Donald Trump winning the presidential election was a genuine surprise, so it’s interesting to see how the stock market reacted to the sudden news that the Republicans will have a unified government. The market is up slightly overall, another point of evidence that what’s good for the stock market is not at all necessarily good for humanity as a whole.
But one of the most important groups the market rewarded was shareholders of the eight riskiest and largest financial institutions. Even though Trump’s specific ideas for curtailing reform aren’t clear, their market capitalization went up over $50 billion over the course of a day on the idea that reform will retreat. As markets start up today, those stocks continue to rally even higher.
The S&P 500 is up overall 1.11 percent. However, that is dwarfed by the eight riskiest banks. I chose these eight because they are the ones deemed systemically risky enough to have to submit to higher levels of capital requirements and submit living wills describing how they’ll survive a failure. Both of these reforms will likely be gone if Republicans get their way. These banks’ one-day returns range from 3.37 percent for Citigroup to 7.1 percent for Morgan Stanley. These returns can’t be explained by beta related to the overall market reflecting reduced uncertainty or their own individual volatility; these are real changes resulting from a Trump presidency.
Measuring those returns against Yahoo Finance’s market cap measure, we see those eight banks’ shareholders saw their total value go up over $50 billion. I’ll update this post next week to see how long and sustained of a rally we see.
Markets rewarded them for a reason. There are two overlapping plans for weakening financial reform: the CHOICE Act from the Financial Services Committee and Paul Ryan’s A Better Way Plan. Both focus much of their deregulation on the largest players. They remove the Volcker Rule, which separates dangerous hedge fund activities from deposits. They remove liquidity capital requirements that ensure the largest players can make payments in times of stress. They weaken the ability of regulators to do stress tests and stop buybacks and dividends for those big banks that fail them. These regulations only really start for banks over $50 billion in size and scale up beginning for those over $250 billion in size; they aren’t relevant for community banks in any major way.
The graphic also includes three industries—private prisons, drug companies, and the for-profit college industry—that each require massive government interventions in the form of contracting, patents, and financing. Their returns to Trump being elected are massive, with private prisons in particular having a windfall at the idea of less scrutiny and law and order. Though these markets survive on government favors, the market is deciding that the new unified conservative government doesn’t have ending “cronyism” on its mind.
Doing financial reform right isn’t on the agenda, either. It’s a shame, since there are real protections in Dodd-Frank, ones that put share price behind reasonable safety, accountability, and stability. Let’s fight to keep it that way.