GOP Takes First Step To Repeal Dodd-Frank, Create Next Financial Crisis

Possibly lost in the outrage and despair of Trumpcare passing the House and Trump’s obstruction of justice in firing James Comey is the fact that the House Financial Services Committee took us one step closer to also repealing the Dodd-Frank legislation that increased regulation of the financial services industry in the wake of the financial crisis and the Great Recession that it caused.

The bill that got passed out of the Committee on a strict party line vote would replace a small segment of Dodd-Frank but repeal most of it. It replaces the Orderly Liquidation provision that called for a government-run unwinding of a failed financial institution with a change to the bankruptcy code that would cover large financial institutions. At the same time, it eliminates the Financial Stability Oversight Council (FSOC) which was responsible for determining what firms qualified as critically important to the functioning of the financial system and would be subjected to the Orderly Liquidation provision and additional increased regulation. In addition, it repeals the Volker Rule which limits risky trading and the rules, that were never implemented, that a financial adviser must act in the best interests of his/her client. To top it off, the bill would gut the Consumer Financial Protection Bureau (CFPB). In essence, the bill would take us back to the rules that existed before the financial crisis in 2008 and we all know how well those regulations protected us and our economy from Wall Street excesses.

Of course, Wall Street has really cleaned up its act since the financial crisis and these new rules are especially onerous and unnecessary because of that. And Wall Street can also sell you the Brooklyn Bridge. As an example, Deutsche Bank (DB), one of the most egregious serial offenders since the financial crisis, was recently fined $20 million dollars for lax controls which allowed the firm to engage in trading activities that were banned by the Volker Rule. In addition, DB was also fined an additional $137 million for improper sharing of currency positions and coordination of strategies with competitors. This is AFTER an enormous class action suit over price-fixing in the currency markets that resulted in over $2 billion in settlements and after DB settled a mortgage securities investigation for over $7 billion last December. Since the end of the financial crisis, DB alone has paid nearly $14 billion in fines for illegal activity.

And just in case you think that the financial industry has stopped engaging in mortgage fraud, think again. A number of financial firms have received requests for information from the SEC concerning the overvaluation of rental properties that are bundled into bonds sold by Wall Street. The valuation of those properties rely on something call broker price opinions (BPOs) which are critical to determining rental rates and the risk involved in those rental-backed securities. Just as Wall Street firms used to go rating shopping when they securitizing regular home mortgages, firms are now being investigated for going BPO shopping, finding the broker who will provide the highest valuation. Opening up the opportunity for even more unethical behavior in this market is that fact that the people providing these BPOs do not need to be a licensed professional nor do they need to even inspect the interior of the property. It can literally be a drive-by appraisal. Even more disturbing, some the these bonds backed by rental properties are now guaranteed by FNMA.

The banking industry has struggled enormously under the restraints of Dodd-Frank, racking up $171 billion in profits in 2016, an all-time high. The financial industry as a whole continues to be a serial offender, constantly being fined for some egregious violations of current rules and regulations. I guess the good news is that those violations will be substantially reduced when and if most of these Dodd-Frank regulations are repealed.