks.
GREG WILPERT: Oh, we’ll definitely continue to follow this bill as it moves through Congress. I was speaking to Bill Black, Professor of Economics and Law at the University of Missouri–Kansas City. Thanks again, Bill, for having joined us today.
BILL BLACK: Thank you.
GREG WILPERT: I’m Greg Wilpert for The Real News Network.