US financial (de)regulation ?

by | 24 Feb 2017 | Sustainable Finance

Just weeks into Donald Trump’s presidency, the uproar over the president’s tweets grows louder by the day, as does concern over the erratic, haphazard and aggressive stance of the White House on various issues.

The President Trump is without any doubt masterful at conflating words and actions in a way that enrages and alarms his opponents and exhilarates and excites his supporters. In these circumstances, it’s more important than ever to distinguish what is from what isn’t.

Although significant uncertainty still exists as to the actual contours of any reform to the current financial regulatory framework in the US, the different Presidential and Congressional activities start to show the path towards financial deregulation. But this should remain a limited move.

White House & Treasury, people are policy

At the White House, President Trump appointed Gary Cohn, in the influential role of director of the US National Economic Council (NEC). Under his influence, on February 3rd, the President issued an executive order outlining White House plans for a recalibration of US financial regulation, and defining seven “core principles” for the reform. The new Secretary of the Treasury, already confirmed by the Senate, Steve Mnuchin, helped by the Financial Stability Oversight Council (FSOC) that he chairs by the way, will report to the President, early June probably, on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other government policies promote the “core principles”.

In some ways, this process can be compared to what had been done by Commissioner Hill in the European Union when he launched the “call for evidence”. But if you look at Gary Cohn or Steve Mnuchin’s Goldman Sachs backgrounds, you don’t need to have passed Yale or Harvard to understand that here, the willingness to dial back of existing regulations is very high.

Steve Bannon, the guy you always see behind the President on the pictures, is probably not their best friend. He will serve as chief strategist and senior counsellor, bringing a more ideological and possibly less pragmatic approach to the White House.

Agencies, a profound renewal too

Chair of the Federal Reserve Board (FRB) Janet Yellen has indicated her intent to remain at the helm of the FRB until her term expires in early 2018, as does the primary Vice Chair, at which point President Trump will be able to replace the holders of both of those roles. In addition to the primary Vice Chair role, there is also a new Dodd-Frank Act regulatory Vice Chair Of Supervision role, currently unfilled officially (albeit unofficially being held by Daniel Tarullo, until he recently resigned for a departure in april).

It is expected that President Trump will fill the two vacant seats, and then name one of those new appointees as Vice Chair of Supervision, during 2017. He will have then to name Governor Tarullo’s vacant seat. He may additionally opt to replace the primary Vice Chair, and/or the Fed Chair, when their terms expire in 2018.

And by the way, as long as the FRB Vice Chair of Supervision position is not filled, there will be no agreement between US, Europe and Japan on the finalization of Basel III/IV framework, despite wishful thinking of the Basel Committee (“distinguish what is from what isn’t” I said).

By the end of 2018 accordingly, this will be five Trump appointees on the seven members FRB Board.

The heads of the Security Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) stepped down before the inauguration and two of the four other Commissioner positions are open at each agency.

Jay Clayton, an M&A partner at Sullivan and Cromwell, has been nominated to chair the SEC. President Trump has not announced a candidate to head the CFTC, but the remaining Republican Commissioner, J. Christopher Giancarlo, is currently serving as the Acting Chairman of the CFTC. He has been critical about much of the CFTC’s rulemaking, but in Europe these last days, is reported to have insisted on his willingness to cooperate on cross-border issues.

These two appointees, and any eventual nominee must still receive Senate approval.

Congress is bicameral, sorry for the House

In parallel to the Executive Order review of financial regulation, a legislative review of 2010 Dodd-Frank Act and Consumer Protection Act was introduced last year. A February 6 released memo from Jeb Hensarling, Chair of the House Financial Services Committee, to the Committee’s Leadership Team updates the proposals in what is now called the “Financial Choice Act 2.0”.

Until now, laws or regulations cannot be unilaterally repealed by the President. Regulations are issued by a regulatory agency, typically to provide detail necessary to give effect to a law. They can be repealed only by legislation enacted by Congress.

But legislative change is often difficult, and it will remain marginal, even with a majority in both houses of Congress:

  • the House of Representatives (“the House”) has a comfortable republican majority (238 republican representatives vs 193 democrats as of February 16th); and its Financial Services Committee is very active and vocal as recent exchanges of charming letters with Janet Yellen proved it;
  • but the new Senate has only 52 Republicans (for 100 senators). It’s theoretically enough to pass a bill by the required majority vote. However, the Senate permits legislation to be defeated by “filibuster” (which is essentially endless talking on a bill until an agreement is reached or the bill is dropped). Sixty votes are needed to defeat a filibuster.

As a result, Senate Republicans, if all united, likely will need at least 8 Senate Democrats to join them in any proposed new or amended legislation. It will be tough as far as financial regulations are concerned.

“Distinguish what is from what isn’t” … or go to augmented reality ?

Iconography : Visitors at the Museum of Modern Art in New York City admire Flag by Jasper Johns, Photo by Steven Zucker. Post originally published, with another illustration, on LinkedIn.