On February 6th 2017, American money manager Frank Casey gave a talk at McGill on his instrumental role as a whistleblower in the Bernie Madoff Ponzi scheme. His enthralling account of the scandal served as a scathing indictment of the SEC’s complacency towards large-scale financial fraud and as a lesson on the devastating effects inadequate regulatory frameworks can cause.
Casey’s message is particularly resounding in today’s tumultuous times, with the Trump administration’s seemingly unrelenting assault on the rules set up to protect the American economy in the wake of the 2008 financial crisis. Following up on his campaign promise to diminish the amount of unspecified “regulations” affecting American businesses, President Trump issued a gimmicky executive order mandating that for every new enacted regulation, two be eliminated. While ultimately symbolic, the order reinforced the Trump administration’s commitment to an aggressive push for deregulation, especially within the financial sector.
Many rules have already been blocked or set for elimination. The fiduciary rule, a piece of financial regulation enacted during the Obama years and set to come into effect in April of this year, was temporarily blocked and submitted for further review by the Department of Labor (DOL) through a presidential memorandum issued on February 3rd, 2017. The rule would have ensured that financial advisers only be permitted to sell advice regarding their clients’ retirement investment plans which is prudent, reasonably priced, and in the client’s best interests. Detractors to the rule claim that it would ultimately lead to higher fees for clients, reducing access to financial advice for poorer Americans. A responsible solution to this issue is evidently not eliminating financial advisers’ fiduciary responsibilities but rather offering low-cost advice to the bulk of Americans, whose retirement investing needs are relatively simple.
One of the main beneficiaries from the removal of this piece of regulation would be the private equity industry, which has been chasing the 401(k) market for years and has already developed financial instruments specifically designed for this vast, largely untapped source of revenue. Eliminating the fiduciary rule would make it easier for financial advisers to recommend riskier and more expensive private equity investments to individual investors for their defined contribution retirement plans. The issue here is therefore one of transparency: should plan advisers be required to divulge the heightened risk and fee structures of such investments and take that into account when providing advice?
Eileen Applebaum, senior economist at the Center for Economic and Policy Research think-tank, claims that investing in such instruments “could put retirement income at risk and may be more costly than the individual investor recognizes […] The financial adviser will know [the high level of risk associated with these investments], but they’re now under no obligation to divulge.” On the other hand, Gary Cohn, Trump’s pick for president of the National Economic Council and ex-Goldman Sachs COO, rightly claims that the rule would greatly limit consumer choice and likens it to “[only putting] healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” The question here is, are those “unhealthy” options for retirement investment advice even worth having?
While it cannot keep the DOL from postponing the rule’s compliance deadline, a U.S. federal judge from Texas issued a ruling on February 8th upholding the fiduciary responsibilities of financial advisers regarding individual retirement plans. The DOL was being sued by multiple plaintiffs, including the U.S. Chamber of Commerce, who unsuccessfully argued that the Department was overstepping its legal authority, that it failed to conduct a thorough cost-benefit analysis of the rule’s impact, and even that it violated financial advisers’ right to free speech.
The White House also has its aims set on the Dodd-Frank Act, a piece of legislation from 2010 whose aim was to prevent another financial crisis by curtailing financial institutions’ ability to make risky investments. Trump promised his administration will “be doing a big number on Dodd-Frank,” eliminating protections like the Volcker Rule (which stops banks from making speculative investments with their own money), the Consumer Financial Protection Bureau (which aims to protect retail banking users from “unfair, deceptive or abusive” products), and the Financial Stability Oversight Council (whose goal is to watch out for threats to the financial system). The regulation is vehemently criticized by Republicans as being excessively burdensome on banks’ ability to do business, though the facts show that its supposedly disastrous effects on banks’ abilities to lend are largely unsubstantiated: Federal Deposit Insurance Corporation (FDIC) figures show gross loans growing steadily since 2014.
The deregulatory frenzy has not been without criticism. Phil Angelides, former Chairman of the Financial Crisis Inquiry Commission, which was set up to investigate the causes of the 2008 financial crisis, characterized the Trump administration’s push to eliminate the “protections put in place to protect America’s families and our economy” after the crisis as “insane.” The European Central Bank’s president Mario Draghi echoed Angelides’ sentiment, claiming that reducing regulation on the financial industry is “the last thing we need.” German central bank president Jens Weidmann also expressed concern about the deleterious impact of “competitive deregulation” between countries and agreed with the need for strict supervision of banks to prevent another crisis. In light of such harsh disapproval, it would be wise to reconsider whether the decision to massively slash financial regulation is a good idea in the first place.
While carefully removing certain regulations constraining the financial industry is not inherently a bad decision, a cursory look at the recent moves by the neophyte American president and his advisers leads us to believe that his administration’s priorities do not lie in the best interests of the American middle class. With the predatory dismantling of protections against another recession, Inauguration Day claims that regular Americans “will never be ignored again” continue to ring hollow.