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February 1, 2018

Deregulation Unleashes Wall Street to Prey on Investors, Consumers and All Hard-Working Americans

Presented at the Global Shareholder Activism Conference
November 30-December 1, 2017

Dennis M. Kelleher
President and CEO
Better Markets, Inc.[1]


As proved by the financial crash of 2008, the consequences of deregulation are catastrophic for investors, consumers, the financial system, the economy and all Americans.  That crash caused the worst economy since the Great Depression of the 1930s, costing the US more than $20 trillion in lost GDP,[2] to say nothing of the horrific political, social and human costs, many of which continue to this day.

The 2008 crash followed decades of bipartisan deregulation[3] and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)[4] was an attempt to re-regulate the financial system, re-installing the basic and minimal safeguards that had been removed. The law had several goals.  First, to eliminate or reduce the systemic threat from the handful of gigantic too-big-too-fail financial firms that pose a unique threat to the country.  Second, to refocus and rebalance the financial system away from the highest risk, most socially unproductive activities and back to supporting the real economy that produces jobs, growth, prosperity and rising standards of living.  Third, to protect investors and consumers, both because they shouldn’t be ripped off and because bubbles and crashes often begin with predatory activities that build into systemic threats over time. 

The law was not perfect.  No law is, but it was the best law that our political system could produce at the time.  Frankly, considering the ferocious opposition from the richest and most politically connected industry in the country — finance in general and Wall Street’s biggest firms in particular — it is amazing that any law at all was enacted. 

Passing the law, however, was just the beginning because it required hundreds of rules, each of which had to be proposed, finalized, implemented, interpreted and enforced by more than seven separate and independent financial regulatory agencies and departments.[5]  Predictably, as soon as the law was passed, the industry moved from attacking the legislation to attacking the rulemaking (and the regulators[6]), often just re-litigating the same arguments that they offered and lost during the legislative phase.  It has been trench warfare at all the agencies ever since; the industry has spared no expense, throwing everything they have at killing or weakening virtually every rule proposed. [7]  Simultaneously, through lobbying, campaign contributions and the revolving door, the industry has used its allies in Congress to attack and underfund[8] the financial regulatory agencies while trying to kill[9] and weaken the law itself.[10]  As is well known, the industry has become significantly emboldened with its new, powerful, albeit unexpected,[11] ally in President Trump.

Nevertheless, as detailed in the academic study “After Dodd-Frank: The Post-Enactment Politics of Financial Reform in the United States,” Better Markets and, on occasion, others were an effective counterweight to this industry onslaught in the rulemaking and litigation that followed enactment of the Dodd-Frank Act: “In particular, small advocacy groups have proven significantly more successful in opposing the financial-services industry than existing theories predict.”[12]

Moreover, the evidence is overwhelming that financial reform is working,[13] that finance is more stable, that the risk of a crash or economic catastrophe is greatly reduced, that banks are highly profitable and increasing their lending, that the economy is steadily growing, and that investor confidence has been restored, as evidence by increased investor participation in the capital markets.[14]  While more still needs to be done, the three primary goals of Dodd-Frank have been largely achieved thus far. 

First, the most dangerous and unreasonable risks in the financial system have been greatly reduced and a financial crash is much less likely due to Dodd-Frank rules which:

  • increase capital and liquidity,
  • regulate derivatives,
  • require living wills and stress tests,
  • reduce counterparty exposure,
  • protect financial consumers,
  • police predatory conduct, and
  • prohibit proprietary trading, among other reforms.[15]

Second, to again serve their social purpose, justify their social costs and deserve their taxpayer backing, the rules have rebalanced and refocused the biggest, most dangerous banks to traditional banking activities and away from trading, which is little more than socially useless gambling designed to enrich a few thousand financiers and executives.[16]  Record bank revenues and profits as well as increased lending to the real economy prove that this goal too is being accomplished.[17]

               Third, investor and consumer protections were strengthened and prioritized by many provisions of the law, rules and, most importantly, the creation of the Consumer Financial Protection Bureau (CFPB).  For example, the Securities and Exchange Commission (SEC) was required to create the Office of the Investor Advocate, protect and reward whistleblowers through the Office of the Whistleblower, and significantly empower and enfranchise investors through better access to proxies, executive compensation changes, and other corporate governance reforms.  The law also mandated that the Commodity Futures Trading Commission (CFTC) bring transparency, a level playing field and competition to the derivatives markets.  Most notably, the CFPB has become in a very brief time one of the most successful consumer protection agencies in the history of the country.  In just the few years since it was created and stood up, it has returned almost $12 billion to more than 27 million ripped off Americans.[18]

Nevertheless, since the election of President Trump, the law and rules of financial protection and reform are being eroded every day and are under constant threat of being destroyed altogether.  

Too many focus only on the legislative branch and think that the only or primary way to kill or gut financial reform is to repeal or significantly change Dodd-Frank.  Notwithstanding recent reports of a bipartisan agreement among some members of the Senate Banking Committee to weaken certain Dodd-Frank provisions,[19] changing the law is not the primary way or the easiest way to quickly and effectively deregulate the financial industry.[20]  Installing industry friendly nominees and appointees at the financial regulatory agencies is the most effective way and much quicker than trying to change the law.[21]

President Trump has been doing this virtually from day one and the change over from President Obama’s appointees to President Trump’s appointees is almost complete, with just the FDIC and CFPB[22] still lead by holdovers.[23]   The Treasury department, SEC, CFTC and Office of Comptroller of the Currency (OCC) are all lead by Trump appointees.  This also means that Trump appointees have a working majority – if not supermajority — on the Financial Stability Oversight Council (FSOC).[24]

The implications and negative consequences of this for investors, consumers, financial stability, our economy and all Americans cannot be overstated.  First, rulemaking has stopped virtually entirely at the financial regulatory agencies.  Second, prior rules are under scrutiny for review, revocation or modification.  Third, the implementation and interpretation of existing rules are likely to change dramatically.  Fourth, enforcement will, at best, be refocused while no doubt decreasing overall.

The three reports from the Treasury Department in response to the President’s executive orders to review financial protection rules all point in one direction:  deregulation in all areas at all times, viewing it as an unqualified good regardless of the reason.[25]  We have seen this already at FSOC, which de-designated AIG as a systemically significant nonbank[26] and has signaled that that it is going to de-designate MetLife.[27]  Given that GE was de-designated by the Obama administration in 2016 because it de-risked,[28] that leaves only Prudential Insurance Company as a designated systemically significant nonbank.  It is expected that Prudential too will be de-designated by Trump’s FSOC.[29]  The result will be that not one non-bank will be deemed systemically significant less than ten years after the 2008 crash, when the world witnessed the devastating costs of unregulated systemically significant non-banks.

The ominous implication is that FSOC is simply not going to regulate the shadow banking system, which is what systemically significant non-banks are and which is where the 2008 crash was spawned and silently spread throughout the global financial system.[30]  Making matters worse, this will recreate the two-tiered regulatory system that incentivized regulatory arbitrage before the 2008 crash and resulted in the less-regulated or unregulated shadow banking system ballooning in size relative to the much more highly regulated banking system. 

As if that weren’t bad enough, the regulated banking system is also going to be deregulated.  For example, the recent bipartisan agreement among Senate Banking Committee members is going to significantly reduce the regulation of banks[31] and the new Fed Vice Chairman for Supervision has said he is going to significantly reduce what he sees as the regulatory burden on banks.[32]

The halt in rulemakings is also troubling.  For example, the SEC has “slashed” its rulemaking agenda.[33]  While there are still 33 rules on the agenda in the proposed or final stages, there are still too many vital rules that haven’t been proposed or finalized.  For example, there is still no rule requiring the claw-back of incentive-based compensation from misconduct or prohibitions on executives being compensated when they decide to take egregious risks that hurt consumers, investors and destabilize financial markets.  Directors can still protect themselves from stock losses by hedging their own holdings of company shares, leaving ordinary investors holding the bag.  There are still no effective rules regarding credit rating agencies and there is still no fiduciary duty rule protecting investors.[34]  Many of these rules were mandated by Congress, seemingly leaving no discretion to the SEC, but none are even on the SEC’s agenda.[35] 

The review and possible revocation of rules is also proceeding apace.  The most aggressive actions have been by the Department of Labor, which has been working nonstop to kill the fiduciary duty, or “clients’ best interests,” rule for retirement investors.  That’s the bad news.  The good news is that they have been stymied at every turn because modifying or killing a rule must undergo the same rigorous process for adopting a rule under the Administrative Procedures Act (APA).  This was a revelation for the DOL, as Trump’s Secretary of Labor had to admit in a Wall Street Journal Op-Ed.[36]  However, they are now purporting to follow the APA to kill the rule, but Better Markets and its allies continue to fight them.[37] 

Regarding enforcement, we have already seen dramatic drops at the SEC and CFTC – both of which are the primary cops on the Wall Street beat, charged by Congress and relied on by Americans to protect investors and markets.[38]  No doubt some of this is due to the transition to a new administration and the prior administration closing out cases before leaving.  However, the signs are troubling, including the statements of Trump’s appointees that suggest rulemaking, regulation and enforcement are not going to be priorities.[39]

Of course, the current fight over the leadership, direction and effectiveness of the CFPB is just the beginning of the battle over consumer protection.  This agency is vital for the protection of investors and consumers as well as for financial stability.  While everyone understands the imperative to protect consumers and punish lawbreakers, few understand that predatory conduct is often the springboard for financial instability and crashes.  This is what happened in the years before the 2008 financial crash.  Financial predators ripped off unsuspecting and unprotected mortgage consumers who were victims of egregious fraud.  Federal regulators did nothing and they stopped state regulators from enforcing their state consumer protection laws.  A result was rampant predatory lending, the collapse of underwriting standards, and the creation, packaging, sale and distribution of fraudulent derivatives and structured products, all of which inflated the subprime bubble that crashed the financial system.  The risk of that happening again (albeit in a new and different form) is virtually assured as the Trump administration on behalf of the financial industry is almost certainly going to cripple the CFPB.

The bottom line:  Trump’s deregulation is going to snatch financial reform defeat from the jaws of victory, placing the country at grave risk of another catastrophic financial crash and all the misery that will result from that.  It is as if the Trump administration thinks we can return to the deregulatory and non-regulatory philosophy that prevailed in the early-to-mid 2000s, but avoid another crash like 2008.  This is as irresponsible as someone suggesting that the U.S. should take down half the protections put up around New Orleans after Hurricane Katrina in 2005 because ten years have passed and there hasn’t been another devastating hurricane.  If anyone had the audacity to make such a suggestion, everyone would correctly laugh at the idiocy of that notion.  Yet, the equivalent of that in financial regulation is the prevailing ideology in the Trump White House, the administration more broadly and much of Washington.  The victims, again, will be America’s investors, consumers, workers, families and communities.

[1]      Better Markets is a Washington, DC based non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street, and make our financial system work for all Americans again, especially consumers, investors and the real economy. Better Markets works with allies—including many in finance—to promote pro-market, pro-business, and pro-growth policies that help build a stronger, safer financial system, one that protects and promotes Americans’ jobs, savings, retirements, and more. See and Better Markets latest Annual Report, available at

[2]      Better Markets, The Cost of the Crisis $20 Trillion and Counting, (July 20, 2015), available at

[3]      For a brief discussion of the causes of the crash, see Dennis Kelleher, “Dodd Frank and Deregulation: Some Lessons from History, Law360, available at; for an extended discussion, see the Report of the Financial Crisis Inquiry Commission, available at, and view their other materials available at

[4]      The Dodd-Frank Act was codified largely in Titles 7 (on derivatives), 12 (on banking), and 15 (on securities) of the U.S. Code.

[5]      Better Markets’ latest Annual Report discusses this policymaking cycle and the “arc of advocacy” Better Markets engages in throughout that cycle.  See Better Markets Annual Report, pgs. 14-15, available at

[6]      Less than a year after Dodd-Frank was passed, Jamie Dimon, the CEO of JP Morgan Chase, led the public attacks, including on the Chairman of the Federal Reserve Board who was one of the key architects of bailing out the financial industry in 2007-2009.  See, e.g., “JP Morgan CEO publically attacks Fed Chairman on regulatory reform,” Lexology, June 10, 2011, available at, and on the Chairman of the Bank of Canada (now Chairman of the Bank of England and the Financial Stability Board), Bloomberg, September 26, 2011, available at

[7]      Better Markets, often the only non-industry participant in the rulemakings, knows this well from first-hand experience:  it has participated in more than 225 Dodd-Frank rulemakings.  See Annual Report, supra n. 5.

[8]      The most egregious and obvious example of this is the chronic gross underfunding of the Commodities Futures Trading Commission (CFTC), which has responsibility for regulating the $400 trillion or so derivatives markets and has been flat funded for four fiscal years with a budget of just $250 million.

[9]      See, e.g., CHOICE Act, H.R. 10 (2017).

[10]     The repeal of the Dodd-Frank Lincoln Amendment, the so-called “swaps push out,” is the best example of this.  See Jonathan Weisman, “A Window Into Washington in an Effort to Undo a Dodd Frank Rule,” The New York Times, available at and a discussion on the PBS Newshour between Dennis Kelleher and Mark Calabria available at

[11]     Although obscured by what he has said and done since assuming office – and by who he has appointed to the highest levels of government — candidate Trump was the most anti-Wall Street candidate since FDR in the 1930s.  Based on his actions in office, President Trump apparently never met candidate Trump.

[12]     Discussed in Better Markets’ Annual Report, supra n. 5 at pps. 89-92.

[13]     See id. at pps. 86-89.

[14]     See a recent survey by Center for Audit Quality outlining greater participation and confidence of U.S. retail investors.  “THE CAQ’S 10TH ANNUAL Main Street Investor Survey,” available at

[15]     See also Dennis Kelleher, “Financial Reform is Working,” HuffPost, March 7, 2016, available at

[16]     This is proved by the dramatic drop in in high-margin, but high-risk (and mostly socially useless if not counterproductive) FICC (fixed income, currencies and commodities) revenue and profits (usually referred to in summary as the “trading” business of the biggest firms).  See, e.g., Alex Morrell, “Wall Street has had a dismal year – and the latest business-to-business report card confirms it,” Business Insider, November 20, 2017, (“The culprit for the down year hasn’t changed in recent months: trading teams have been hammered, especially on the FICC side of the business.”), available at; Trefis Team, “FICC Trading Revenues at Five Largest U.S. Banks Tank in Q3 Due to Low Volatility,” Forbes, November 9, 2017 (“The global FICC trading industry has seen secular changes since the economic downturn, as stricter regulations have had a fundamental impact on the level of activity in the industry.”), available at; and, Kate Kelly, “Inside the Race for the Top Job on Wall Street,” the New York Times, November 26, 2017 (“…new regulations are clipping profits….Goldman’s trading unit, long the engine of its profits, has struggled to adapt to the post-crisis world.”), available at

[17]     See, e.g., Dennis Kelleher, “Financial Reform is Working, but Deregulation that Incentivizes One-Way Bets is Sowing the Seeds of Another Catastrophic Crash” section on “The Claimed Basis for Deregulation is Contradicted by Data and Is Based on the False Choice Between Financial Protection Rules and Economic Growth,” 2017 Institute for New Economic Thinking (INET) Conference, October 16, 2017, Edinburgh, Scotland, forthcoming in The George Washington Business & Finance Law Review, currently available at also, FDIC reports of quarterly and annual bank results, available at, including in particular the FDIC Chairman’s accompanying statements, most recent available at

[18]     See, Gregory D. Squires, “The Consumer Financial Protection Bureau: Past, Present and Future,” HuffPost, February 27, 2017, available at

[19]     Andrew Ackerman et al., “Senators Support Rollback of Bank Oversight,” the Wall Street Journal, November 13, 2017, available at

[20]     The exception here is the Congressional Review Act (CRA) which gives Congress the ability to overturn an agency rule under certain limited circumstances.  The CRA had been used only once prior to the election of President Trump, but has been used more than fifteen times since then.  Most recently, Congress used the CRA to invalidate the CFPB’s rule banning forced arbitration clauses that prohibit consumers from participating in class actions. See Susan Dudley, “We Haven’t See The Last of the CRA Yet,” Forbes, October 31, 207, available at

[21]     See, e.g., Jesse Hamilton, “How Trump Can Give Wall Street What it Wants,” Bloomberg, November 16, 2017, available at, Ben Protess, et al., “Under Trump, Banking Watchdog Trades Its Bite for a Tamer Stance,” the New York Times, November 15, 2017, available at, and Ryan Tracy and Christina Rexrode, “Trump Administration to Banker: You’re Not the Villain Anymore,” the Wall Street Journal, November 12, 2017, available at

[22]     While Obama’s nominee to the CFPB, Richard Cordray, has stepped down, he appointed a Deputy Director who, under the law, serves as acting Director until a Presidential nominee is confirmed by the Senate.  However, the President ignored the express language of the statue and legislative history (see Adam Levitin, “CFPB Directorship Succession: What the Dodd-Frank Act’s Legislative History Tells Us,” Credit Slips, November 20, 2017, available at and appointed someone else to be the Director of the CFPB.  This will no doubt lead to litigation.  See Tara Siegel Bernard, “Dueling Appointments Lead to Clash at Consumer Protection Bureau,” the New York Times, November 24, 2017, available at

[23]     The Federal Reserve Board is still lead by Obama appointee Janet Yellen, but Trump’s nominee Randy Quarles was recently sworn in as a Governor and as Vice Chair for Supervision with responsibility for the regulatory reform portfolio which was previously handled by Governor Dan Tarullo.  Peter Conti-Brown, “Does the New Fed Governor Serve at the Pleasure of the President?”, Yale Journal on Regulation, October 17, 2017, available at Moreover, Governor Jay Powell has been nominated by President Trump to replace Yellen and his nomination hearing before the Senate Banking Committee is scheduled for November 28th, with his confirmation all but assured shortly thereafter, which is when Chair Yellen will resign.  See, e.g., Ana Swanson and Binyamin Appelbaum, “Trump Announces Jerome Powell as New Fed Chairman,” the New York Times, November 2, 2017, available at, and Victoria Guida, “Yellen, denied second term as Fed chair, announces resignation,” Politico, November 20, 2017, available at

[24]     The FSOC’s voting members are: the Treasury Secretary; the Chair of the Federal Reserve Board of Governors (Fed); the Comptroller of the Currency; the Director of the Consumer Financial Protection Bureau; the Chair of the Securities and Exchange Commission (SEC); the Chair of the Federal Deposit Insurance Corporation (FDIC); the Chair of the Commodity Futures Trading Commission (CFTC); the Director of the Federal Housing Finance Agency; the Chair of the National Credit Union Administration Board; and an insurance expert appointed by the President and confirmed by the Senate. FSOC’s non-voting members include the Director of the Office of Financial Research; the Director of the Federal Insurance Office; a state insurance commissioner selected by the various state insurance commissioners; a state banking supervisor selected by the various state banking supervisors; and a state securities commissioner selected by the various state securities commissioners.  See Better Markets Fact Sheet “The Financial Stability Oversight Council: Saving Taxpayers from the Next AIG and the Next Crisis” (Nov. 2015)–%2011-2-2015.pdf.

[25]     “A Financial System That Creates Economic Opportunities: Banks and Credit Unions”, U.S. Department of the Treasury, June 2017, available at; “A Financial System That Creates Economic Opportunities: Capital Markets”, U.S. Department of the Treasury, October 2017, available at; and, “Financial Stability Oversight Council Designations,” U.S. Department of the Treasury, November 17, 2017, available at

[26]     See supra n. 17, section on “Gutting the FSOC and the Dangerous Deregulation of AIG: Incentivizing a Bailout Culture and Cycle.”

[27]     Lisa Lambert, “U.S. Court Puts MetLife ‘Too Big to Fail’ Case on Indefinite Pause,” Reuters, August 2, 2017, available at

[28]     Ted Mann and Ryan Tracy, “GE Capital Sheds ‘Systemically Important’ Label,” the Wall Street Journal, June 29, 2016, available at

[29]     Jesse Hamilton, “Prudential Is Plotting Its Escape from Fed’s Tough Oversight,” Bloomberg, August 17, 2017, available at

[30]     Testimony of Dennis Kelleher before the United States Senate Committee on Banking  Housing, and Urban Affairs “FSOC Accountability: Nonbank Designations” (Mar. 25, 2015)

[31]     Michelle Price and Pete Schroeder, “Senate reaches deal to cut the number of systemically important banks,” Reuters, November 13, 2017, available at

[32]     Ben McLannahan, “Randal Quarles seeks more collaboration as Fed regulatory chief,” the Financial Times, November 7, 2017 (addressing “one of the most powerful lobbying groups for the banks,” Quarles expressly stated he’d be addressing and almost certainly changing the “bullet points on the wish list of the big” banks’ lobby groups), available at and Jesse Hamilton, “Fed’s Quarles Makes a Friendly First Impression on Wall Street,” Bloomberg, November 7, 2017, available at

[33]     Andrew Ramonas, “SEC Under Trump Slashes Rulemaking Agenda,” BNA, July 20, 2017, available at and Carmen Germaine, “SEC Cuts Dodd Frank Mandates From Rule-Making Agenda,” Law360, July 21, 2017, available at also, Gabriel Rubin, “CFTC Chairman Readies Swaps Rules Revamp,” the Wall Street Journal, August 11, 2017 available at and Gabriel Rubin, “CFTC Chief Works to Tweak, Not Decimate, Obama-era Rule,” the Wall Street Journal, November 25, 2017, available at

[34]     While it appears to be a move to help kill the DOL fiduciary duty rule rather than a genuine effort to protect investors, the SEC has recently indicated that it is going to begin a rulemaking related to a fiduciary duty rule for investors. Mark Schoeff, “Jay Clayton tells lawmakers SEC is drafting its own fiduciary duty rule,” Pensions & Investments, October 4, 2017, available at

[35]     It is a fair point to ask how this many key rules (at the SEC and elsewhere) could be left un-proposed and/or unfinalized at the end of 2016, six years after the Dodd-Frank Act was passed and when a Democratic President’s appointees were in control of all the financial regulatory agencies.

[36]     Alexander Acosta, “Deregulators Must Follow the Law, So Regulators Will Too,” the Wall Street Journal, May 22, 2017, available at

[37]     Tracey Longo, “Is DOL Using A Back Door to Kill the Fiduciary Duty Rule?,” Financial Advisor, November 3, 2017, available at

[38]     See, e.g., Renae Merle, “Wall Street’s Watchdog is Pursuing Fewer Cases Since Trump Took Office,” the Washington Post, November 23, 2017, available at and Gabriel Rubin, “CFTC Reports Steep Drop in Enforcement Actions and Fines,” the Wall Street Journal, November 22, 2017, available at

[39]     See, e.g., Dave Michaels, “SEC Signals Pullback From Prosecutorial Approach to Enforcement,” the Wall Street Journal, October 26, 2017, available at and Ryan Tracy and Christina Rexrode, “Trump Administration to Bankers: You’re Not the Villain Anymore,” the Wall Street Journal, November 12, 2017, available at



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