The Treasury Put Mirage: How Deregulation Risks Bankrupting Taxpayers in 2025

The "Treasury put"—the widely held belief that the U.S. government will always bail out collapsing financial giants—is a myth perpetuated by regulatory rollbacks that expose taxpayers to catastrophic risk. As legislative efforts to dismantle post-crisis reforms gain traction, 2025 has become a pivotal year for financial stability. The Financial CHOICE Act, a legislative blueprint to weaken Dodd-Frank safeguards, threatens to resurrect the conditions that led to the 2008 crisis, while recent Supreme Court rulings highlight the fragile legal armor protecting taxpayer interests. For investors, this means a clear path: embrace defensive sectors and bet against financial stocks exposed to systemic fragility.

The CHOICE Act's Deregulatory Time Bomb

The Financial CHOICE Act, introduced during the Trump era and revived in 2024, aims to dismantle key Dodd-Frank provisions designed to prevent another taxpayer-funded bailout. Its most dangerous provisions include:
1. Repeal of the Orderly Liquidation Authority (OLA): Eliminating the FDIC's power to unwind failing systemic institutions outside bankruptcy court removes a critical tool for orderly resolution. Without OLA, courts—unfamiliar with managing trillion-dollar financial collapses—could trigger panic selling and contagion.
2. Volcker Rule Repeal: Lifting restrictions on proprietary trading and hedge fund investments by banks reintroduces the "casino banking" that fueled the 2008 crisis. JPMorgan Chase and Goldman Sachs, for instance, could once again bet heavily on risky derivatives, leveraging taxpayer-insured deposits.
3. Leverage Ratio "Off Ramp": Banks meeting a 10% leverage ratio can opt out of stress tests and liquidity rules. While this sounds strict, it ignores risk-weighted exposures, allowing institutions like Citigroup to reduce capital buffers by billions.

These changes, if implemented, would resurrect the "too big to fail" problem. A 2023 study by the Bank for International Settlements warns that even a 1% drop in major banks' capital ratios could increase the probability of a systemic crisis by 15%. The Treasury put, far from a guarantee, becomes a dangerous delusion.

Judicial Limits vs. Legislative Threats

The 2025 Supreme Court ruling in State Farm v. SEC offers a glimmer of hope. In a 6-3 decision, the Court struck down the CHOICE Act's attempt to eliminate risk retention rules for mortgage-backed securities, citing the 1982 State Farm precedent. That case held that regulators cannot arbitrarily deregulate industries if it harms public safety—a principle now applied to financial stability.

However, legislative threats persist. While the Court upheld risk retention, it allowed the repeal of the Office of Financial Research (OFR) and the Financial Stability Oversight Council's (FSOC) power to designate nonbank systemically important firms. Without the OFR's data and FSOC's oversight, regulators are blind to risks in shadow banks like BlackRock or AIG. This partial victory underscores the fragility of post-crisis safeguards: half a law is no law at all.

Investment Implications: Defend, Short, Hedge

The regulatory landscape is now a minefield. Here's how to position:

1. Short Financial Stocks Exposed to Deregulation Risks
- Top Shorts: Bank of America (BAC), Citigroup (C), and regional banks like SVB Financial (SIVB) are most vulnerable to liquidity crises. Their shares have already underperformed since 2023 amid rising interest rates and regulatory uncertainty.
- ETF Play: Use inverse financial ETFs like UltraShort Financial ProShares (SKF) to bet against sector declines.

2. Buy Defensive Sectors
- Utilities (^XLU) and Healthcare (^XLV): These sectors have historically outperformed during financial volatility. Regulated utilities, in particular, benefit from stable cash flows and low correlation to banking sector collapses.
- Dividend Plays: Companies like NextEra Energy (NEE) and Johnson & Johnson (JNJ) offer safety and income in turbulent markets.

3. Hedge with Inflation-Linked Bonds
- TIPS (TLT) or Gold ETFs (GLD): Rising systemic risk often coincides with inflation spikes as governments print money to bail out failing institutions. Inflation-protected assets provide ballast against fiscal recklessness.

Conclusion: The Cost of Regulatory Amnesia

The CHOICE Act's proponents argue that deregulation fosters innovation. But history—and the Supreme Court—remind us that unchecked risk is a recipe for disaster. Taxpayers are once again being asked to underwrite Wall Street's bets, while safeguards crumble. Investors who ignore this reality risk being crushed in the next crisis. The path forward is clear: hedge against financial sector fragility and bet on stability in the face of regulatory chaos.

Final Note: Monitor Congress closely. If the CHOICE Act's core provisions pass, expect a repeat of 2008—but with higher stakes and fewer tools to stop it.

Data as of June 2025. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.