President Trump's executive order on Friday (Feb. 3) has many asking "will Trump undo Dodd-Frank?"
Some believe the directive was meant to roll back the Dodd-Frank law passed in 2010. Just look at USA Today's headline from Friday that declares "Trump to dismantle Dodd-Frank Wall Street rules through executive orders."
But Trump's executive order doesn't mention Dodd-Frank by name. Instead, the order directs the secretary of the Treasury to issue a report within 120 days on any laws or regulations impeding economic growth.
That's why not everyone is convinced the law is under threat, including one of its primary authors, Barney Frank.
"The executive order that the president offered with a lot of hype has no specifics. In fact, it doesn't do anything," Frank told New York's WNYM radio station.
Naturally, this is creating uncertainty for investors. That's why we're going to tell you whether President Trump will repeal Dodd-Frank and why repealing Dodd-Frank is such a big deal...
What Is Dodd-Frank and Why Does It Matter?
In July 2010, President Obama signed the "Dodd-Frank Wall Street Reform and Consumer Protection Act" into law.
The law was a response to the financial crisis of 2008. During the financial crisis, the federal government bailed out Wall Street banks by buying $700 billion of bad assets.
The government had to buy these assets to keep the banks from failing and collapsing the economy. Dodd-Frank was designed to prevent that from happening again.
Yet the law is complicated. The complete text is 849 pages long with 16 different chapters. To make things simpler, we broke it down into three major parts.
First, it empowers the government to classify certain companies as "systemically important financial institutions" (SIFIs). These are banks or insurance companies the government worries could be "too big to fail." Large banks like Capital One and U.S. Bancorp and insurance companies like AIG are considered SIFIs.
And they are regulated much more strictly...
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SIFIs are required to keep more capital on hand, which limits their borrowing and lending.
SIFIs also have to pass an annual "stress test" to prove to they will survive if economic conditions worsen. If the company fails the stress test, it has to take immediate action to fix the problem, including selling off parts of its business to other companies.
MetLife Inc. (NYSE: MET) failed a stress test in 2012 and had to sell its banking unit to GE Capital (NYSE: GE).
These requirements add extra expenses to a company's operations, and it limits their ability to profit. Restricting how much a bank can borrow restricts how much it can invest.
Second, Dodd-Frank turned the "Volcker Rule" into law.
The Volcker Rule restricts the investment activity of banks. Banks can't engage in proprietary trading, which means they can't invest money from their own accounts.
Banks are also limited to which types of investments they can buy. Banks can't own more than 3% of hedge funds or private-equity funds, for instance.
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Third, Dodd-Frank created the Bureau of Consumer Financial Protection (CFPB), originally proposed by Sen. Elizabeth Warren.
The CFPB is an independent regulatory agency designed to monitor the financial industry and ensure its practices are fair to consumers. Specifically, the CFPB monitors mortgages, student loans, and credit cards for "unfair, deceptive, or abusive practices."
The CFPB has been subject to at least four federal court challenges since its inception.
In October 2016, a federal judge ruled the president had the constitutional authority to remove the director of the CFPB at will. President Obama had argued the director could only be removed in cases of neglect of duty or incompetence.
Banks have argued the law unfairly burdens them and limits their potential for growth. Jamie Dimon, CEO of JPMorgan Chase & Co. (NYSE: JPM), has been one of the law's most prominent critics.
Specifically, Dimon has argued the Volcker Rule has hamstrung banks and prevented them from making investments that are more profitable.
Now that Donald Trump is president, it's possible Dodd-Frank could be repealed or undone.
The "Trump administration will be very good for kind of unleashing business," Dimon said in December.
Here's what you can expect to happen to Dodd-Frank after President Trump's executive order...
Will Trump Undo Dodd-Frank?
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Dodd-Frank can only be repealed by Congress. However, President Trump can begin weakening it through executive action.
Even though his executive order on Friday didn't mention the law by name, Trump's stance on the law is well-known.
Trump has called it "a disaster." Before signing the executive order Trump said, "We expect to be cutting a lot from Dodd-Frank, because, frankly, I have so many people, friends of mine, that have nice businesses, they can't borrow money."
And the executive order directs the secretary of Treasury to look at all financial regulations that undermine a set of financial principles outlined by Trump. Once confirmed, the secretary of Treasury will be Steven Mnuchin, the former chief information officer of Goldman Sachs Group Inc. (NYSE: GS).
As a former banker, Mnuchin shares Dimon's criticisms of the law.
"The number one problem with Dodd-Frank is that it's way too complicated and cuts back on lending," Mnuchin said in a CNBC interview. "So we want to strip back parts of Dodd-Frank and that will be the number one priority on the regulatory side."
After Mnuchin completes his report, he is likely to recommend substantial changes to the law, if not outright repeal.
With Republicans controlling both chambers of Congress, undoing the law is a distinct possibility.
And Congress has already passed a measure to repeal part of the Dodd-Frank law.
In June 2016, the Obama administration created a new regulation for energy companies under the authority of Dodd-Frank. The regulation required energy companies to disclose all payments made to foreign governments.
On Friday (Feb. 3), the Senate voted to roll back this restriction by using a special process that only requires 51 votes.
However, repealing all of Dodd-Frank, or even gutting the law, will be more difficult.
Democrats are likely to filibuster any attempt to undo the law, and that means Republicans will need 60 votes in the Senate. Currently, there are only 52 Republican Senators.
Without Democrats crossing party lines, the law will be difficult to repeal and the Trump administration will have to weaken the law in other ways. For instance, because of the recent federal court case, President Trump has the authority to remove and replace the director of the CFPB.
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