Donald Trump convened a long-awaited, and not entirely un-controversial, meeting of his high-powered Strategy and Policy Forum in the State Dining Room of the White House. It had been a wild first two weeks in the White House—a fortnight replete with Trump’s botched immigration executive order, protests at airports across the country, “alternative facts,” and the world’s introduction to the delights of Sean Spicer. Uber’s co-founder and C.E.O., Travis Kalanick, had pulled out of the meeting the previous day under pressure from his customers, among others. Perhaps sensitive to the dissension, or simply giddy to see so many people who once shunned him now kiss his ring, Trump demonstrated his more genial side. To Stephen A. Schwarzman, the billionaire co-founder, chairman, and C.E.O. of the Blackstone Group, he said, “You have done, as usual, an amazing job.” To Larry Fink, the billionaire co-founder, chairman, and C.E.O. of BlackRock, the huge asset-management firm, he said, “Larry did a great job for me. He managed a lot of my money, and I have to tell you, he got me great returns last year.” To Jamie Dimon, the demi-billionaire chairman, president, and C.E.O. of JPMorganChase & Co., who was rumored to be a top contender for the secretary of the Treasury, Trump said, “There’s nobody better to tell me about Dodd-Frank than Jamie, so you’re going to tell me about it.”
Perhaps even greater than flattery, Trump turned his attention to that very issue which many of the money people at the table cared most about—Dodd-Frank, the controversial and sprawling financial re-regulation law, passed in 2010, that aims to ward off another financial crisis. “We expect to be cutting a lot out of Dodd-Frank,” Trump continued, “because, frankly, I have so many people, friends of mine that have nice businesses that can’t borrow money, they just can’t get any money because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank.” After the meeting, Trump returned to the Oval Office where he signed an executive order signaling his intention to repeal many of the financial regulations that were imposed on the banking sector in the wake of the 2008 financial crisis, including much of Dodd-Frank. Just off Trump’s left shoulder, grinning ear to ear, was Gary Cohn, formerly the president and C.O.O. of Goldman Sachs, now the director of the National Economic Council. Also lurking around the White House were other Goldman alumni, including Stephen Bannon, Trump’s chief strategist, and Steven Mnuchin, his soon-to-be-confirmed Treasury secretary.
Unsurprisingly, Trump’s shenanigans that day lit up Sen. Elizabeth Warren, one of his fiercest critics on the left. “Donald Trump talked a big game about Wall Street during his campaign—but as President, we’re finding out whose side he’s really on,” she wrote in a statement on Facebook. “Today, after literally standing alongside big bank and hedge fund C.E.O.s, he announced two new orders—one that will make it easier for investment advisors to cheat you out of your retirement savings, and another that will put two former Goldman Sachs executives in charge of gutting the rules that protect you from financial fraud and another economic meltdown. The Wall Street bankers and lobbyists whose greed and recklessness nearly destroyed this country may be toasting each other with champagne, but the American people have not forgotten the 2008 financial crisis—and they will not forget what happened today.”
For much of the past eight years, Washington has delighted in punishing Wall Street for its role in exacerbating the 2008 financial crisis by layering on thousands of pages of rules and regulations that govern everything from how much capital a bank must keep to how they advertise. (You can almost imagine Washington politicians and regulators deciding how many bankers should be allowed to go to the bathroom at the same time.) On the one hand, many politicians’ desire for retribution is understandable. After all, there was plenty of evidence that the big Wall Street banks knowingly packaged up shoddy mortgages—mortgages that should never have been issued in the first place—into securities, got them rated AAA (even though they weren’t), and sold them off as high-quality investments all around the world (again, even though they weren’t).
But on the other hand, these regulations have become a byzantine mess—one that would be comical were it not for the fact that they were impinging on the livelihoods of the very Americans, on Main Street, they were purportedly designed to protect. Owing to Washington’s zealous compliance policies, according to a senior Wall Street executive, the job of nearly one out of every five people working on Wall Street these days is to watch what four other people do all day long. Washington’s financial regulators now help themselves to meetings with a bank’s board of directors. Bank regulators now pass judgment on everything from the wisdom of an individual loan to how much capital a bank must have and how it uses it. On account of regulatory requirements, the bond market is now shockingly illiquid, costing tens of millions of Americans with 401Ks and pensions every time they, or their fiduciaries, try to buy or sell a bond. Home mortgages have become increasingly difficult to get, unless of course you don’t need or don’t want one.
According to Davis Polk, the Wall Street law firm, the new regulations governing the banking system run to more than 22,000 pages of new rules, that’s on top of the 848 pages of the Dodd-Frank law—all of which is still in the process of being decoded, let alone understood, in the more than six years since the law was passed. Another 20 percent of the regulations mandated by Dodd-Frank still have not been written. According to Federal Financial Analytics Inc., the six largest U.S. banks by assets spent $70.2 billion in 2013 on regulatory compliance, nearly double what they collectively spent in 2007—and that is on top of the more than $200 billion in fines and penalties that federal and state prosecutors, as well as regulators, have extracted from shareholders of Wall Street banks for their role in causing the financial crisis. Of course, bankers, traders, and executives also should have been held accountable for their bad behavior in the years leading up to the financial crisis. But that is a task for the Justice Department, not politicians and regulators. (The fact that Obama’s Justice Department failed miserably in that assignment is a discussion for another day.)
Wall Street has always played the essential role as the left ventricle of capitalism. For centuries, back to our nation’s founding, businesspeople looking for access to capital have turned to Wall Street bankers to provide it, at a fair price, to allow them to start or to grow their businesses. For the longest time, its interstitial role was always tempered by the fact that the Wall Street firms themselves were always small, private partnerships where individual partners had their own money at risk, as well as their entire net worth, if something went wrong. And things went wrong quite often. The history of Wall Street is littered with the names of firms that once seemed invincible but soon found themselves on the junk heap of history. Bear Stearns and Lehman Brothers are but the most recent examples.
As a result of these I.P.O.s, Wall Street had access to lots of other people’s money. But the incentives on Wall Street also changed completely. Whereas partners were once encouraged to take prudent risks, after the D.L.J. I.P.O. bankers, traders and executives were rewarded for taking big risks with other people’s money. Lost in the process was any sense of accountability for bad behavior. The new calculus on Wall Street rewarded bankers hugely, with multi-million-dollar bonuses, for generating revenue—and, crucially, it did not penalize them when things went terribly wrong. Indeed, the changed incentive system on Wall Street has resulted in one financial crisis after another, with the big kahuna coming in spectacular fashion in September 2008.
But just as Wall Street excess has gone too far the past two or so decades, so too did Washington’s retribution of Wall Street for the role it played in helping to cause the crisis in the first place. What we need now, as the country comes to terms with a maniac in the White House who seems determined to give Wall Street the keys to the candy store, is a clear-eyed understanding of what Wall Street does well, what Wall Street does wrong, and, invaluably, what must be changed as part of any deal that the nutty dealmaker in chief makes with the members of his business advisory council.
Moreover, we need to have a fact-based debate about the role Wall Street plays—and must continue to be permitted to play—in getting our economy moving again. The American banking system, once the envy of the world, must be allowed to succeed in its essential task of providing capital to those who need it to innovate, to start new businesses, to build new plants and equipment, and to hire employees at respectable, and increasing, wages. Banks must be allowed to take prudent risks and earn rewards for taking them.
Donald Trump is a bewildering narcissist who poses enormous threats to our economy, national security, and dignity. He has called Mexicans “rapists”; he was recorded saying he could grab women “by the pussy”; he is a serially bankrupt businessman, whose West Wing resembles a B-list reality show. And he has stacked the Cabinet of his supposedly populist administration with former Goldman Sachs executives. But whether it’s his own intuition, or the advice of his advisers and friends (despite their staggering wealth, no one feels picked on more than Wall Street guys), Trump—as painful as it is for me to say it—is right about Wall Street. He is correct to try to abandon the retributive policies and regulations that have gummed up the gears of the banking system since 2010 and replace them with those that allow banks to provide the fuel for the economy’s growth.
The truth is, just as Trump signaled he would do on February 3, there needs to be an intelligent, well-considered reform of the onerous provisions of Dodd-Frank. That does not mean a wholesale junking of the law. It means that some of the law should be preserved, such as the provisions that mandate capital requirements and that complex derivatives be traded on exchanges. And it also means that any changes to Dodd-Frank should be part of a grand bargain with Wall Street that requires that the financial services industry reform its outdated incentive system to make key bankers, traders, and executives once again accountable for their behavior, just as they were in the olden days of the partnership era. It’s a fair trade, and one that Trump should demand.