On Thursday, barely a day after Hillary Clinton conceded the presidential election, Massachusetts Sen. Elizabeth Warren gave a fiery speech at an invitation-only lunch hosted by the executive council of the AFL-CIO. There, Warren took a moment to praise President-elect Donald Trump’s promises to boost infrastructure spending and his criticisms of Wall Street.
Then she pounced. “Let’s also be clear about what rebuilding our economy does not mean,” Warren said in her released remarks. “Americans want to hold the big banks accountable. That will not happen if we gut Dodd-Frank and fire the cops responsible for watching over those banks, like the Consumer Financial Protection Bureau. If Trump and the Republican Party try to turn loose the big banks and financial institutions so they can once again gamble with our economy and bring it all crashing down, then we will fight them every step of the way.”
We don’t precisely know what kind of stance the Trump administration will take toward the financial services sector. Trump has railed imprecisely against the predations of Wall Street yet may well staff his administration with its veterans. He has plucked populist chords, but it’s quite possible he’ll defer to the deregulatory fiscal tune of House Speaker Paul Ryan. And he has specifically said he wants to tear down Dodd-Frank, although transition-team sources have told reporters that the new administration will focus on overturning individual provisions. But it’s reasonable to assume that Warren’s accomplishments on behalf of consumers during the eight years of Obama’s presidency will get a prime slot in front of Trump’s gold-plated wrecking ball.
Obama’s legacy is Elizabeth Warren’s legacy, too, after all: The Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted in the wake of the financial crisis, also set up the CFPB, which Warren initially proposed and later midwifed into existence. Then there are the beefed-up standards for those advising the nation’s retirement savers—the fiduciary rule—set to go into effect in April. The proposed standards, which make financial advisers put their clients’ best interests over their own, treaded water for years before Warren took an interest in late 2013. Anthony Scaramucci, a principle at Skybridge Capital and an early Trump backer who is now a member of the transition team, compared the new regulations last month to the Dred Scott decision. No, I don’t get the analogy, either, but it’s clear he doesn’t like it.
The CFPB and the reconstituted retirement savings regulations are designed to protect Americans from the worst instincts of the financial services sector. How Trump approaches them will tell us a lot about how much he truly values the financial welfare of the millions of Americans who gave him their vote. Already, lobbyists for the energy sector, banks, and other interest groups are working on Trump’s transition team. I wouldn’t consider that a great sign.
The threat to the CFPB is simple: The financial services sector hates it and would like it to go away. Republicans in Congress have carried water for the industry on this issue for years. In 2015, Sen. Ted Cruz introduced a bill to abolish the CFPB, saying in press release, “Don’t let the name fool you. The Consumer Financial Protection Bureau does little to protect consumers.”
No doubt customers of Wells Fargo, where the CFPB’s $100 million fine brought attention to the 2 million fake checking, savings, and credit card accounts set up by bank employees without their clients’ knowledge, would beg to differ. So might the majority of Americans: A poll conducted earlier this summer by the left-leaning Americans for Financial Reform found that two-thirds of us approve of the CFPB even when informed of the arguments against it.
It’s nearly a certainty that another bill like Cruz’s will be introduced, likely within the early days of the 115th Congress. But that’s not the real threat to the agency’s existence. First, Democrats will surely rally to save the CFPB, a core achievement of the Obama administration. Republicans may hold a majority of the seats in both houses of Congress, but they don’t enjoy filibuster-proof dominance in the Senate. (At least not yet.)
You might think of any bill to abolish the CFPB as a bit of performance art, which will make other proposals to curb the CFPB look reasonable. Rep. Jeb Hensarling—a Texas Republican who is now a leading contender to serve as the secretary of Treasury—has a proposal to kill Dodd-Frank, which would reformulate the CFPB as something called the Consumer Financial Opportunity Commission. The reconstituted agency would be governed by a five-member commission instead of a director, its funding subject to approval by Congress instead of the Federal Reserve. It all sounds harmless enough.
But the CFPB’s organizational and financial structure is designed to keep Congress—and those who donate to members of Congress—from exerting influence over the CFPB. And the five-member commission is all but a guarantee for gridlock. At the Securities and Exchange Commission, a similar structure has been a recipe for getting little done. Yes, SEC Chair Mary Jo White has been less-than-aggressive in some areas, but as Bloomberg reported earlier this year, “she’s also been caught in the middle between commissioners with extreme Republican and Democratic views.”
And let’s not forget the potential impact on the CFPB of ongoing litigation. Last month, I bemoaned a federal circuit court decision declaring the set-up of the CFPB to be unconstitutional. According to the rule, the president now can fire the head of the CFPB at any time he wants, where previously it needed to be for cause. Otherwise, the president needed to wait till the end of appointment’s term, which for current CFPB director Richard Cordray is 2018.
The CFPB is likely going to appeal that decision, so it will be stayed for a time. But come on. You think the Supreme Court, whose vacancy Donald Trump will fill, will back the CFPB up? And besides, even if Trump can’t fire one of America’s top financial enforcers for whatever reason he wants, it’s safe to assume he has a loose definition of “with cause.”
Finally, there’s the status of current CFPB initiatives to reign in payday lending and to do away with mandatory arbitration clauses in financial contracts. It’s easy enough to pick away at this stuff, and the incoming administration wouldn’t even necessarily need Republicans to take the heat for doing so. Rep. Debbie Wasserman Schultz, the former head of the Democratic National Committee, attempted to undercut a CFPB proposal to regulate the payday loan industry with legislation that would have, among other things, allowed weaker state rules to supplant the federal ones. And that happened this year. Only when Hillary Clinton spoke out in defense of the CFPB’s effort did Wasserman Schultz back down.
It’s possible something similar could happen to the retirement standards. Even though the rules are set to go into effect in April, the new Trump administration could simply issue an executive directive to delay implementation for a period of time. There are also ways to defund enforcement via the budget reconciliation process. Prior to Warren and then Obama’s effort to get them out of bureaucratic limbo, hostility to the initiative was so high that even Sen. Bernie Sanders signed a letter opposing an earlier version of the change.
There are also a number of court cases challenging the laws. Long-established precedent says a new administration would continue to defend the change even if it disagrees with it, but precedent doesn’t account for Trump. Moreover, unlike the CFPB, few in the public know much about the fiduciary change or what the impact of doing away with it would mean to their bottom line. Under the previous rules, advisers didn’t need to act in the best interest of their clients, something that the Obama administration estimated enriched the industry at the expense of their customers by $17 billion annually.
Irony of ironies, it’s possible the constituency that might emerge to work with Warren to save the re-invigorated retirement rules is the very same financial services industry that opposed them so bitterly. Rescinding the standards would likely cause corporate chaos. Many firms have spent millions upon millions of dollars on ensuring they will be in compliance with the new regulations come April. Others, like JP Morgan Chase, reformed how they would pay brokers advising clients on how to invest their Individual Retirement Accounts. Another group, like MetLife, have sold off advisory divisions, not wanting to deal with the increased hassle of the new regulations.
Politics, of course, makes strange bedfellows. We should expect to see a lot of those over the next four years.