Wall Street’s expectations that Donald Trump will quickly free banks from the grip of aggressive regulators could encounter a problem: Some of Barack Obama’s top appointees aren’t planning to leave anytime soon.
A handful of officials who’ve implemented the Dodd-Frank Act are vowing to keep running their agencies for months into Trump’s presidency. They can do that because independent regulators are meant to be insulated from political interference, and they serve terms that last years.
Atop the list of those sticking around is Federal Reserve Chair Janet Yellen. While traders hang on her every word about the economy, she also has tremendous sway over big banks, including powers to set directives that impact who they can lend to, what assets they can hold and what trades they can make.
Yellen has publicly said she’s not going anywhere until her term ends in February 2018. Other financial regulators have expressed similar reluctance about leaving their posts before they have to. Collectively their agencies regulate everything from housing policy to credit cards and rules for money laundering. Trump can try to push some of them out, but that could land his administration in contentious, and very public, legal battles.
Trump’s transition team didn’t return an e-mail seeking comment.
Dismantling Dodd-Frank is key to a goal that Trump and Republican lawmakers share: cutting red tape that they say has stifled the economy under Obama. One strategy for attacking the legislation is repealing parts of it. But doing so could be challenging because most major bills will need the support of at least some Senate Democrats to become law. Another option is for regulators to not enforce Dodd-Frank or re-interpret its rules in a way that’s friendlier to banks.
That may not be possible right away. Of the several regulators that oversee the inner workings of the U.S. financial system, the Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Federal Housing Finance Agency and Consumer Financial Protection Bureau will have Obama appointees in charge when Trump takes office. So any effort within government agencies to strangle Dodd-Frank and other banking restrictions could be in the unwilling hands of the same people who put the rules in place.
While Wall Street would welcome a break from constraints like the Volcker Rule ban on banks making bets with their own money, there are more subtle changes that probably require different government supervisors. For instance, new officials at the Fed and OCC could prompt the agencies to re-think the hard line they’ve taken to limit U.S. banks’ role in the $1 trillion leveraged-lending market.
For Wall Street, loans to highly indebted firms — often connected to corporate buyouts — have long been among the industry’s most lucrative. But banking regulators appointed after the 2008 crisis think some of these financing arrangement are dangerous. They told the industry to step back from the riskiest deals or face reprimands.
At the Fed, Governor Daniel Tarullo has spearheaded the central bank’s broad insistence on tough oversight since the 2008 meltdown, making him one of Wall Street’s least favorite regulators. Trump could try to sideline Tarullo by installing a Fed vice chairman for supervision, a long-vacant position that handles bank examinations and regulation. Tarullo has ostensibly done the job without Senate confirmation.
While Republican senators will probably be keen to help Trump push Tarullo aside, any replacement would still have to contend with Yellen. She has backed Tarullo’s aggressive approach, and can block any changes to bank rules as long as she’s Fed chairman.
Fed chairs historically haven’t been part of the partisan turnover in Washington after presidential elections, so there’s nothing unusual about Yellen finishing out her term.
Among her counterparts, FDIC Chairman Martin Gruenberg said he plans to stay on until his term is up in November, and Thomas Curry said he’ll keep leading the OCC until at least April. FHFA Director Mel Watt has told employees and others close to him that he plans to remain in his post after Trump becomes president, people with knowledge of the matter have said. Watt’s term doesn’t end until January 2019.
“As long as these leaders are running agencies, we need and want to work with them,” said Rob Nichols, head of the American Bankers Association, an industry trade group. He said lenders are particularly eager to help on policy changes that goose the economy.
The Obama appointee thought to be in the most perilous position is CFPB Director Richard Cordray. While he has said he intends to stick around until his term ends in July 2018, constitutional lawyers say an October legal decision could make that difficult.
A federal appeals court ruled that the CFPB is too far removed from the White House’s authority, and gave the president power to fire its director for any reason at any time. Before the decision, a president wanting to fire the consumer agency chief would have had to claim he neglected his duties or did something improper.
The CFPB is fighting the court decision. Still, Trump’s advisers could try to claim they already have plenty of legal grounds to remove Cordray. How any battle between Trump and Cordray plays out could have implications beyond the CFPB. The FHFA is structured in a similar way.
“Cordray is clearly the most vulnerable,” said Michael Carvin, a lawyer at Jones Day in Washington who specializes in constitutional fights against the federal government. Other regulators also “have a real cloud hanging over their constitutional validity” after the CFPB ruling, Carvin said.
Even if Obama’s holdovers remain in their jobs, and succeed in keeping Trump’s deregulation agenda at bay, it will only be temporary. In the meantime, Republican lawmakers can put heat on them, including by scheduling frequent congressional hearings to scrutinize their actions.
“They’re going to be under political pressure,” said Marcus Stanley, policy director for Americans for Financial Reform, a group that backs tough financial rules.