While attention has focused on the 2016 presidential campaign and the drama of Senate Republicans' blockade of Merrick Garland, the Obama administration has been quietly undertaking a series of tough, obscure, progressive economic policy measures that seriously threaten the bottom lines of America's once untouchable banks.
Today comes a new Consumer Financial Protection Bureau rule restoring customers' right to sue banks for misconduct, following announcements in April of new rules on tax inversions and financial advising, along with hints of a substantial crackdown on shell companies.
None of this is as dramatic or easy to explain as a few CEOs being dragged off in handcuffs, but it adds up to a big agenda that — if sustained by the next administration — could do a lot to cut into the size of the American financial sector.
CFPB wants to restore consumers' right to sue
Sometimes in life, a business transaction goes wrong and one party needs to seek redress from the other through the legal system. In cases that pit an individual consumer against a giant company for a modest sum of money, however, it's often not practical for an individual to mount a lawsuit. Consequently, plaintiffs' lawyers like to handle these cases by bundling a whole bunch of claims together to mount a class action. Each individual case may be small, but the class as a whole can bring a large complaint that greatly impacts a company's bottom line.
Consequently, many companies have begun to quietly insert binding arbitration clauses into their contracts that prevent consumers from seeking redress via class actions.
Such clauses exist across a range of industries but are particularly common among credit card companies, banks, and other lenders that fall under the CFPB purview.
Their proposed solution is simple: ban these clauses, a move that will potentially cost the industry billions of dollars.
Treasury's crackdown on tax inversions
Recent years have seen a surge in a kind of business transaction known as a tax inversion, when a US-based company buys a foreign company headquartered in a country with a lower corporate income tax rate and then proclaims itself to be foreign for tax purposes.
These deals had sparked public outrage and two rounds of Treasury Department anti-inversion rules that nibbled around the edges. The new rules announced on April 4 are different because they specifically target the most lucrative part of an inversion — "earnings stripping" tactics, whereby the strategic use of debt and interest payments are used to transfer profits from a US-based subsidiary to a foreign-based one.
Tax analyst Robert Willens told the Wall Street Journal that the new rules are "pretty much taking all of the juice out of inversions."
The rules had an immediate impact, leading to the cancellation of a planned merger between pharmaceutical companies Pfizer and Allergan.
One impact of anti-inversion rules will, of course, be to increase the federal government's corporate income tax haul relative to what it could obtain in a world in which inversions continued to run amok. But inversion dealmaking had also become a major business for investment banks, leading to tens of millions of dollars a year in fees for major players.
Thomson-Reuters estimates that $1.3 billion in fees have been paid to investment banks for work on tax inversions since 2011, amounting to a bit more than 5 percent of the overall merger and acquisition market. All that is now set to vanish, according to the Wall Street Journal's John Carney, who notes that beyond direct fee collection, major Wall Street banks are also primed to lose because "if inversion deals dry up, fees earned from underwriting bonds and bank loans connected to them will do the same."
Labor's crackdown on investment advisers
Separately this week, the Labor Department finalized an obscure-sounding rule requiring investment advisers to follow a fiduciary rule when discussing investment strategies with their clients.
This means, in essence, that advisers now have to in good faith offer advice that is in the best interests of their clients. Up until now, they've operated like car salesmen — people who are paid on commission and whose job is to talk you into paying the highest fees possible.
A White House Council of Economic Advisers report from 2015 found that bad advice from conflicted broker-dealers reduced savers’ returns by about 1 percent a year — as much as $17 billion a year nationwide.
A new crackdown on shell companies
The Panama Papers revelations have focused national and international attention on the use of anonymous shell companies as a vehicle for financial shenanigans around the world. Louise Story of the New York Times reported earlier this week that the Treasury Department's Financial Crimes Enforcement Network has actually been working for several years on a rule that would essentially prevent American banks from doing business with such companies.
Existing federal regulations require banks with branches in the United States to "know their customers," but that's been traditionally interpreted as allowing knowledge of the name of a shell company. The new rule would, in some form or another, require banks to actually know the identities of the human beings who own or control those companies — essentially making it impossible for US banks to do business with the kind of shell companies discussed in the Panama Papers.
Shrinking banking, not banks
Thanks to Bernie Sanders, the recent political debate has largely focused on the idea of shrinking the largest banks in the United States.
The Obama administration's Federal Reserve appointees have nudged in this direction with their supplementary leverage rules but fundamentally have not embraced it as a goal in the way that Sanders and his Senate colleagues Sherrod Brown and Elizabeth Warren have.
What they are doing with this suite of new rules is something different but thematically aligned — shrinking the financial sector as a whole by cracking down on many of its sources of revenues. Right now in the United States there are no particularly large auto dealership companies, but auto dealerships as a whole are very big business. Similarly, finance as a whole could be big even if it were fragmented into midsize banks. Conversely, finance as a whole can shrink without becoming less concentrated.
All three new rules shrink the financial sector by cutting down on lucrative activities that have nothing to do with finance's core social purpose of channeling funds to economically useful activities. The nature of the regulatory process is that each rule needs to be justified on its own narrow terms, but putting them all together reveals a surprisingly activist Obama administration that's still at work in its last year on putting banking in its place.