Trumponomics: The surprise result of the 2016 presidential election seemed to catch everyone off guard- the public, media and certainly the pollsters. And judging by the frenzied pace with which investors dumped bonds for stocks it also clearly caught Wall Street off guard, too. What will a Trump victory mean for finance jobs?
The potential for a strong era of financial deregulation is a real possibility, thanks to what is now being referred to as Trumponomics. This has been called on before by politicians but with a Republican controlled Congress and an unorthodox president-elect, anything is possible.
Banks and related finance companies ranging from money center banks to life insurance companies should benefit from a deregulatory tailwind. We prognosticate on the impact for certain financial entities.
Commercial Banking in “Trumponomics”
Trump has repeatedly said he wants to dismantle the financial regulatory law known as Dodd-Frank, once stating “Dodd-Frank has made it impossible for bankers to function.”1 The Dodd-Frank law was passed in 2010 following the Financial Crisis and is designed to curb risky behavior by banks.
Trump’s new pick for Treasury Secretary, former Goldman Sachs executive Steven Mnuchin, has stated “we want to strip back parts of Dodd-Frank that prevents banks from lending.”2
And recently, former economist and Federal Reserve chairman Alan Greenspan echoed the sentiment that it should be repealed.
This is obviously great news for lenders. The repealing of Dodd-Frank, or at least a ‘watering down’ of its oversight, could allow banks to engage in riskier, more profitable lending activities. The result could be looser credit standards resulting in more access to capital for both consumers and businesses.
This would be a boon for commercial banking (as well as investment banking). As commercial lending operations increase, the amount of staff necessary to process all of the transactions should commensurately increase. More administrative and operations personnel would probably be needed.
And this increased lending could become more profitable lending. If interest rates continue to increase in anticipation of improved economic growth, the net interest margin for banks will increase. This is the difference between the rate the bank pays depositors and the rate the bank earns through lending. This would lead to increased profitability, all else equal.
Rising interest rates could also produce a rush of potential borrowers into the housing, namely millennials who continually are rumored to be on the sideline.
Commercial banks should also prosper as they see more opportunity to do business with real estate developers. Real estate development projects include: shopping centers, office parks, arenas, even the construction of charter schools.
Of course, the Trumps have a long history in commercial real estate, from casinos in Atlantic City to golf courses in South Florida and Trump Tower in New York City. Considering the fact that he (through his family) still operates these companies and their subsidiaries, we should expect a friendly regulatory tailwind for at least the next four years.
Finally, those real estate companies operating as REITs (Real Estate Investment Trusts) could also see a less adversarial tax environment.
REITs are required to distribute 90% of its taxable income to shareholders annually as dividends.3
Given the paltry level of interest rates, REIT owners enjoyed relatively fat dividend payouts but that preferential treatment was increasingly being scrutinized by tax hawks.
Deregulation should also help the residential real estate side as well. Many realtors have claimed that transactions have been delayed or scrapped due to lack of financing by many banks struggling with Dodd-Frank compliance. A name that generally comes up is Wells Fargo.
Community Banks in “Trumponomics”
Trump is seen as a major supporter of American small businesses which could see increased access to capital due to looser credit. The market clearly sees renewed growth for this sector which is so vital for the American economy. We witnessed the Russell 2000, an index of 2000 small market capitalization stocks, reach a new all-time high soon after Trump’s election victory.
There are over 28 million small businesses in the United States, so there is a huge opportunity for local, community banks to provide them with small business funding.
And there could be increased activity and hiring alternative lenders servicing those brand new businesses or startups with no profitability (and thus no access to bank capital) include factoring companies and fintech upstarts including peer-to-peer lenders.
There is also the possibility of the repeal of another major legislation, the Affordable Care Act, which has been weighing on the profitability and further hiring at small businesses.
According to Russ Carpel, CEO of healthcare consulting firm Level Funded Health, “what we’re seeing is health insurance premiums skyrocket anywhere from 20-200% year over year on these traditional small group health insurance coverage plans that these small businesses are in today.”4
Investment Banks in “Trumponomics”
The new Trump team has also hinted that they will be looking closely at what’s commonly referred to as the ‘Volcker Rule’, the section of Dodd-Frank dealing with curtailing bank’s risky activity.
It could also open the door to the resumption of proprietary trading, which would mean hiring on trading desks across the financial industry. These Sales and Trading departments could see increased staffing for the first time in years.
Under the regulation, banks were forced to maintain higher capital levels and take on less risk in activities such as market-making. This was worrisome for many considering that certain less-liquid areas of finance, including high-yield fixed income and options, would need adequate market making activity to facilitate trading.
Not so Fast
But there will definitely be some push back by supporters of the law, notably incoming Senate Minority Leader Chuck Schumer of New York, who claims to have rallied enough votes to block Trumps efforts.5
Whether the Dodd-Frank bill gets repealed or not, there should be a less-stringent regulatory cloud hanging over the financial industry.
So what does this mean for employment at the banks? Overall this appears to be very positive but it might produce a mixed bag.
Deregulation could cause other finance company departments to see a reduction in staffing. There are risks to areas like fixed income, accounting and compliance departments with the deregulation
Trumponomics is likely to produce. But for most top-line producers, Trump’s election could be a way for banks to get back to business as usual (not sure whether that’s a good thing or a bad thing).