The future of Dodd-Frank, breaking up big banks, taxing hedge funds and the Federal Reserve are the biggest campaign issues for Wall Street. The Dodd-Frank Act was enacted in response to the financial crisis is 2008. Today, both candidates are fighting over its impact and future law and the financial industry.
During the Republican convention that nominated Donald Trump, the repeal of the six-year-old law, as well as abolishing the Consumer Financial Protection Bureau created under Dodd-Frank was underscored. Trump told CNBC, Reuters, Fox News and other news sources, “Dodd-Frank has to be eliminated or greatly changed. The regulatory climate is so bad that banks just aren’t loaning to banks. It’s one of the reasons we have no growth.”
Conversely, Hillary Clinton is in favor of Dodd-Frank. She will “veto any legislation that would weaken financial reform” and expand the law to more lightly regulated corners of finance. During the Democratic Convention that nominated Clinton, the pledge of giving the Justice Department, the Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission “more resources to prosecute wrongdoing” and to extend the “statute of limitations for prosecuting major financial fraud” was emphasized.
Clinton also pledges to increase financial regulations by levying a “risk fee” on the largest banks, impose higher capital requirements and tighten the “Volcker Rule” that bans banks from betting with deposits covered by taxpayer-funded insurance. Other Clinton proposals include taxing certain types of high frequency automated stock trading, overhauling and imposing higher taxes on capital-gains taxes and enforcing rules to limit Wall Street’s pay.
Another continuing debate is to break up the big banks.
In July, Trump’s campaign in Cleveland created confusion by calling for reinstatement of the Depression-era Glass-Steagall Act, “which prohibits commercial banks from engaging in high-risk investment.” This would effectively force a break-up of the big Wall Street banks.
Trump campaign chairman Paul Manafort told reporters the line was inserted to draw a contrast with Clinton who has avoided supporting the restoration of the 1933 law that was repealed during her husband’s presidency, in the late 1990s. Trump himself hasn’t mentioned restoring Glass-Steagall.
Clinton has been pressed by Bernie Sanders to support breaking up the biggest banks. She said “such prescriptions are too simple.” But, she would use existing laws to force financial institutions to shrink—if regulators deemed that step necessary. “Banks should not be able to gamble with taxpayers’ deposits or pose an undue risk to Main Street.
Due to the unpopularity of Wall Street, Trump and Clinton have questionable positions, as both have close ties to the financial industry.
In his January Iowa appearance, Trump boasted about his campaign’s independence from the financial sector, saying: “I don’t care about the Wall Street guys… I’m not taking any of their money.”
He criticizes Clinton for her finance industry ties. “Hillary will never reform Wall Street. She is owned by Wall Street!”
Despite his earlier comments, Wall Street has emerged as a top source of cash for the Trump campaign, donating at least $10 million in June to his joint fund with the Republican National Committee. That figure, however, still lags significantly behind the amount raised by Clinton. According to the nonpartisan Center for Responsive Politics, Clinton’s super PAC drew $36 million from Wall Street donors, about a third of its total fundraising.
Despite these contributions and ties, Clinton continues to attack Wall Street and supports a bill that would ban the practice of financial firms giving executives big bonuses as they leave to take a government position. Critics agree, the payments essentially keep them on the firm’s payroll while they’re making policy.
Another ongoing debate is asset managers receiving pay in the form of “carried interest” rather than as a salary or year-end bonus. This means their long-term income is taxed as capital gains, which faces a top rate of 23.8%, well below the top income tax rate of 39.6%—prompting critics to accuse asset managers of tax avoidance.
Both candidates agree that carried interest should be taxed as ordinary income.
Trump often states in speeches, “the hedge fund guys are getting away with murder” on their taxes. “They’re paying nothing, and it’s ridiculous,”Trump said in an interview on CBS’s Face the Nation. In his first major economic policy address in Detroit on Aug. 8, he declared: “we will eliminate the carried interest deduction and other special interest loopholes that have been so good for Wall Street investors, and people like me, but unfair to American workers.”
The candidates differ in one way on the hedge fund compensation debate. Hedge-fund managers could end up paying fewer taxes since Trump also wants to narrow the gap between capital gains and income taxes, slashing the top rate to 25%.
Both parties support auditing the Federal Reserve.
Trump has signaled support for a congressional Republican push to impose tighter oversight of the Fed, notably for the “audit the Fed” bill authored by former Republican presidential candidate Sen. Rand Paul of Kentucky that would open up the central bank’s policy-making to greater congressional scrutiny.
Clinton said in a campaign statement that common sense reforms like getting bankers off the boards of the regional Federal Reserve banks are long overdue. She argued that the board doesn’t adequately reflect the country’s demographics.
These issues will continue to dominate Wall Street’s scrutiny as we approach the November 8th election.