At first glance, the current political climate appears to be looking up for banks. Congressional Republicans are due this week to unveil their latest attempt to roll back the Dodd-Frank Act, while President Trump signed an executive order Friday targeting the 2010 financial reform law.
But there is a significant downside to what’s going on, one that might not be clear to banks until it’s too late. Trump’s early assault on Dodd-Frank has angered the Democratic base, emboldening bank critics Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt.
At the very least, the order is likely to hamper efforts to reach comprehensive regulatory reform. In the long run, however – assuming Democrats ever regain the White House or Congress – it could lead to far more drastic consequences. Items like big-bank breakups, higher capital requirements and a restoration of the Glass-Steagall Act, which separated commercial and investment banking, may ultimately be back on the agenda.
That’s because as Republicans and financial executives embrace Trump, Democrats are moving further to the left. This is the natural outcome for most political parties after a loss, similar to Republicans who tacked right after President Obama’s election.
But the stakes for banks from the coming realignment are likely to be significant.
Despite all the banker anger directed at Dodd-Frank, it was not a law built to dramatically reinterpret the financial system. Policymakers like former Rep. Barney Frank, D-Mass., then-Treasury Secretary Tim Geithner and former Sen. Chris Dodd, D-Conn., were far more interested in preserving the existing system rather than tearing it down.
Similarly, Hillary Clinton’s presidential campaign only called for modest reforms to the financial system, centered mostly on defending Dodd-Frank rather than adding to it.
But Frank, Dodd and Clinton are part of yesterday’s Democratic Party, pre-Trump-era policymakers who do not reflect the current mood among the base. And if that mood can be summed up in one word, it is this: vengeance.
Witness the remarks by Democratic leaders over the weekend after Trump issued his executive order on financial regulations. Sanders called Trump a “fraud,” noting that Trump criticized Wall Street during the campaign, but has tied himself to it now.
“This guy ran for president of the United States saying, ‘I, Donald Trump, I’m going to take on Wall Street. These guys are getting away with murder,’” Sanders said on CNN. “And then suddenly, he appoints all these billionaires. His major financial adviser comes from Goldman Sachs. And now he is going to dismantle legislation that protects consumers.”
House Minority Leader Nancy Pelosi said Trump and his advisers “are putting forth a Wall Street-first policy at the expense of the American people. They want to take us back.”
But the best summary of the current zeitgeist within the Democratic party came from Warren, who delivered a fiery speech over the weekend in which she called on Democrats to “grow a backbone.”
“Always remember: the Republicans are not on your side,” Warren said. “They’re rushing to unleash the big banks. They’re rushing to gut the consumer agency that has forced banks to give $12 billion back to customers they cheated.
“They’re ramming through a cabinet of ethically challenged billionaires with long histories of grinding working people into the dirt. And the corporate CEOs and the Wall Street bankers and the lobbyists are so happy they are doing little money dances in the halls of Congress.”
Warren’s solution wasn’t to cut deals or look for places to compromise. In unambiguous language, she urged Democrats to oppose the GOP at every turn.
“The so-called ‘leaders’ of the Republican Party can keep their rich friends,” Warren said. “Giveaways to giant banks so they can cheat people and blow up our economy again? We will fight back!”
Bankers tend to dismiss this kind of populism, but it has struck a nerve with Democrats and it plays well politically. Just ask Trump, who successfully painted Clinton as a tool of Wall Street. Next time around, it will be Democrats making that charge, showing as proof photos of Trump hobnobbing last week at the White House with JPMorgan Chase CEO Jamie Dimon. (Indeed, a CNN writer used the photo in a tweet as evidence that Trump had made an abrupt about-face on Wall Street.)
Already on Monday, the fallout was becoming clearer. Liberal groups called for a rally Tuesday evening that would start at JPMorgan’s headquarters and proceeds in a march to Goldman Sachs.
To be sure, Democrats in Congress have some motivation to compromise. They must defend more than two dozen Senate seats in the 2018 election cycle, giving them an incentive to try to get things done. Moreover, some GOP lawmakers believe they can use the budget reconciliation process to win some Dodd-Frank reforms without Democrats’ help.
But the executive order – and banks’ perceived complicity with Trump’s administration – will make reaching common ground tougher. And any provisions that are part of reconciliation are likely to fall well short of the broader changes for which bankers are hoping.
And as the Democratic base moves further to the left, the next time political power swings in its direction, there will be no Clinton or Geithner to urge moderation.
Bankers may be inclined to enjoy this moment while they have it. But one day, the bill will come due—and the cost is likely to be high.