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08/12/2016

Trump, Wall Street and the banks: Massive deregulation ahead

Euro & Finance

Trump, Wall Street and the banks: Massive deregulation ahead

Trump has promised to abolish financial regulations introduced after the crisis.

[htmvalerio/Flickr]

Donald Trump’s promise to cut red tape in the financial sector is one of the few areas the president-elect has been consistent. Despite his anti-Wall Street rhetoric, the billionaire is close to America’s financial hub. EurActiv’s partner La Tribune reports.

As a well-known and trusted political personality, Hillary Clinton was a clear first choice for the world of finance. But surprise victor Trump is closer to the financiers than he made out in his election campaign.

In true liberal Republican style, his promise to massively deregulate the banking sector is one he has not gone back on. Trump has regularly stated that he will repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted by the Democrats in 2010 to preserve financial stability and avoid another financial crisis.

In an interview with Fox News last October, Trump said, “We have to get rid of Dodd-Frank. The banks are not loaning money to people that need it. The banks will give me all the money I need, because I don’t need the money. Anybody that doesn’t need money is a great candidate to get money. But if you need money to create jobs or build something, whether it’s buildings or a company, the banks aren’t there. The regulators are running the banks, and that is why people can’t borrow money in our country today.”

Ditching anti-growth regulation

Dodd-Frank created new control authorities, limited the banks’ speculative activities to 3% of their equity and regulated derivative products, which were behind the subprime mortgage crisis.

But for Trump, the banks are being held back by too much red tape, which he blames for the slow growth of the American economy. His economic plan, which so far lacks detail, focusses on the “massive” abolition of “anti-growth regulation” and the establishment of a “new modern regulatory framework”.

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Trump gave more details in an interview with Reuters in May. “Dodd-Frank has made it impossible for bankers to function, […] that has to stop,” he said, adding that his programme would lead to something “close to [the] dismantling of Dodd-Frank”.

The official programme adopted by the Republican Party this summer included both the Reaganist principle of deregulation and the repeal of Dodd-Frank, particularly the consumer protection aspects of the law.

David Lafferty, the chief market strategist at Natixis Global Asset Management, also said on Wednesday (9 November) that he expected banking regulation, including Dodd-Frank, to be softened.

Love-hate relationship

But the president-elect’s relationship with Wall Street is more ambivalent, as was his campaign discourse. He was a harsh critic of his rival’s links with Wall Street, saying she was “in the pocket” of the financial sector. Clinton was paid $675,000 for three speeches at Goldman Sachs.

While campaigning in Iowa in January, Trump said, “I know Wall Street. I know the people on Wall Street. We are going to have the best negotiators in the world, I’m not going to let Wall Street get away with murder. Wall Street has caused tremendous problems for us. We are going to tax Wall Street.”

The property billionaire also said he was not worried about “the guys on Wall Street”, adding, “I don’t accept their money.”

But a few months later, the Republican made a U-turn, making overtures towards several big players in finance, from the activist shareholder Carl Icahn to the hedge fund manager John Paulson, who made his fortune shorting the subprime mortgage market when the crisis hit.

He muted his anti-finance diatribes and managed to collect some $5 million in donations for his campaign, according to the non-partisan Centre for Responsive Politics, which follows political donations.

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But Trump continued to attack Clinton on this issue in September, claiming she had “received $100 million in contributions from Wall Street and hedge funds”. This is a slightly inflated figure: in reality it was $78m (although donations from the whole of the financial, insurance and property sectors came to $105m).

And in light of Trump’s philosophy of cutting taxes, there is no guarantee that his promised capital gains tax on investment funds will materialise.

But the impact of Trump on Wall Street and the global financial markets more broadly may be most acutely felt in interest rates: he has been a harsh critic of Janet Yellen, the president of the Federal Reserve, who he said was “more political than Clinton” for her insistence on maintaining “artificially low interest rates”.

Paradoxically, the uncertainty caused by Trump’s election, which will last at least until he takes over the White House in January, calls the Fed’s plans for a gradual increase in interest rates into question.

European banks penalised?

What will happen the European banks in all this upheaval? Will they fall victim to the protectionism the president-elect has promised? The financial markets showed signs of concern on the Wednesday following Trump’s election.

Deutsche Bank shares fell 3% over fears the German behemoth’s ongoing negotiations with American courts over a possible $14bn fine could be penalised. The shares then bounced back.

The effects of a Trump presidency on the Mexican economy could have very negative consequences for the Spanish bank BBVA, which makes 40% of its profits in the Central American country. Santander could also be affected, but to a lesser extent. BBVA shares fell 5% and Santander shares 1.7% on Wednesday. Again, both recovered before the close of trading.

Europe’s biggest bank, HSBC, could also suffer as a result of Trump’s trade policy. While some analysts doubt they will materialise, the promised return of customs barriers would hurt the bank, which is deeply involved in international trade.

In the short term, most banks are likely to suffer as they postpone financial operations, waiting for firm signals from the president and the markets.