Why Killing Dodd-Frank Could Lead to the Next Crash

In the age of Trump, bipartisanship is considered a sin. So one would think that when Republicans and Democrats do pass a law together, it'd be for something so popular, it couldn't be questioned politically: a nonbinding resolution on the cuteness of puppies, maybe, or a national ice cream giveaway.

Nope. The rare bipartisan bill turned out to be a rollback of the Dodd-Frank financial-reform act. More than 80 percent of Democrats and two-thirds of Republicans want tougher rules on banks. Yet this was our Trump-era kumbaya moment: a bank deregulation bill!

Ostensibly passed to address the causes of the 2008 crash, the Dodd-Frank Act has instead spent more than half a decade now as a hostage to a payola Congress, with both parties taking turns cutting it down and delaying its implementation. The latest indignity is S.2155, a.k.a. the "Economic Growth, Regulatory Relief, and Consumer Protection Act." Supposedly designed to help some banks by reducing capital requirements and ending regular "stress tests," the act is really more like helping ships steam faster by allowing them to ditch their lifeboats.

But the bill isn't just unnecessary - the banking sector smashed records with $56 billion in profits in this year's first quarter - it's also a Wall Street handout disguised as an aid to "Main Street" banks.

Ohio Sen. Sherrod Brown, a longtime critic of the "Too Big to Fail" banking system, opposed the bill. He pointed out upon passage that in one section of the act, "the change of just one word . . . forces the Fed to weaken the rules even for the largest banks."

The microchange Brown refers to is a masterstroke of deregulatory trickery, one that should go in the Hall of Fame of legislative chicanery. The original Dodd-Frank Act said the Federal Reserve may consider weakening safety rules for a particular bank. The single word change of "may" to "shall" would mandate the Fed to consider every request for special treatment. If Bloodsucking Bank A thinks it deserves relaxed regulation, it could sue the Fed to consider its request.

Because the rules weakened under this section cover almost all the restrictions in Dodd-Frank, this "may-to-shall" trick could be the mother of all loopholes. "It's potentially the most damaging thing in the bill," is how one Senate aide put it.

But why did this bill even pass? Only 50 Republicans backed the rollback, meaning even a few members of a dependably craven Republican caucus hesitated to pull the trigger. That means they needed one Democratic vote to pass this foul thing. They got 17. Why? What made this bill the weak link in the battle line against Trump's agenda?

The 2008 crash was caused when financial companies, high on greed and the temptations of an irrationally exuberant economy, borrowed beyond their means. Leveraging themselves to the hilt, banks bet your kids' future on a losing roulette spin known as the subprime-mortgage market. Post-crash, the obvious reform was to make sure banks would have enough assets on hand that they wouldn't need bailouts the next time they ruined themselves at the tables.

Dodd-Frank told them they had to either borrow less ("reduce leverage") or have a bigger stack in reserve ("raise capital requirements"). They had to pass regular "stress tests," create contingency plans in case of collapse, and, through the so-called Volcker Rule, keep their depository and investment banking operations separate.

In recent years, however, lobbyists began to complain that the restrictions were hurting small regional banks. Currently, the rules apply to any bank with more than $50 billion in assets. The new bill raises that to $100 billion immediately, then, potentially, to $250 billion. If the carve-out goes to $250 billion in assets, roughly 99 percent of banks will be exempted from the Dodd-Frank safety provisions. So, yes, it helps out your local bank. And basically all the other banks too.

Still, Republicans and Democrats alike successfully pitched the bill as helping small business - what Elizabeth Warren described as using community banks as a "human shield."

It's a huge victory for Trump - eliminating Dodd-Frank was such an urgent need for His Orangeness that an executive order mandating the act's deconstruction was one of his first policy moves. Like his White House hirings of so many Goldman Sachs vets after loudly campaigning against the bank, Trump showed his true colors when he made killing Wall Street's most hated law a high priority.

Then again, the Democrats showed their colors when they gave him the win. Nobody will say so, but everyone on the Hill knows why this bill passed. According to the Center for Responsive Politics, three of the bill's Democratic co-sponsors, North Dakota's Heidi Heitkamp, Indiana's Joe Donnelly and Montana's Jon Tester, are three of the Senate's biggest recipients of financial-services donations. Quelle surprise!

This would be merely politically disgusting, were it not for the consequences in an overheated economy. Remember how tossing the Glass-Steagall Act during the Internet boom worked out? We should be increasing safety standards, not eliminating them. "With debt levels higher than before the last crash, a stock market bubble and wage stagnation," says Dennis Kelleher, head of the watchdog group Better Markets, "now is the worst time to deregulate the financial industry."

We've been here before - in an economy that feels shakier than suspiciously swollen stock market numbers would indicate. Either Trump is an economic genius, or we're in for a correction soon. Who feels like taking off the life jacket?