Back in 2017, when Congress and the Trump administration were pushing a bill to weaken hard-fought banking regulations, we warned that they were playing with fire. Barely a decade had passed since the 2007-08 economic meltdown. Blatant abuses in the financial industry had more than merited the tough banking regulations that followed. Yet, Congress and the Trump administration wanted to weaken regulations to placate the banking lobby.
To recap how the meltdown happened: Reckless risk-taking by mortgage lenders had brought major financial institutions to the brink of collapse. The stock market tanked. Millions of Americans lost their homes, their jobs, their retirement accounts, or all three. Banks hated the tighter regulations imposed by the 2010 Dodd-Frank banking reform act and unleashed their most powerful forces — gobs and gobs of money — to lobby for a rollback.
Money talked. With billionaire Treasury Secretary Steven Mnuchin leading the charge on behalf of oppressed billionaire bankers, Congress agreed to dramatically loosen regulation thresholds so that smaller banks — those with less than $250 billion in assets — could take bigger risks again. Billionaire President Donald Trump signed the bill. Billionaire bankers cheered. Also swept up in the fervor was former Rep. Barney Frank, D-Mass., who found reason to push for reversal of his own banking restrictions. Why? Perhaps because he now held a lucrative board position at one of those smaller institutions: Signature Bank.
Last weekend, Signature Bank and Silicon Valley Bank became two of the three largest bank failures in U.S. history. Fears of a broader banking failure have sent U.S. stock markets plummeting again, while the Federal Reserve is scrambling to head off a depositor panic. Tech firms whose Silicon Valley Bank deposits exceeded the federal insurance coverage limits worried that they wouldn’t be able to make payroll unless the government stepped in.
The two banks failed for different reasons, but both were rooted in the 2018 legislation that had allowed them to escape the federal stress-test regulations that had previously applied to them. They had placed too many of their assets in liquidity-risky holdings that tighter federal regulation would likely have caught. Silicon Valley had placed more than half of its assets in low-yield, low-liquidity U.S. Treasury bonds, and Signature Bank had put far too much reliance on cryptocurrency transactions.
The relaxed regulations provided Wagner and other Republicans with a short-term political victory that oddly played well with Trump’s base of working-class non-billionaires. Frank reportedly walked away with $2.4 million in compensation from Signature. But Americans this week once again are watching their 401(k)’s sink in value while wondering: Is this 2007 all over again?
