The Trump campaign has offered scant details about its promise to "dismantle" the Dodd-Frank Act, leaving many to wonder whether his administration will allow them to restart their proprietary trading operations, which were banned in the wake of the financial crisis.
The Motley Fool's John Maxfield and Gaby Lapera discuss this possibility in this segment from Industry Focus: Financials. They also note that there are also reasons to think that the Trump administration could go in the opposite direction when it comes to allowing banks to trade on a proprietary basis.
A full transcript follows the video.
This podcast was recorded on Nov. 21, 2016.
Gaby Lapera: Dodd-Frank put this all into place post-financial crisis, where people were worried about there being another potential run on the banks. They were worried about the banks failing because they didn't have enough capital to back up bad bets they had made. Which is why there are such stringent requirements in Dodd-Frank. Hensraling and, I'm not saying for sure, but potentially the Trump team, agree with the idea that this might have been too much for the banks.
Interestingly, there's been a lot of back and forth on the Volcker rule. I mentioned that earlier. The Volcker rule prohibits banks from proprietary trading, which is basically the banks acting like hedge funds. They were allowed to do that pre-financial crisis, because of a repeal of the Glass-Steagall Act. It's really interesting. If they repeal that, that increases the risks of investing in banks a lot, but it also increases the banks' chances of making a lot more money.
John Maxfield: This is a really important inconsistency that you're pointing out, Gaby. And here's where it comes from. Trump's team has not provided a lot of details in terms of what it would look like if they were to "dismantle" Dodd-Frank. The closest proxy that we have for what that might look like is Jeb Hensarling's Financial Choice Act. And Jeb Hensarling was, for a while, it was rumored that he was being considered to be the Treasury secretary. Then, there was also conversation in the media that members of Trump's team were in favor of a lot of the things that Hensarling was saying. So, that's where that connection comes from. It's in Hensarling's Financial Choice Act where it says that one of the things that they would do is to get rid of the Volcker rule, which, as you explained, would allow banks to go back and act like hedge funds and proprietary trade, basically do whatever they want in the markets.
Lapera: But, interestingly, Trump has also said he would be in favor of putting the Glass-Steagall Act back, of un-repealing the Glass-Steagall Act, whatever you want to call it, whatever method they would want to go through. Bringing back the Glass-Steagall Act basically makes getting rid of the Volcker rule null. It's very confusing. And I think that's something you'll see in a lot of news coverage -- A, we don't know a lot; B, the things that have been said are confusing because we don't know a lot; and C, we're just going to have to wait and see what happens. Do you want to talk a little bit more about Glass-Steagall?
Maxfield: Yeah, then I'll bring up one more point. What Glass-Steagall does is -- this was implemented during the Great Depression -- say, "If you're going to be a commercial bank that has insured deposits, you can't also run an investment bank." And part of an investment bank is a trading operation. So, to Gaby's point, the Volcker rule says a bank can't run trading operations, but the Glass-Steagall Act says you can't run any type of thing that's an investment act. So there is inconsistency between these two positions.