Unlock the White House Watch newsletter for free
A guide to what the 2024 US election means for Washington and the world.
It’s been a hectic week on Wall Street. Following Donald Trump’s landslide victory in the U.S. presidential election, bankers and private equity giants are hoping he will loosen regulatory reins and increase demand for all kinds of deals and loans.
More directly, the outcome is doomed to all but undermine the Biden administration’s efforts to not only impose higher bank capital requirements but also impose new rules on everything from climate change disclosures to outsourcing. be.
As executives were eager to say goodbye to Gary Gensler as chairman of the Securities and Exchange Commission and Michael Barr as head of Federal Reserve oversight, a voice sounded in the background saying, “Ding-dong, witch.” You can almost hear the sound of “He’s dead.”
Private equity firms and traditional asset managers not only welcome the end of Mr. Gensler’s multi-year regulatory tightening, but also hope that a friendly SEC will more easily greenlight new financial products. There is. Alternative assets such as cryptocurrencies, unlisted credit and private equity could soon be flowing into personal accounts.
Bank executives, meanwhile, have dreams of watering down the Fed’s annual stress tests, a key limit on how much risk they can take. Investors are also betting that industry mergers like Capital One and Discover will become more likely.
Optimists argue that removing unnecessary constraints will stimulate growth by making it easier for bank loans and investment company savings to be channeled into much-needed infrastructure and innovation. They also point out that regulations tend to be cumulative, and modest reductions may be warranted to contain overall costs and red tape.
One insider described the atmosphere at the time as “the banks are back.” “Mr. Trump wants to ‘build, produce, build,’ and that requires a lot of money.”
Pessimists say the anti-regulatory tone set by Trump and his new efficiency guru, Elon Musk, will cause talented government employees to run for the exits. I’m concerned. That could thwart the speedy regulatory approvals the industry is hoping for, and leave watchdogs dangerously lacking the skills needed to spot and address new problems.
“A lot of the enthusiasm is based on false assumptions,” one veteran executive told me. “We now run the risk of going into whatever the next bubble is. No doubt it will come.”
Even if optimism initially prevails, longtime Wall Street veterans warn that the industry needs to be careful not to push its advantages too far. “If we loosen regulations too much, more banks will fail,” another longtime official warned this week.
The Trump administration’s initial decision to ease regulations for mid-sized regional banks in 2018 is a case in point. While most banks in this light-touch category conducted their operations successfully, some took risks that later turned out to be fatal. Their failure triggered the local banking crisis of 2023. The resulting chaos justifies Barr’s late Basel III proposal to raise capital requirements, which the industry has spent more than a year avoiding.
The U.S. federal system has built-in risks for industries seeking to completely eliminate supervisory attacks. If federal watchdogs are too accommodating, ambitious state-level regulators could try to fill the void. The history of the 2002 research analyst scandal is instructive here.
When then-President George W. Bush appointed industry lawyer Harvey Pitt to head the SEC in 2001, investment banks were luring initial public offering clients with promises of favorable analyst coverage. This was an open secret on Wall Street, even for companies with no hope of going public. make a profit. Pitt, who promised a “kinder, gentler” style, canceled a planned report and called a private meeting with major banks to urge them to address conflicts of interest.
Before any reforms were agreed to, then-New York Attorney General Eliot Spitzer released his own investigation and shared colorful emails that embarrassed the industry and infuriated investors who lost money in the dot-com bust. did. In the end, 10 banks paid a record $1.4 billion and agreed to costly restructuring. The victory has emboldened Spitzer and other pro-restriction state police to file more cases, and they continue to do so.
All of this may feel like ancient history to the financiers who popped the champagne corks this week over Trump’s victory. However, it’s good to remember that the financial industry remains a highly cyclical industry, and customers can be very angry if they feel they’ve been deceived. Transparent guardrails act not only as restraints but also as shields.
brook.masters@ft.com
Follow Brooke Masters on myFT and X
