Trump campaigned on deregulating Wall Street, saying that regulations are killing our country and our jobs. He wants to repeal Dodd-Frank, the 2010 law that tried to reign in the banks after the financial crisis. What exactly does Dodd-Frank do? And is the president right that it threatens the American economy?

 

 

“There’s nobody better to tell me about Dodd-Frank than Jamie,” Trump said, referring to 2010’s Dodd-Frank Act, the single most visible legislative consequence of the banking crisis, and also to J.P. Morgan’s CEO, Jamie Dimon, with whom he would later meet to discuss regulation. “We expect to be cutting a lot out of Dodd-Frank,” Trump said. “I have so many people, friends of mine, with nice businesses, they can’t borrow money, because the banks just won’t let them borrow because of the rules and regulations and Dodd-Frank.”

Hours later, as promised, the president issued a memorandum that sets in motion his plan to scale back the provisions of Dodd-Frank and repeal the upcoming fiduciary rule—the latest in his slate of executive orders aimed at decreasing regulations. Named for Senators Barney Frank and Chris Dodd, the bipartisan act—formally, it’s the Dodd–Frank Wall Street Reform and Consumer Protection Act—was responsible for creating more stringent rules regarding bank capitalization (that is, the amount of money that banks must have on hand), increasing compliance and reporting standards for banks, introducing stricter mortgage requirements, creating the Financial Stability Oversight Council (FSOC) and the Consumer Financial Protection Bureau (CFPB), and curbing excessive risk-taking and the existence of too-big-to-fail institutions on Wall Street.

 

Despite Trump’s calls for “cutting a lot,” the executive order is actually more of a command to review Dodd-Frank than to dismantle it. According to the order, the Treasury Secretary—Trump’s pick, the former Goldman Sachs banker Steve Mnuchin, has yet to be confirmed—will be tasked with meeting with various agencies that oversee and implement Dodd-Frank’s regulations, such as the Securities and Exchange Commission, in order to find areas to be amended. 

But while the executive order might seem less severe than others issued by Trump, that certainly doesn’t mean that the impact won’t be as important. “I think this is the opening salvo in their attack on consumer and investor protection,” says Michael S. Barr, a law professor at the University of Michigan and one of the architects of the Dodd-Frank Act. Barr says that despite the fact that the executive order on financial regulations seems gradual, the administration has already been quite aggressive when it comes to chipping away at financial-sector regulations. “They’ve already started,” he told me, citing recently-passed legislation that would get rid of one provision of Dodd Frank requiring oil companies to disclose payments to foreign governments.

The increased regulation stemming from Dodd-Frank has been a consistent point of conflict between politicians in Washington. On one side, Republicans have claimed that stricter rules for banks have hindered the financial sector’s growth, innovation, and ability to lend. They have also targeted the CFPB specifically, saying that the agency’s structure—which provides for a director and a budget that aren’t beholden to congressional oversight—is unconstitutional, an opinion that a D.C. circuit court recently upheld. Democrats have some complaints too—many have questioned whether or not portions of the legislation may have been drawn with overly-broad strokes, leaving small and community banks bearing a disproportionate regulatory burden—but they would likely meet calls for a wider repeal or any scalebacks of the law with resistance. Their fear is that the stability of the financial sector—and thus of the entire economy—will once again be undermined if banks are allowed to return to the highly-leveraged and speculative lending that precipitated and caused the Great Recession.

 

The order Trump signed also asks the Department of Labor to repeal the upcoming fiduciary rule, which was slated for implementation during the spring of 2017. The rule, issued by the Obama appointee Tom Perez, would have required financial advisors to put their clients’ interest first when investing their money, as opposed to choosing investments that would result in higher commissions for themselves. Some financial advisors had criticized the rule, saying that the decreased income would make it more difficult for them to provide services to low-income clients and limit the financial options of some Americans. Barr, though, says that the decision to go after the fiduciary rule, which was an attempt by Dodd-Frank to root out conflicts of interest, is especially telling, as is momentum for dampening FSOC’s attempts to curb shadow banking, a practice where financial institutions engage in unregulated activities.

 

It’s not surprising, given Trump’s rhetoric on Dodd-Frank (he has called it “a disaster”) and the slew of former bankers and executives he has nominated to fill cabinet positions, that Trump’s plans to reduce regulation includes scrapping some provisions of Dodd-Frank provisions and undoing plans to impose fiduciary responsibility on financial advisors. In a press conference prior to the signing of the orders, White House Press Secretary Sean Spicer cited both as examples of regulatory overreach and claimed that both failed to adequately protect the American people. In addition to the predictable preferences of his nominees, Trump’s advisors on Dodd-Frank and other financial regulation include many financial titans, including Jamie Dimon, who isn’t exactly an impartial source when it comes to banking regulations. Not only does Dimon run one of the nation’s largest banks, which has fallen under Dodd-Frank’s purview because of its designation as a “systemically important financial institution,” but he has also been a vocal critic of the act.

 

The effects of the president’s order on financial regulation may not be quite as immediate as those of his order on the Affordable Care Act. Instead of a broad repeal, the administration is taking more of a gradual, piecemeal approach to rolling back  or amending provisions of the legislation. But even without a full-scale repeal, weakening Dodd-Frank won’t be as simple as signing a piece of paper. To dismantle all or a portion of Dodd-Frank, one would probably have to understand the rule’s myriad parts and intricacies. That’s no small task—the law’s complexity is one one of its most noteworthy features. The bill has a number of key components—including higher capital requirements, the Volcker rule (which prevents deposit-taking operations from making speculative investments), the imposition of bank stress tests (which ensure that banks can withstand a financial hit), and the creation of the CFPB—that have already been completed and implemented. And amending portions of the rule will require Congressional approval, which means Trump could face a fight from Democrats such as Senators Bernie Sanders and Elizabeth Warren, who helped create the CFPB.

Aside from the logistical questions that repealing portions of Dodd-Frank will surely bring, there’s also a conflict between Trump’s populist message during the campaign—which included condemnation of the bankers and financial executives that tanked the economy—and the repeal of Dodd-Frank, which would benefit those same exact bankers and businesses. And despite the more gradual approach of Trump’s order on financial regulation, there will still be an impact: The order will place greater scrutiny on not only the agencies created by Dodd-Frank, but also the agencies that are intimately involved with regulating Wall Street. However that plays out, the order certainly furthers Trump’s attempts to create an economy where regulation is difficult and minimal.

In an interview with The Wall Street Journal, Gary Cohn, the director of the White House National Economic Council, explained why he didn’t like Dodd-Frank. “We have the best, most highly capitalized banks in the world, and we should use that to our competitive advantage,” he said, adding that he believed that American banks were also the most highly regulated and overburdened.

 

“I think that’s exactly backwards,” Barr said of Cohn’s comments. “We have a strong, well-capitalized financial system because we quickly responded in the wake of the crisis to the problems that caused it. I think that the financial system is far from perfect by any measure, but I would say that Dodd-Frank and the changes we put in place made the financial system safer and fairer.”