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Dodd-Frank, Donald Trump and Goldman Sachs: you’ve been suckered

The big headline on Friday was Donald Trump has signed an Executive Order to review the Dodd-Frank regulations.  He also changed rules relating to brokers, so that they can seek maximised profits rather than being forced to behave in the client’s best interests, as ordered under the Obama Administration.

MSN reports:

Taken together, the president’s actions constitute a broad effort to loosen regulations on banks and other major financial companies, put into motion by a president who campaigned as a champion of working Americans and a critic of Wall Street elites. On Friday, Mr. Trump said his actions were intended to help both Wall Street and workers as his administration eases constraints on banks and enables them to lend to companies, which could then hire more workers.

“We expect to be cutting a lot out of Dodd-Frank because frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money,” Mr. Trump said in the State Dining Room during his meeting with business leaders. “They just can’t get any money because the banks just won’t let them borrow it because of the rules and regulations in Dodd-Frank” …

The actions are the latest sign that Mr. Trump, despite striking a populist tone during the campaign, is working to accommodate Wall Street and other corporations.

“The administration apparently plans to turn over financial regulation to Wall Street titan Goldman Sachs, and make it easier for them and other big banks like Wells Fargo to steal from their customers and destabilize the economy,” said Lisa Donner, executive director of Americans for Financial Reform, an advocacy group that supports Dodd-Frank. “That betrays the promises Trump made to stand up to Wall Street, and it will have dire consequences if he’s successful.”

Interesting.

Just before Christmas, I said that Trump would be sympathetic to Wall Street on Brett King’s Breaking Banks, as he’s surrounded by Goldman Sachs bankers, and this is the first step to show that this is the case.  As Nomi Prins blogs at billmoyers.com:

No less than six Trump administration appointments already hail from that single banking outfit. Of those, two will impact your life strikingly: former Goldman partner and soon-to-be Treasury Secretary Steven Mnuchin and incoming top economic adviser and National Economic Council Chair Gary Cohn, former president and “number two” at Goldman.

So the USA is now run by bankers, as it has been for most of its history.  After all, JP Morgan and co were the financiers of the American Dream.  But how come Donald Trump is surrounding himself with Goldman Sachs people?  After all, this is the candidate who campaigned against Hillary Clinton for being in Blankfein’s pocket (check 1m10s into this campaign video):

Wall Street on Parade has an interesting take on this:

Trump’s non-stop nominations and appointments of Goldman Sachs alumni have left his supporters stunned. Trump nominated Steven Mnuchin, a 17-year veteran of Goldman Sachs to be his Treasury Secretary. Stephen Bannon, another former Goldman Sachs banker, was named by Trump as his Chief Strategist in the White House. The sitting President of Goldman Sachs, Gary Cohn, has been named by Trump as Director of the National Economic Council, which, according to its website, coordinates “policy-making for domestic and international economic issues.”  Last week, in a move that stunned even Wall Street, Trump nominated a Goldman Sachs outside lawyer, Jay Clayton of Sullivan & Cromwell, to serve as Wall Street’s top cop as Chairman of the Securities and Exchange Commission. Adding to the slap in the face to Trump’s working class supporters, Clayton’s wife currently works as a Vice President at Goldman Sachs.

But the Goldman Sachs’ ties don’t stop there. 

When Alexander Blankfein, the oldest son of Goldman Sachs’ CEO Lloyd Blankfein was married in 2013, Joshua Kushner attended the wedding. Joshua had been Alexander’s roommate at Harvard according to the New York Times. Joshua is the brother-in-law to a woman who will play a major role in the Trump administration – Ivanka Trump, daughter of the President-elect and wife of Joshua’s brother, Jared.

According to Politico, Goldman Sachs partner, Dina Powell, President of the Goldman Sachs Foundation, is Ivanka’s “top adviser on policy and staffing.”

Then there is Erin Walsh who had worked at Goldman Sachs since 2010 as an Executive Director and head of its Office of Corporate Engagement for Asia Pacific. Walsh also previously worked in the Bureau of Near Eastern Affairs at the U.S. Department of State. Walsh is now part of Trump’s transition landing team for the State Department and is engaged in prepping the just retired CEO of ExxonMobil, Rex Tillerson, for his Senate confirmation hearing this week to become the Secretary of the Department of State, according to Politico.

A recent Executive Director of Goldman Sachs preparing the recent titular head of Big Oil to pass muster to run the State Department is the Orwellian version of draining the swamp — and Trump’s pre-election campaign language is proving to have been very Orwellian, as in reverse-speak.

And there is yet another former Goldman Sachs banker, Anthony Scaramucci, who sits on Trump’s transition team.

Since 2010, according to Federal Election Commission records, Gary Cohn, the President of Goldman Sachs and Trump’s designee as Director of the National Economic Council, has given $148,800 to political candidates running for Federal office. No contributions were made to Donald Trump. Despite that, Cohn will sit atop a powerful body and have the President’s ear on both domestic and international economic issues. According to multiple media reports, Jared Kushner, Trump’s son-in-law, is a close friend of Cohn’s and set up the first meeting with Trump.

During the primary campaign, when it emerged that Trump’s opponent Ted Cruz had received a loan from Goldman Sachs, Trump said that Cruz was “owned” by Goldman Sachs. Now the Dow Jones company, MarketWatch, has reported that Trump’s debt is held by more than 150 Wall Street firms. The New York Times has reported that Goldman Sachs Mortgage Company holds a loan on an office tower at 1290 Avenue of the Americas, a building that is 30 percent owned by Donald Trump.

In a separate piece, Wall Street on Parade investigates Goldman Sachs’ stake in derivatives and why they would fear Dodd-Frank:

Dodd-Frank legislation mandated that derivatives at the big Wall Street banks move into the sunshine by moving out of over-the-counter contracts whose details are known only to the buyer and seller and onto some type of centrally cleared platform. Dodd-Frank was signed into law on July 21, 2010. It’s almost six years later and yet the OCC’s report of September 30, 2016 shows that of the total derivatives held by Goldman Sachs only 24 percent are centrally cleared versus 76 percent at Goldman that remain over-the-counter. Again, that’s a far higher percentage of over-the-counter contracts than at its peer banks on Wall Street.

OK, so Goldman Sachs aren’t keen on central clearing, but hey, that’s no reason to destroy Dodd-Frank is it?

Goldman Sachs has a unique vested interest in repealing chunks of Dodd-Frank while making sure that the Glass-Steagall Act is not reinstated. That’s because when it comes to derivatives, Goldman Sachs is keeping a lot of secrets.

The Office of the Comptroller of the Currency (OCC) is the regulator of national banks. Each quarter it publishes a report on the derivative holdings of the biggest Wall Street banks and their holding companies. Its most recent report shows that as of September 30, 2016 Goldman Sachs Bank USA (a taxpayer-backstopped, FDIC insured bank where it holds its derivatives) had “credit exposure to risk-based capital” of 433 percent. That figure was more than double that of JPMorgan Chase (216 percent) and six times that of Bank of America (68 percent).

There’s another big problem with Goldman Sachs: it has a miniscule asset base compared to the big guns on Wall Street but it’s attempting to play in the big leagues in terms of derivatives.

goldman-derivatives

As the chart shows, Goldman Sachs is the third largest holder of derivatives on Wall Street with $45.48 trillion in notionals (face amount). (As of 2015, the entire GDP of the United States was only $18 trillion.) But Goldman only has $880 billion in assets. That ratio compares to JPMorgan Chase with $2.5 trillion in assets and $50.6 trillion in derivatives and Citigroup with $1.8 trillion in assets and $51.78 trillion in derivatives.

The amount of these derivatives is insane on all levels but, clearly, Goldman stands out starkly in its ratios.

Ah well.  Donald Trump, the candidate campaigning for the common American, shows his true colours: he’s owned by Wall Street (and possibly the Russians too).

Meantime, what’s the reality of repealing major sections of Dodd-Frank?  As Joshua M Brown blogs over at The Reformed Broker:

Dangerous Stability Threatens America’s Banks

The US financial and banking system has gone almost seven full years without experiencing a major crisis. With today’s announcement from the administration that Dodd-Frank regulations are about to be dismantled, this nightmarish period of excessive stability will finally be coming to a close …

America’s banks must be globally competitive again. For too long, the banking giants of Europe of have outpaced their US counterparts in their ability to routinely sustain massive, unthinkable losses. Germany’s Deutsche Bank and Italy’s Banca Monte dei Paschi have been afforded the opportunity to lose tens of billions of dollars, year after year, while the JP Morgan Chases of the world have been effectively sidelined. With the loosening of reserve requirements and international capital rules, our great domestic financial institutions will finally be able to rejoin the fray.

Hmmm.

I guess my take is that this is a potential disaster, as much of the massive bonus-based casino capitalism culture of the capital markets can be traced back to the Goldman Sachs’ IPO of 1999.  As this Harvard Business Review analysis concludes:

Goldman Sachs grew from a relatively small group of financially interconnected partners to a publicly traded corporation in which compensation took the form of individual, predominantly discretionary performance bonuses plus stock that could be sold before retirement. The fixed percentages, financial interconnectedness, and personal liability are mostly gone … this was one of the key elements that made the Goldman Sachs of 2006 so different from the firm of the 1990s.

In conclusion, back to MSN:

As we discussed a month ago, during the Republican presidential primaries, for example, one of Trump’s most common attacks against Sen. Ted Cruz was blasting the Republican senator’s ties to – you guessed it – Goldman Sachs. “Is Cruz honest?” Trump asked in January. “He is in bed w/ Wall St. & is funded by Goldman Sachs.” Trump added, “Goldman Sachs owns [Cruz], he will do anything they demand. Not much of a reformer!”

In the general election, the fact that Hillary Clinton once gave a speech to Goldman Sachs was, somewhat inexplicably, also a popular line of attack – with Trump claiming the investment giant has “total control” over her.

As Rachel put it on last night’s show, if you were told you shouldn’t vote for Hillary Clinton because of Goldman Sachs, “you got suckered.”

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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