It's a good bet that Lloyd Blankfein won't be recording an all-staff voicemail expressing opposition to President Donald Trump's latest executive order.
After just two weeks in the Oval Office, Trump is set to order the Treasury Department and other regulators to conduct a sweeping review of the Dodd-Frank Act -- rules that were introduced following the 2008 financial crisis in the hopes of preventing another one. Implementing any changes won't be swift, with Senator Elizabeth Warren likely to lead Democrats in opposition to what they -- and others -- see as a huge setback to the safety and soundness of the financial system not only the U.S., but globally. Still, some sort of loosening of regulations is likely and with Friday's order, the process begins.
While Trump's recent travel-ban order caught CEOs and bankers unawares, this time around they seem to have the president's ear. The review will be overseen in part by Gary Cohn, director of the White House National Economic Council, who was -- just weeks ago -- still second-in-command at Goldman Sachs Group Inc. Also, Blackstone Group LP founder Stephen Schwarzman and JPMorgan Chase & Co.'s Jamie Dimon, two critics of Dodd-Frank, are among CEOs advising the president on an economic advisory panel.
In an interview Friday with Blomberg Television, Cohn said the administration would attack all aspects of Dodd-Frank. That said, it's not as if banks will be given free reign. The rules seem likely to be scaled back rather than scrapped completely, especially if Jeb Hensarling's Financial Choice Act is used as a template. "We are not against regulation...we want well-regulated banks but we want banks that function, we want markets that function, we want lending to function," Cohn said.
Cohn has questioned the value and effectiveness of a handful of policies including "living wills," comprehensive plans in which banks detail how they'd unwind in event of a bankruptcy without requiring government bailout. It is a burdensome process --- but it's unthinkable that some type of a living-will requirement won't remain in some form, if only to preserve the confidence in the financial system that it fosters.
That's perhaps not as certain for another part of the Dodd-Frank Act. The Volcker Rule, which limits the ability of banks to make wagers with their own funds, appears to be the easiest to lift, and has earned "particular attention" from the Trump administration. Consultancy firm Opimas estimates eliminating the Volcker Rule would save investment banks roughly $6 billion. And Cohn's former colleagues at Goldman should benefit more than others. Morgan Stanley, for example, will never re-enter the business of proprietary trading, its CEO James Gorman told Bloomberg TV last month.
In the short term, investors have been cheerleaders for deregulation: the KBW Bank Index gained almost 2 percent on Friday, adding to a more-than 20 percent run since the election.
Caution will be required, though, as the impact of deregulation begins to play out. Sure, if curbs on capital and risk-taking were loosened, fixed-income investors would be granted the gift of additional liquidity at a time when the interest-rate cycle is turning -- and banks could return to their role of market-maker. But if rule changes are too aggressive -- and reins are unreasonably loosened -- less transparency, heightened counterparty risk and reduced investor trust will follow (even if bright-line capital requirement rules remain).
While U.S. bank CEOs say they'd prefer reform rather than repeal of Dodd-Frank, Trump has been far more combative and labeled the law a disaster. Let's hope cooler heads prevail as Dodd-Frank migrates to Dead-Frank.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Democratic Senators Warren and Baldwin have asked that Cohn recuses himself from any decisions that may have a significant direct impact on Goldman.
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