Wall Street Financial Reform
Financial reform on Wall Street banks has been a major topic of political conversation for much longer than the past few years since the financial crisis. The finance industry is one of the most heavily regulated industries in the United States. If you are looking to get into a career in investment banking, private equity or any other type of financial services, you should know this financial regulation and how it can affect you.
Glass-Steagall Act of 1932
In the 1929, the stock market crashed in what ultimately led to the Great Depression. At the end of a prosperous decade, investors truly believed that the stock market could only go up. However, when uncertainty crept into the market, investors got scared and began rapidly selling causing the market to rapidly lose value. Commercial banks were keeping a large percentage of their deposits in the stock market, and when its value dropped these banks lost a significant amount of customer deposits sending the United States Economy into a tailspin.
The Glass-Steagall Act of 1929 prevented commercial banks from participating in investment banking and insurance activities to prevent the risk of the banks from losing customer deposits. In plain English, from 1932 to 1999 when Glass-Steagall was in effect, banks either had to serve consumers by making loans and lending or serve institutions by trading stocks and bonds and providing capital. Banks could no longer do both.
In 1929, banking was unorganized and hectic. Glass-Steagall put a check on these banks to protect the everyday consumer. Some criticize Glass-Steagall saying it was an overreaction and that it prevents banks from growing and effectively competing against each other. The act was ultimately repealed in 1999 by President Bill Clinton because it no longer properly addressed the risks being taken in the financial services industry (mainly by speculative asset managers). Some believe that this repeal is what led to the financial crisis of 2008-2009.
Sarbanes-Oxley of 2002
The early 2000s started with three major accounting disclosure standards that rattled the confidence of investors in the United States- Enron, Worldcom and Tyco. As a response, President George W. Bush signed the Sarbanes-Oxley Act into law. This law set stricter standards for the public accounting industry including:
- Requirement of company management to sign off on the accuracy its annual filings
- Jail time punishment for executives who knowingly certify inaccurate reports
- Set up a Public Company Account Oversight Board to Oversee public accounting firms
- Require management to establish internal controls for its accounting standards and imposes expensive fines for public companies that fail to adhere to their internal controls
Sarbanes Oxley was signed into effect in order to hold public companies accountable for misleading and cheating their investors through financial statements. Some criticize the law stating that it has been ineffective and brought almost no real jail time to corporate executives.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
After the 2008-2009 financial crisis, many Americans blamed the nation’s largest financial institutions for the meltdown. Lehman Brothers went bankrupt, and several other institutions were either acquired or bailed out by the United States government. As in 1929, the banks’ balance sheets were too risky, and it was hurting the average American consumers. Dodd-Frank was signed in a response to this meltdown. Dodd-Frank has many complicated components, but its main objective was to prevent financial institutions from taking the same balance sheet risks that they did in the years leading up to the financial crisis. The following are major items in Dodd-Frank explained in detail:
- Volcker Rule
- Prevents investment banks from owning, investing in, or sponsoring hedge funds, private equity funds or other speculative proprietary trading units for their own profit
- Establishment of the Consumer Financial Protection Bureau
- One regulatory body that supervises financial institutions for the protection of consumers
- This body makes sure that banks aren’t taking too big of risk to hurt consumers or deceiving them
- Establishment of the Financial Stability Oversight Council
- In charge of monitoring trends affecting the financial industry
- In charge of monitoring banks’ levels of reserves (the amount of capital they must maintain at all times to prevent them from going bankrupt)
- Requires banks to have an easy to understand shut down plan if they go bankrupt
- Established a whistle blower provision that gives someone with information about a violation a financial reward
The United States is still realizing the implications of Dodd-Frank. Critics argue that the regulation is an overreaction (such as with Glass-Steagall) and that the act prevents banks from operating efficiently and slows growth for the entire economy. Proponents of financial reform say that the act does not regulate the banks enough. These people think that Wall Street is running out of control and that bank executives need to be held personally responsible for any wrongdoings committed by their institutions.
Donald Trump’s Proposed Plan for Wall Street
With Donald Trump set as the 45th president of the United States. It is important to understand where he stands on key financial reform issues. We hope to give you an overview of these opinions, but remember it’s politics and people change their minds all the time.
Dodd-Frank– Donald Trump strongly opposes Dodd-Frank stating, “We have to get rid of Dodd-Frank. The banks aren’t loaning money to people that need it… The regulators are running the banks.” Donald Trump aims to cut regulations in the financial services industry in order to spur economic growth in the United States. He believes that the banks cannot operate effectively when so many regulations are imposed.
Bailing Out the Big Banks– The bailout of banks in 2008-2009 was widely criticized at the time it was brought into effect. Donald Trump believes that a bail out is at least worth a shot. He believes that the banks are integral part of the American company that must keep stay running for America to function effectively.
Donald Trump’s main financial reform will be getting rid of Dodd-Frank altogether. This has been on the republican agenda since the bill was signed into effect in 2010, and the party should have no problem doing it with control of the house, senate, and white house. People on both sides of the issue are still arguing the long term implications of Dodd-Frank, but in the near-term, the repeal of Dodd-Frank is a positive for any job seeker looking to get into the financial services industry. Less regulation means that the banks will have more capital to put to work and therefore should be poised to grow at a steady pace over the next few years.