The Finance 202: Former Fed heavyweight blasts Trump-era financial deregulation

Published in Politics
2 months ago   by Tory Newmyer

THE TICKER

President Barack Obama’s financial regulatory czar is ringing the alarm over his successors’ push to roll back post-crisis restrictions on big banks, moves he says could exacerbate the next major meltdown. 

Daniel Tarullo, the Federal Reserve governor who spent eight years following the 2008-2009 crisis rewriting the Wall Street rule book, in a Monday speech denounced what he called the Trump era’s “low-intensity deregulation” of the financial industry. He defined the phenomenon as a pileup of small tweaks to the existing regime, all ignored by the public, that taken together will undermine a system intended to prevent another devastating recession. After the current regulators have “moved on,” he said, “somewhere down the line, someone else will suffer that damage. In all likelihood, it will once again be the most vulnerable of households and businesses.”

The speech, delivered at Americans for Financial Reform in Washington, amounted to a rare rebuke of Tarullo’s successors from the man the Wall Street Journal once called “the most powerful man in banking,” and Wall Streeters themselves nicknamed “the Wizard of Oz” for his quiet power over their industry. (Read the speech here.)

And it comes a week after two former Fed chairs and two former Treasury secretaries sounded a warning about how Trump’s Wall Street watchdogs are minding their beat. In a letter last Monday, the former Fed chairs, Ben Bernanke and Janet Yellen, and the former treasury chiefs, Tim Geithner and Jack Lew, criticized the decision by the Financial Stability Oversight Council (FSOC) to stop subjecting to extra oversight non-banks including major insurers and asset managers. “Though framed as procedural changes, these amendments amount to a substantial weakening of the post-crisis reforms,” they wrote.

“What’s most notable here is just that all of these regulators collectively think that now is the time to speak out,” says Jeremy Kress, an assistant professor of business law at the University of Michigan and a crisis-era attorney at the Fed. “Between what’s going on at the Fed and FSOC, all the crisis-era regulators have had enough. And while they’ve generally maintained a low profile since leaving office, they’ve decided to put their personas behind substantive and serious critiques of these deregulatory proposals.”

Tarullo focused in particular on stress testing, the exercise designed to determine whether banks have enough reserve capital to survive an economic collapse. He said the tests offer too many advance clues to banks, a change made in the name of transparency that will in fact allow banks to “find clever ways to reshape their assets” so they can maintain lower levels of capital without actually trimming risk. Tarullo also said a Fed proposal to create a new “stress capital buffer” to prevent banks from depleting their capital cushion with dividend payments could allow them to take on more risk, since it would exclude one of two standards used to calculate a bank’s exposure.  

Kevin Fromer, president of the Financial Services Forum, which represents CEOs of eight of the largest banks, suggested Tarullo’s concerns are unfounded, because the biggest firms have more than an adequate capital cushion. “I don’t think there’s any question the overall level of capital in these institutions is obviously higher, and the stress tests have demonstrated repeatedly that these institutions are extremely well capitalized and capable of lending in an extreme economic downturn,” he said. 

But Marcus Stanley, policy director of Americans for Financial Reform, which advocates tougher regulation of the industry, said Tarullo’s critique highlighted how changes to the stress tests raise doubts about their reliability to ensure banks remain sound. “For someone who is the architect of this system to come out publicly and say this isn’t fine-tuning, and it’s undermining the system, is quite significant,” he said. 

Ian Katz, an analyst at Capital Alpha Partners, says the former regulators worked long and hard on the post-crisis rules, so it’s “understandable” they now want to be on record opposing efforts to dial them back. Plus, Katz notes the industry appears to be gaining some traction on Capitol Hill: In the House, 26 Republicans recently wrote financial regulators pushing for more deregulation. 

Yet he said his conversations with investors in the industry indicate they are more concerned with those firms outside the scope of strict federal oversight.

“I’ve had discussions with people who believe that the regulators, particularly the Fed, are still paying close attention to things like leveraged lending. But in the markets, to the extent people are concerned, they’re more concerned about whats going on outside the regulated banking sector.”

MARKET MOVERS

— Theresa May: Let Parliament vote on second Brexit referendum. The Post's Karla Adams: "British Prime Minister Theresa May urged British lawmakers on Tuesday to back her 'new' Brexit deal, which would include a binding vote by Parliament on whether to hold a second Brexit referendum. In a speech in London, May said lawmakers will have “one last chance” to deliver Brexit in a vote early next month. But, more accurately, it probably will be May’s last chance. She has signaled that she will step down if her thrice-rejected divorce deal fails again in the House of Commons, as it is widely expected to do."

The speech got panned. Per The Guardian: "The Labour leadership insisted it did not represent a meaningful change and hard Brexit-supporting Tories and the DUP indicated they had little or no intention of voting for it. The People’s Vote campaign also dismissed May’s offer of a vote on a second referendum.

— Trump team eyes Fed critic Judy Shelton. WSJ's Nick Timiraos: "Economist Judy Shelton, a potential nominee to the Federal Reserve, said in an interview that she would bring a different perspective to the central bank and press for a change in how it sets interest rates. Ms. Shelton has been interviewed by White House officials for a nomination to the Fed’s board of governors and served as an informal adviser to [Trump’s] 2016 campaign. She wrote critically in the weeks before that election about how the Fed’s low- rate policies were boosting wealthy investors and corporations at the expense of working Americans and retirees with fixed incomes. On Tuesday, Ms. Shelton said she is no longer concerned about such perils because she believes the administration’s fiscal policies have boosted growth and productivity."

TRUMP TRACKER

TRADE FLY-AROUND:

— Xi speaks in subtext: Chinese President Xi Jinping didn’t mention his country’s trade war on Tuesday, but his actions show that he is ready for the long haul.

Perspective: Rare earth materials may not be such a trump card. CNN's James Griffiths explains: "Despite their name, rare earths are not that rare... Unlike oil and other raw materials, the need for a large and constant supply of many rare earth materials is also less important. Many products which use rare earths only require tiny amounts -- they have been described as 'the vitamins of modern technology' -- and therefore it will take time for them to be impacted by tariffs. The US also maintains stockpiles of many key rare earth materials, not least those used in the defense industry."

— The Trump administration targeted Huawei after China talks went south. “The Trump administration held off on blacklisting Huawei Technologies Co. out of concern the move could disrupt trade negotiations with China and only took action after the last round of talks hit an impasse, according to people familiar with the matter,” Bloomberg’s Jenny Leonard, Nick Wadhams, and Margaret Talev report.

“Timing of the U.S. action raised questions about whether [Trump] is punishing the company in part to gain a negotiating edge with Beijing in a deepening clash over trade. Talks between Beijing and Washington deadlocked this month as Trump accused China of backing out of a deal that was taking shape with U.S. officials, saying China reneged on an agreement to enshrine a wide range of reforms in law.”

Five more companies to the blacklist? Bloomberg's Jenny Leonard and Nick Wadhams: "The U.S. is considering cutting off the flow of vital American technology to as many as five Chinese companies including Hangzhou Hikvision Digital Technology Co., widening the dragnet beyond Huawei to include world leaders in video surveillance. The U.S. is deliberating whether to add Hikvision, Zhejiang Dahua Technology Co. and several unidentified others to a blacklist that bars them from U.S. components or software, people familiar with the matter said."

POCKET CHANGE

— Walmart workers invite Bernie Sanders to company’s annual meeting: “For years, Walmart workers have attended the company’s annual shareholders meeting to call for higher wages, better benefits and more predictable schedules,” my colleague Abha Bhattarai reports. “This year they’ll have someone new delivering the message on their behalf: Sen. Bernie Sanders.”

“The presidential candidate, who has repeatedly called on Walmart to improve its working conditions, is heading to Bentonville, Ark., on June 5 to introduce a shareholders’ proposal that would give hourly Walmart workers a seat on the company’s board.”

— BMW CEO’s future in jeopardy: “BMW AG Chief Executive Officer Harald Krueger’s job is hanging in the balance as the luxury carmaker steers through a fundamental shift toward electric and autonomous vehicles as well as weakening markets, people familiar with the discussions said,” Bloomberg News’s Elisabeth Behrmann and Oliver Sachgau report.

“Some supervisory board members are raising questions over whether he’s the right choice to lead the company and will discuss the CEO’s second-term prospects in the coming weeks, the people said, asking not to be identified discussing confidential deliberations. Krueger’s current tenure ends next May, with an announcement on his future due in June or July.”

— J.C. Penney’s sales fall short. “Same-store sales fell more than expected at J.C. Penney Co Inc in the first quarter and its net loss nearly doubled after the retailer exited its appliance and in-store furniture businesses, sending shares down more than 9% on Tuesday,” Reuters’s Melissa Fares and Uday Sampath Kumar report.

“Chief Executive Jill Soltau, on an earnings conference call, warned investors that Penney would likely take a further hit if [Trump] imposed additional tariffs on another $300 billion worth of imports from China.”

MONEY ON THE HILL

— McCarthy blocked bipartisan bid to limit China’s role in U.S. transit: “House Minority Leader Kevin McCarthy (R-Calif.) blocked a bipartisan attempt to limit Chinese companies from contracting with U.S. transit systems, a move that benefited a Chinese government-backed manufacturer with a plant in his district, according to multiple people familiar with the matter,” my colleagues Damian Paletta and Eric Werner report.

“Lawmakers frequently take a stance on legislation that could affect campaign contributors or hometown companies. But McCarthy’s intervention was striking because the close ally of [Trump] sought to protect Chinese interests at a time when Trump and many lawmakers on Capitol Hill are attempting to curb Beijing’s access to U.S. markets, particularly in industries deemed vital to national security.”

— Ben Carson misheard a housing term as “Oreo”: “When a freshman congresswoman asked U.S. Housing and Urban Development Secretary Ben Carson at a congressional hearing Tuesday whether he knew what the housing term 'REO' was, Carson thought she was referencing the similar-sounding cookie,” my colleague Colby Itkowitz reports.

Here’s what ensued:

Watch it here: 

Carson tries to clean up afterward: “Hours after the hearing ended, Carson tweeted a photo of a package of Oreos next to a note thanking Porter for participating in the hearing …”

Upcoming:

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