Trump’s Financial Reforms: Needed Correction or Ticking Time Bomb? 

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1:14Bloomberg Audio Studios. Podcasts, radio, news. It's going to be the largest regulatory reduction in the history of our country, and it's going to happen very fast.

1:37Stephanie Flanders:I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, and what on earth is going to happen next. And this week, we're talking about Donald Trump's way with money, all kinds of it. The old guard on Wall Street and the crypto punks are all delighted with the administration's plans for the financial sector so far, especially the big push on deregulation. That's no mean feat. I mean, there's little else these folks could agree on. But when the financial sector gets everything it's asked for, that's not always good news for the rest of us.

2:15Stephanie Flanders:In loosening the guardrails on the banks, or at least saying that's what it wants to do, and giving the presidential seal of approval to all kinds of crypto, is the administration laying the groundwork for the next big financial crisis, or just correcting the mountain of bureaucracy, regulation and risk aversion that descended on America's financial system in the years after the financial crisis of 2008? That's what I'm wondering about this week, and I have two expert colleagues to help me navigate it all. Joining from New York, Christine Harper, a member of the Bloomberg editorial board and also the co-author, with the man himself, of Paul Volcker's biography.

2:53Stephanie Flanders:And in Washington, D.C., Katanga Johnson, who's our lead reporter covering banking regulation in that bureau. Thank you so much for coming, both of you. Thank you. Thanks for having us.

3:06Stephanie Flanders:So, Katanga, we tend to come to reporters first because they're the ones who are trying to kind of keep track of everything that's going on. When the administration came in, what would you say were their big priorities in thinking about the state of financial regulation in the U.S. and the system that they were inheriting? On day one, Trump's regulators really wanted to focus on streamlining all regulatory and supervisory efforts to make sure that small banks, community banks could compete and that bigger banks weren't necessarily complying with rules that were, as they say, goal-plated or much more onerous than the framers had anticipated.

3:43Part of that focus was really to address things that didn't really address a bank's balance sheet. Things like climate rules, restricting access on partnerships with fintechs and non-banks, a heavier hand on anything tied to crypto. So Trump's regulators came in thinking, how can we level the playing field for banks to compete, whether those were smaller banks and bigger banks, and let's pause anything that the Biden administration proposed and then revisit some of the bigger ticket items that addressed issues that actually affected their ability to lend, like capital, liquidity, and all the rest.

4:18Stephanie Flanders:Okay, so that's really useful. We've tended to think that the administration has acted extremely quickly on an enormous range of fronts in its first few months. If you think about those goals that you just set out, how are they doing? Have they made some big moves in those directions? On the one hand, initially, privately, you'd hear folks on Wall Street and even some in Washington would agree there are things the administration's doing that's not quite the main priority. That included a flurry of executive orders that seem to get in the way of regulators getting to work. But to some degree, the personnel moves that we've seen at the agencies have really made a big difference in terms of their ability to get the deregulation agenda started.

4:57And chiefly at the Fed, the departure of Michael Barr, who, as the vice chair of supervision under Biden, was supposed to be in office until next year. His departure in a bid to sort of avoid a fight with Trump opened the way for Michelle Bowman, who's now the Fed's top bank cop, to come in and really take a look at, OK, what are the main issues that banks have said they want to see paused? And what are things that we could begin to do around capital? And the major agenda item so far out of the Fed and indeed all of the regulators has been a major capital rule, this enhanced supplemental leverage ratio, which is the beginning of easing capital rules for banks.

5:36There are others that we expect, but already having a proposal with a 30-day comment period on that item, in addition to pausing other rules that sort of got in the way, has been in some ways ahead of track for the administration, again, because of Barr's departure.

5:52Stephanie Flanders:It's good you've taken us to the Fed because I want to get onto that a bit later. I think we tend to focus a lot on what's going to happen to the chairmanship of the Fed and thinking about Jay Powell and whether he's going to get fired and how much power that might get the president. But as you've reminded us, there's lots of people behind slightly less high profile things that the Fed is deeply involved in, which the administration can have a lot of influence over, partly because of that personnel change you just mentioned, Michelle Bowman. So we'll get on to that in a bit. But Christine, after many years of very distinguished reporting in different areas, often in finance in Bloomberg, you're now on the editorial board.

6:30Stephanie Flanders:And so you're associated with the editorials. And I was quite struck by one on financial deregulation that was published soon after President Trump was reelected, saying, this campaign's disdain for the administrative state and the public's growing exasperation with red tape suggests the country is in for a period of bureaucratic humility. Here's hoping the financial system doesn't become vulnerable as a result. Well, I think you got the bureaucratic humility right. But do you think overall that we're heading in a direction where the financial system will be less safe? Well, it's hard to say. I mean, but as Katanga was pointing out, personnel is really policy here.

7:10I mean, besides Michelle Bowman, who's been a very staunch opponent of many of the regulatory efforts under Biden. The Trump administration has named to all of the key regulatory posts, people who are advocates for the industry in one way or another. I think even Michelle Bowman has named one of the top lobbyists for the banks as a key deputy. So now there are people in position to rewrite or pause, in many cases, rules or enforcement actions that the industry didn't like. That's not always a bad thing. Some of the things that were happening under the Biden administration were just, you know, probably overaggressive.

7:51Gary Gensler had an incredible record at the SEC of writing and proposing rules, far exceeding his predecessors. And many of the rules he was proposing were not required by statute. So he was really going above and beyond. And that is all being dialed back pretty quickly. The people who are in place are just right now just trying to end anything that was happening under their predecessors. And as I said, some of that makes sense. For instance, these really onerous requirements on mergers between banks probably don't make that much sense. Bank mergers are in and of themselves not a bad thing. They can actually make the system safer sometimes.

8:30That said, I mean, they basically gutted the Consumer Financial Protection Bureau, which had done some pretty useful work in protecting consumers. and, you know, remains to be seen how lowering capital requirements as they're proposing will affect the resilience of banks if things go wrong. And then they're dialing back some of the oversight that had been proposed over the sort of so-called shadow banking system, which poses its own set of potential dangers. I thought it was interesting just to make one point that the SEC, one of the commissioners who's still on the commission, who's a Republican, is Hester Pierce.

9:04she's so pro the cryptocurrency industry that she's known as crypto mom but she actually put out a fascinating statement last week pushing back at the effort to tokenize all the financial instruments if you tokenize things it doesn't magically change the underlying thing you can't just avoid securities laws by tokenizing something so even people are who are industry advocates are starting to see they need to push back a little bit against some of the excessive optimism of the people there.

9:36Stephanie Flanders:So just to touch into the weeds a little bit, one of the rules that has certainly been a little bit unpopular among some of the big banks is this supplemental ratio, which is supposed to be about maintaining the strength of the balance sheet of the bank and making sure that They can't be too highly leveraged. But there's a change in effective loosening in that, which the administration is very keen to achieve. You know, roughly, what is that aimed at doing, Katanga? Roughly, the regulators hope that by making changes to the ratio, to the enhanced supplementary leverage ratio, that trading in the$29 trillion Treasuries market, particularly in a moment of crisis, would be easier for the likes of JP Morgan, Goldman Sachs, Sachs and Morgan Stanley.

10:24And by lowering that requirement for those banks, it would allow them and their subsidiaries to sort of have the same requirement.

10:34Stephanie Flanders:So, Christine, I'm remembering in the first Trump administration, some of the constraints that were put on banks after the global financial crisis were pared back. And then it was suggested later that those changes had helped put us on a path to the bank failures we had a couple of years ago, I guess, you know, Silicon Valley Bank, Signature, First Republic. Do you have the same kind of worries about this effort to change the supplemental leverage ratio? Or do you think it actually makes a bit of sense? Well, I mean, it's certainly true that the size of the Treasury market has grown dramatically since those rules were first proposed back in, I think, 2014.

11:09And so when they were proposed, there was supposed to be this limit on how many, you know, assets banks could have compared to their level of capital. even if those assets were super safe things like treasuries or central bank reserves. So they wanted to make sure that there was a minimum sort of backstop, no matter what the riskiness of their assets was. But as this treasury market has grown, now the banks are constrained when things really develop from being able to just buy unlimited treasuries. And as a result, you've seen a lot of hedge funds and proprietary trading firms step in and do a lot more activity in the treasury market.

11:48But the problem is that if you lower that backstop, that sort of minimum capital requirement for banks, you're just reducing the safety that bank depositors and other investors have that if something goes wrong in the assets on the bank's balance sheet, that they'll have enough capital to deal with it. So things just go wrong. They always do. And so as a result, it would make more sense, in my view, to have capital requirements where they are. It doesn't seem necessary to lower them. there are other ways you could solve the problems in the treasury market.

12:19Stephanie Flanders:It is funny. When you look at a bank balance sheet, there is this kind of basic fact that if it was any other business, you would say it was hugely bankrupt. You know, it's like they're the only institutions that are able to have a relatively small amount of equity. And then they're lending a huge amount on the back of that, which you'd never be able to do if you were just a sort of normal company. Right. And that's by design. And that's one of the arguments that a lot of the private credit and non-bank companies are saying is that, you know, we have a different model where we have more permanent capital.

12:47And so there's no risk that depositors suddenly flee and you have a problem with, you know, trying to repay your lenders. But banks, you know, are always going to be leveraged, but making sure that they're not over leveraged is sort of the core part of the post-financial crisis regulation. And so any effort to sort of water that down seems concerning. Some people treat ChachiPT like some kind of smart search engine, And some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work.

13:24It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode. Available on Plus and Pro plans.

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14:25Stephanie Flanders:Now, Katanga, I think, I mean, Scott Besson, the Treasury Secretary, does seem to be one of the key movers in this financial deregulation, or certainly this push to change banking regulation. And of course, the Treasury Secretary has always had quite a lot of power in these areas. But I guess the way that the administration has concentrated power and gained a lot more influence over the independent agencies, you know, Supreme Court has kind of given them the power to hire and fire many of these officials at independent agencies who we previously would have thought of as a bit more arm's length from the administration.

15:00Stephanie Flanders:Am I right in thinking that he has become a particularly important figure in this and along with Michel Bowman is really giving the administration a much sort of clearer, unified policymaking than we might have had in previous areas? You're right, Stephanie. Bassett has really taken the helm of the financial regulators and said, let's coordinate our efforts by meeting with the heads of the three main bank regulators, the Federal Reserve, the Federal Deposit Insurance Corp, and the Treasury's own Office of the Comptroller of the Currency. Together, those three agencies are now trying to coordinate their efforts in streamlining rules, discussing the sort of priorities around changes to capital.

15:44Stephanie Flanders:Call me suspicious, but I can't help noticing that Scott Besant, the Treasury Secretary, who's now going to be also presiding over a massive increase in the number of US treasuries. I mean, the debt is going to go up by several trillion dollars, at least according to almost everyone's forecast. Is it a coincidence that he also wants to make it much easier for banks to hold treasuries not worried too much about how many they own? Isn't that going to be on balance sort of positive for the market at a time when the cost of borrowing for government's been going up? Many people would agree that yes, on its face, it's interesting that Besson is playing that role and seemingly following some strategy that many others either haven't seen or haven't agreed on.

16:24But what the impact will be will be rather interesting. And I imagine a lot of ways people close to him privately must be discussing, hey, have you considered what the outcome will be by addressing things in this way on both sides?

16:37Stephanie Flanders:Well, that's a very careful answer, which I would expect no less. But lots of people will be amazed that we haven't talked about crypto. Yeah. Christine, for people on the outside, that seems like the biggest sort of mood shift and change of direction for this administration when it comes to finance. I mean, that feels like the whole world of cryptocurrencies is being kind of welcomed into the American financial system in a way that was just not the case under the previous administration. That's absolutely true. And just to return to your previous point about the treasury market, one of the first things that the banking committee got to was the Genius Act, which is a way of creating a sort of regulatory framework for what are known as stable coins.

17:21This is a part of the crypto market that basically just is a digital version of the dollar, let's say. And part of the regulatory regime will require them to own safe assets, like in particularly treasuries. And there's an argument that this will increase demand for treasuries and help the dollar and whatnot. And so you're building sort of a whole financial structure that's even more leveraged on treasury market. So stable coins and banks, as you've talked about, at a time when the treasury market maybe is becoming a little less reliable, as you just saw a downgrade from the third of the three big rating agencies.

17:59That maybe should be a cause for some concern. But otherwise, crypto in general, sort of the irony is it's being boosted by regulation because they were the least regulated thing that existed and they could do whatever they wanted. And it turned out that was not good for the crypto industry because they went too far and they stole too much money and people lost their life savings and got scammed and got defrauded. And there were a lot of problems. And so now they're writing rules to make people feel comfortable about the crypto industry. And it's interesting that these are rules that were essentially very similar to what Sam Bankman-Fried was proposing back when he was on the Hill, you know, asking for regulation by the commodity and futures.

18:44Right, before his company blew up. Yeah, before he went to jail. So, you know, and Trump himself was a big skeptic of crypto back in the day, kind of in the same vein as Jamie Dimon and Warren Buffett. But now he's in the business. So he's a proponent. So, yeah, everything seems to be designed on Capitol Hill to do whatever they can to help the crypto industry. And, you know, there's, I think, a genuinely large degree of risk in that. You know, the volatility of these assets, they're just not, they don't have the tradition of risk management that the sort of, you know, more established banking and financial system have.

19:22So there's a lot more volatility and there's no fundamental value in a lot of these sort of meme coins or different tokens. I mean, stable coins are different, obviously. But even stable coins, it's going to be a lot of tech companies starting these. One way of thinking of it is you sort of had banks that were becoming more technologically focused and now you're having tech companies that are becoming more bank focused. And which do you feel safer putting your money in? It's a real question. The risk is that we're having a bubble, which, you know, is very possible. We had one in 2022 that popped.

19:55And then if it all turns around, then you have a big, you know, and the more the traditional financial system is connected to it, the more risk you have for the broader economy and people who aren't connected to crypto.

20:12Stephanie Flanders:Katanga, weren't there some limits that were put on the banks to prevent them having too much exposure to crypto? And the administration has been talking about pairing those back. Is that right? So Trump's regulators have indeed sort of reversed those guardrails that were put in place following the 2022 issues in the industry. But since then, they've tried to underscore the importance of banks that are holding crypto custody as recently as this month, saying banks really should bear in mind that the onus is on those institutions for any tie-ups they have with crypto firms to make sure that they disclose adequately and spell off for their customers what the risks are, which is commonplace, right?

20:52That's an expectation.

20:53Stephanie Flanders:You know, we saw that really work very well in 2008, just to, you know, just be careful, just make sure you know the risks on your balance sheet. If you were one of the big banks, there has to be something a little bit alarming about this zeal to have this whole new form of finance that really, although it's somewhat regulated now, makes a virtue of not being very transparent, of being difficult to track, and somewhat outside the traditional system. You have the Peter Thiels of this world and others. They actively want to, you would say, disintermediate, you know, bring the finance outside of traditional banks.

21:32Stephanie Flanders:It is a threat to the sort of traditional financial system ultimately, and its administration seems to be all in favor. Well, I mean, in two ways. So I would say one thing that's been a rallying cry among Republicans this year has been this claim that the big banks were debanking, meaning denying banking services to crypto related companies just on the basis of sort of reputation or not liking them and that this was a wrong thing and that it had to be stopped. And so there was put in place a change so that regulators couldn't consider reputation risk when they're assessing banks. Banks have a lot of reasons why they legitimately had to have concerns about banking with these crypto companies.