What Does the Repeal of Dodd-Frank Mean?

The Dodd-Frank Act of 2010 has received a lot of press lately because of President Trump’s intentions of repealing it. To understand how this will impact you as a trader, you need to understand what the Act accomplished and what is most likely to occur if and when it is eliminated.

The Context

Dodd-Frank was passed in the aftermath of the financial crisis that peaked in 2008. After Lehman Brothers failed, the shockwaves that had been shaking the financial world became fissures in the foundation of the economy. Lehman Brothers was then the fourth largest investment bank in the United States, and the credit freeze that resulted from this hurt much of the economy, even those outside of the financial sector. For example, major companies like General Electric were unable to gain access to credit and had trouble meeting payroll demands thanks to this.

The government bailouts that followed up were to act as a stop-gap measure to help companies recover afterward. JPMorgan Chase was one of the first to receive an offer from the government. But soon after, Bank of America, Citigroup, and Wells Fargo also received huge stimulus packages to help smooth over the crisis until credit could resume as normal.

It was in this context that Dodd-Frank arose. The goal was to accomplish over the long term what the government stimuli did during the emergency. It addressed the belief that banks were “too big to fail,” which was one of the primary reasons that protective measures did not prevent the financial crisis. It was meant to act as a Wall Street reform, and it created stress tests that every bank with more than $50 billion in its balance sheet would be subject to. The law also required banks with this large amount of cash to keep a sizeable portion of their holdings in assets that can be easily liquidated, in case money is needed quickly. There were a few other components to Dodd-Frank, but these sum up some of the most important aspects of the law.

The Repercussions

President Trump is expected to sign an executive order that will dismantle Dodd-Frank, and there is a lot of criticism arising here. First, it should be noted that Dodd-Frank was originally a very controversial law, and most of those that voted on it voted along party lines. Democrats mainly voted to pass it, while Republicans voted against it. With President Obama still fairly new in office, he was able to sway some of those that were on the fence about the act and garner enough votes to push it through.

If Dodd-Frank is repealed, the immediate repercussion will likely be that institutions in the financial sector will have a lot more freedom to lend money and to take out larger and perhaps riskier holdings. As you might have guessed, this is likely to drive up the prices of many companies in the finance realm. Short term traders, both binary options and CFD, have a lot of opportunity here.

The long term impact is that banks might find themselves on unstable ground in the future. The financial crisis of 2008 could repeat, just as this was eerily similar to what occurred in 1984. If internal safeguards are not imposed, then there is more long term risk. A free market is created in this setting, though, and a “survival of the fittest” atmosphere is created. Over time, companies will be weeded out, and the strong will keep getting stronger. While great in theory, the potential for abuse within the industry rises a bit. This is something that traders need to pay attention to as they create positions moving forward.