Trump's Deregulators igniting a Financial Crisis?

Issues like Robert Mueller’s Investigation and North Korea in past few months have impacted US government intensely just after Washington celebrated enormous cuts in corporate taxes. But the destruction that the looming financial crisis will cause to the US economy through the stock market will be even worse.

Hardly anyone is thinking about the chaos that the stock market crash will bring to the world economy. Overlooking Wall Street is certainly not the right thing to do at this critical time. Trump’s economic squad has taken the financial system towards another bubble that will explode very soon. The biggest US banks are sitting on record profits, but despite triggering massive unemployment which lead to volatility in the economy, no banks' management was directly blamed for this.

Trump government believes in the doctrine of 'leave the banks alone,' unlike Obama who believed in the Dodd-Frank Act of 2010 that places regulations of financial industry in government’s hands. Dodd- Frank created financial regulatory processes that enforced accountability and transparency to limit risk. The Act keeps the banking system under close watch and encourages any original information about security violation to be reported to government. While the launch of Dodd, Franck Act, many important banking reforms were sidelined. The law never put pressure on banks to part deposits of Americans from complex derivative transactions of Wall Street keeping it different from Glass- Steagall Act of 1933.

The share price of stocks of Big Six banks –JP Morgan Chase, Citigroup, Well Fargo, Bank of America, Goldman Sachs and Morgan Stanley have drastically outperformed the S&P 500 Index as a whole, ever since the financial crisis of 2008. US largest bank JPMorgan Chase paid $13 billion for settlement of many fraudulent acts. Its chairman and CEO, Jamie Dimon who predicted the win of Democrats in 2020, has also said that it was just about time when government allowed banks to do what they wanted to do and the Democrats are not going to have that chance again as they lack presence of a pro-business and pro-free enterprise individual with politically moderate views.

When we look at the background of Jamie Dimon, he was the one who got Bear Stearns and Washington Mutual Funds during financial crisis of 2008 as gift from the US government. His company got cheap loans from the Federal Reserve and got billions as bailout money. JPMorgan Chase now stands second position in terms of profit among all companies in the US. Then the question here arises that why he is so concerned about what will happen if another financial crisis occurs, when Trump is in power? When pro-business and pro-bailout philosophies are seen prospering, what is likely to happen adversely?

There should be some restrictions against highly permissive acts done by Dimon. Regulatory organizations like Federal Reserve, Securities and Exchange Commission, Office of Comptroller of the Currency, Treasury Department and Consumer Financial Protection Bureau (added recently under Dodd-Frank Act of 2010) are assigned to restrict big banks from ruining the economy and from committing any financial offence. Most of the persons operating these regulatory bodies believe in giving Wall Street more autonomy.

Regardless of the fact that Republicans agreed to restore the Glass-Steagall Act, Treasury secretary, Steven Munchin, (former Goldman Sachs partner) clarified that it was not done with his support. He released AIG from its regulatory chains as an indication to big financial institutions around. AIG’s fall down in 2008 endangered the total financial system of US to collapse. This insurance company was the centre of crisis when its investment errors led to a government bailout of $182.3 billion. AIG is no longer too big to fail. AIG was released from the monitoring of Financial Services Oversight Board. Now Munchin has left his position at Financial Services Oversight Board making things vulnerable to similar blunders.

Joseph Otting, ex banker and ex co worker of Munchin, has now made it to Washington and is now managing the Office of the Comptroller of the Currency (OCC). Before doing this, he worked as CEO of OneWest (formerly IndyMac, the failed California based bank), where Munchin was picked up in 2009 just before the possessions of houses of common Americans was taken and sold again for personal profits accounting to hundreds of millions of dollars. Jerome Powell, after his selection as the chairman of Federal Reserve, by the Trump’s government, has many times articulated his lack of interest and concern towards banking regulations. He believes that the concept of too big to fail banks is no longer true.

Apparently Trump’s agenda is leading the economy to some financial crisis. First see what makes trump’s team to act like this and how they are participating to worsening the economic conditions. 

It is the responsibility of the Office of Comptroller to make sure that all the banks are functioning in safe and sound environment. The office is also responsible for giving banks ease to access their facilities and services with fair customer dealings in accordance with federal regulations and other laws. As soon as Senate approved the appointment of Joseph Otting as Head of OCC, some of the senators described him as unsuitable and less qualified for the position. They argued that he is not appropriate for leading an organization that was created by President Abraham Lincoln in 1863 to protect banking system. So the person who leads the company should be able to prevent financial crisis caused by the banks.

Joseph Otting worked at Union Bank NA in 1990s where he managed work related to loans given to medium size companies. From where he moved to US Bancorp and worked for establishing middle market business for his corporation to expand in California. His assignment covered companies with annual revenue ranging from $50 million to $1 billion).

In 2009 Munchin alongwith a group of billionaires bought IndyMac, a California based bank which was failing badly. He bought the bank on condition that Federal Insurance Corp. will pay for future losses above a certain threshold. They changed the name of the bank to OneWest. Otting switched from his previous job in 2010 and started working as CEO at OneWest (CIT Group owns it now), working closely to Munchin. This is the time when OneWest closed out more than 36,000 homeowners and later he faced charges of offensively shutting out them and he paid a penalty of $89 million. CIT bought OneWest in 2015 and fired Otting from his job; he got $10.5million as payout for his termination and become another individual who happily ended up making huge sum of money from financial crisis. Otting supports relaxing the lending regulations. He is not in favor of Glass-Steagall and Volcker Rule that limits banks to do some transactions not meant to benefit clients. 

After 1920s financial crisis when Great Depression was at its peak, President Franklin founded Securities and Exchange Commission in 1934. The purpose was to give protection to investors by ensuring that the securities are trading in a secured manner. Joseph Kennedy was the first to supervise SEC but he did not prove himself to be the best choice for the post. Jay Clayton, the new head of SEC who is a renowned lawyer of Wall Street. He worked at Sullivan & Cromwell as partner after completing his academics. He closely worked with many banks after financial crisis of 2008. He was side by side when Barclays’s purchased Lehman Brothers ‘assets and JPMorgan Chase purchased Bear Stearn.

Clayton also worked for ten largest institutions of Wall Street facing charges of violating the laws. Clayton now heads the agency who investigated these institutions and he along with his spouse holds between $12 million to $47 million worth of assets in these institutions. At various occasions, Clayton gave his opinion and legal advice to Goldman Sachs confirming his association with Goldman. Clayton has proved himself successful by lowering SEC penalties by 15.5% keeping it at the level of $3.5 billion. He did this in first year of Trump’s government. In the year 2017 only 62 companies were issued letter for legal trials which is also much lower than last year.

Mick Mulvaney, head of Office of Management and Budget, initiated social plans to benefit Americans. He actively participated to develop the GOP tax plan that put up to $1.5 trillion to US debt. The plan is designed to facilitate corporations and rich Americans with vast tax breaks. Later Mick contributed to selling this plan to media. Mick was appointed as head of the Consumer Financial Protection Bureau after Richard Cordray resigned. He imposed restrictions on new appointments for one month just after he got his seat and also stopped any changes to rules, laws and regulations. He is now focusing to defund Consumer Financial Protection Bureau to further destabilize the Americans and have requesting Federal Reserve to not send any funds for the second quarter of fiscal year 2018.

President Woodrow Wilson established Fed in 1913 with the objective to encourage secure and easily reachable banking facilities and services to the clients. But it looks that Fed has now moved away from its objective in recent years. In financial crisis of 2008, Fed adopted the Quantitative easing strategy and bought trillion dollars worth of bonds. Not only this, Fed also injected an amount equal to $7.8 trillion to four big banks of Wall Street as hidden loans. The purpose of this injection was to motivate the economic situation but the effort hardly did its job.

Jerome Powell, old companion of Janet Yellen and a renowned lawyer has taken the charge as Chairman of Federal Reserve recently. Powell is known to be of the opinion that Federal Reserve’s funds should be increased to drive the financial market. His monetary policy does not look as appealing as the policies of Janet Yellen and Ben Bernank were. Powell always showed that he is uncertain about quantitative easing but contrary to his concerns he always voted to support quantitative easing. Powell is an important part of Trump’s financial team and he can impact the decisions related to appointments in the Fed. This is the time when deregulation is essential for economic and financial strategies in the US. Recently Randal Quarles, a deregulator has been nominated as vice chairman for Supervision for Fed.

It has been anticipated that Powell will take banking to a different way through his deregulator’s attitude in his practices. In addition, Fed is also willing to give easy access to more loans if required and will ease the capital requirements for big banks. It is frightening to notice that individuals with history of breach of rules and regulations and have made money in suspicious ways are now heading most of the regulatory institutions with direct impact on the financial system of the country.

In the past such negligence in appointing heads of important financial institution in a time of slack regulations in the banking sector have aroused financial crisis that impacted the economy very badly and Trump is exactly doing the same thing. The current financial system is not established enough to stand if the market collapses. The big banks will continue to grow even when another financial crisis will arise in a time when Trump government is putting the economy at risk.

Whenever there is a financial crash, the government starts talking about reforms and regulations for and then they forget it without reaching a solution, until another crash is on its way. The same story repeats every time and nothing unique is expected to happen if the bubble explodes and brings another financial crash. 

SAMT AG, Independent Swiss Wealth Manager Re-inventing wealth management with a structured process.