FINANCIAL REGULATION | One Year into Trump Era

Update 245 from Dana Chasin —  Financial Regulation Reshaped

A year into office, President Trump has made significant progress in reshaping the financial regulatory agencies, as many of his nominees are confirmed. Their generally ambitious deregulatory plans have risks. —————————————————- FSOC: Still Standing, with Stature At Wednesday’s Senate Banking nomination hearing, senators questioned Thomas Workman, who would serve as FSOC’s independent member with insurance expertise. Workman was president and CEO of the Life Insurance Council of New York from 1999 to 2016. Workman would join FSOC just as it reconsiders its listing of the large insurance companies critical enough within the financial system to trigger a crisis. Workman declined to answer direct questioning about what he thought about the $50 billion threshold at which FSOC declares a nonbank financial firm systemically important. He did echo the sentiment of a November Treasury report by expressing an openness to “tailoring” FSOC’s SIFI designation process by shifting regulatory analysis to focus on a firm’s activities, as opposed to its assets.  FSOC lifted its classification of AIG as a Systemically Important Financial Institution in September, while the DOJ dropped its case appealing a decision to delist MetLife. Prudential is the only remaining insurance company considered systemically important by the federal government. Expect Workman to sail through a relatively easy nomination process. CFPB Staff get a Memo from Mulvaney  Last November, the Trump administration appointed Office of Management and Budget director Mick Mulvaney as interim head to the Consumer Finance Protection Bureau. This appointment, which is the only position the administration will get to fill at this agency, drew an immediate legal challenge from outgoing Obama-era administrators.  Mulvaney remains legal acting head of the CFPB. Trump has yet to name a permanent nominee for a five-year term.   On Tuesday, Mulvaney released a memo to clarify his deregulatory stance and announce a review of “everything we do” at the CFPB. While he assured employees that he does not intend to shutdown the Bureau, he harshly criticized what he sees as his predecessors’ willingness to “push the envelope” by disproportionately target offending companies. Mulvaney might not be planning to end the CFPB, but he has certainly made clear his intentions to scale back the Bureau’s regulatory ambitions. Goodfriend’s Single-Mandate Vision for Fed Marvin Goodfriend for Fed Governor is one of the most polarizing nominations of the Trump administration yet. At Wednesday’s Senate Banking hearing, Ranking Member Brown was quick to take issue with Goodfriend’s belief that the Fed should only focus on half of its statutory mandate: stabilizing inflation.  Mr. Goodfriend has a long history of inflation hysterics. Sen. Warren called him out on his off-the-mark prediction in 2011 that further Fed interest rate cuts would push inflation past the Fed’s two percent target, without lessening the then-nine percent unemployment rate.   In 2012, he similarly stated that inflation would skyrocket if the unemployment rate fell below seven percent. Today, the unemployment rate is consistently south of 4.5 percent with inflation remaining stubbornly under the Fed’s two percent target. Goodfriend seems unmoved by this reality, and would likely push for more aggressive interest rate hikes should he be confirmed.   FDIC still a Guardian vs. Risk? Jelena McWilliams (nominated to the FDIC Board) was a longtime Republican staffer on the Senate Banking Committee. She is currently the Executive Vice President and Chief Legal Officer of Cincinnati-based Fifth Third Bank. McWilliams would replace Martin Gruenberg, a critic of the Republican Wall Street bill, S.2155.  Her confirmation would give the FDIC three Republican Board members -- its statutory maximum -- along with Mick Mulvaney (CFPB Director) and Comptroller of the Currency Joseph Otting. The Trump administration has no intention to appoint Independent and Democratic members to the Board. McWilliams emphasized her priority to reverse the consolidation and closure of community banks, which she argues should be exempt from the Dodd-Frank Act rule on proprietary trading. This would loosen their capital requirements and streamlining anti-money laundering reporting. While Williams earned unabashed praise from Republican members of the panel, Sen. Brown objected to her view that excessive leverage at the nation’s largest bank did not trigger the financial crisis. Her prospects for confirmation as FDIC Chairperson are strong, as Republicans are solidly supportive. Familiar Faces at the CFTC Chris Giancarlo — Giancarlo has been serving as CFTC chair since before Trump took office. As a Republican, Giancarlo has criticised FSOC (of which he is now a full-time member) of inadequately weighing the cost of regulation and SIFI designation on the institutions under its watch. This is in line with Trump’s deregulatory tendency and goes a long way towards explain the recent delisting of companies such as AIG. Brian Quintenz — Quintenz was nominated by Barack Obama for this role, but the session ended before the Senate voted on his appointment. Trump briefly pulled the nomination before ultimately renominating the Republican investment manager and Hill staffer. Quintenz was confirmed Aug. 3. Rostin Behnam — Benham is a former senior counselor to Debbie Stabenow and worked for the Attorney General of New Jersey. Benham joined Stabenow’s office in 2011, but has been a  supporter of DFA since its inception. Behnam assumed office last Sept. 6. MIxed Signals at the SEC Jay Clayton: Clayton was confirmed as SEC chair in May and he has exhibited conventional conservative ideology ever since. Notably, he has pushed to encourage IPO’s by reducing regulatory oversight of companies looking to go public. Sen. Cortez-Masto vocally opposed his nomination in committee. Nevertheless, with Clayton’s confirmation passing committee on a 15-8 vote, and the floor on a 61-37 vote, Clayton’s confirmation was never much in doubt. Hester Peirce: Before nomination, Ms. Peirce was a senior fellow at the very conservative Mercatus Center at George Mason University. In that role, Peirce wrote numerous articles, op-eds, and books arguing that the regulatory response to the financial crisis was overblown and that allowing the market to “pare the big banks down” would’ve been more appropriate. When she was first nominated, she refused to commit to requiring public corporations to disclose political contributions. She was confirmed by the Senate last month. Robert Jackson: Mr. Jackson has an illustrious educational background with degrees from Harvard Law and Kennedy schools, Wharton, University of Pennsylvania, and Oxford. Jackson is a staunch liberal regulator in line with Sen. Elizabeth Warren in his preference for oversight of large financial institutions. Mr. Jackson was confirmed along Ms. Pierce in December. OCC -- The Foreclosure King Goes to Washington The Senate voted to confirm Joseph Otting as comptroller of the currency on November 16. The vote was 54-43, largely on party lines. Otting was the CEO of OneWest Bank, a lender co-founded by Treasury Secretary Steve Mnuchin. During the financial crisis he was labelled the “foreclosure king” for failing to effectively oversee thousands of loans to families who would eventually lose their homes. The nomination and subsequent confirmation sparked heavy criticisms from Senate Democrats.  Ex-Im Bank Avoids Garrett Senate Banking rejected the Trump administration’s nomination of Scott Garrett to head the Export-Import Bank, with Republican Sens. Mike Rounds (S.D.) and Tim Scott (S.C.) crossing party lines to vote with Democrats, 13-10. Garrett’s nomination had been subject to intense criticism from business groups, primarily because of his strong opposition to the agency during his time representing New Jersey in the House. Other than the failed nomination of Garrett, there have been five other nominations to fill out: Claudia Slacik, Spencer Bachus III, Kimberly A. Reed, Judith Delzoppo Pryor, and Mark L. Greenblatt. These nominations are far from contentious with some of these nominees even drawing bipartisan support. If successful, these nominees would fill out the Ex-Im bank board for the first time in years.

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DODD-FRANK | House Bill Takes Aim, by Dana Chasin

Dodd-Frank applied CPR to the 1933 Glass-
Steagall Act, which gave banks deposit insurance
in return for bank and securities regulation.
Hensarling wants a GOP-branded Act...

The following is slightly abbreviated from a summary by Dana Chasin of the new Hensarling bill:

Jeb Hensarling (R, TX-5), Chair of the House Financial Services Committee, has announced a beefed-up Financial Choice Act to eliminate some key Dodd-Frank provisions.

It would reduce Sarbanes-Oxley and JOBS Act regulations.

The bill, Hensarling 2.0 (H2O), proposes major structural changes to the Consumer Financial Protection Board (CFPB) and the SEC. Hensarling has said he would get H2O through his Committee to the House floor by the end of April.

The Major Changes

Major Dodd-Frank-related provisions in Hensarling's H2O bill include:

• weakening of provisions protecting against systemic risk, increasing the threat of “too big to fail” financial institutions, holding up taxpayers for another bailout
• rolling back safeguards protecting ordinary investors and consumers on financial transactions involving everything from derivatives trading to retail banking
• repealing restrictions on the kind of subprime mortgages that caused the 2008 financial crisis.

Jeb Hensaring (R, TX-5).
Chair, Financial Services
Committee.

[Hensarling says on his website that H2O will do what Dodd-Frank failed to accomplish after the 2008 financial crisis. “It would end bank bailouts,” he says. “It would give regulatory relief for community financial institutions, and we would also have the strongest penalties for Wall Street wrongdoers that have ever been on the books.” Though Republicans want to roll back Dodd-Frank, Hensarling says they don't want a repeat of the 2008 financial crisis and so his bill would require banks to hold on to more loss-absorbing capital than is currently required. “We’re not trying to save any individual institution,” says Hensarling. “We’re trying to save the entire financial apparatus and our whole financial system.”]

Hensarling Needs Votes

Hensarling believes that his Financial Choice approach should replace Dodd-Frank entirely. But if Dodd-Frank reforms were passed in present form, they would undermine the 2010 financial regulation law. The skeleton will still exist, and the new bill would act as a disable-and-disregard "remedy" to Dodd-Frank.

With that in mind, the bill will most probably not make it to the floor until the summertime, per Rep. Patrick McHenry, vice chair of House Financial Services. Although passing the Senate would require a Herculean legislative effort to create a bipartisan measure, some Republicans are still looking for ways to roll back Dodd-Frank while avoiding working with Democrats. GOP Senator Pat Toomey suggested last week that the reconciliation process to repeal regulations on a simple majority vote basis is still available.

The Role of Capital Requirements

What is interesting is the Republican interest in capital regimes, which monetize regulations. Another way of looking at these is effectively as a corporate tax. So instead of ducking a regulation by imposing a corporate tax, the GOP could weigh that out during their tax reform efforts as a means to compromise with Democrats.

Hensarling’s new plan also includes reducing the frequency of bank stress tests performed by the Federal Reserve (once every two years as opposed to annually). The plan would also give the president the authority to fire the directors of the CFPB and restrict its oversight, as well as changing the code of conduct between the SEC and private companies.

Republican Strategy vs. Street Sense

Seeking to learn from the health-care-reform failure, the Congressional leadership may be of the view that H2O provides a strongly conservative approach to repealing and replacing Dodd-Frank, bridging the gap in the GOP between the Freedom Caucus and House leadership. It’s hard to see it get through the House without compromise, though. All the while, Dodd-Frank has quietly been picking up support in the last couple of months from the banks and their main news source: the Wall Street Journal, featuring masthead editorials opposing repeal of Dodd-Frank. [Treasury Secretary Steven Mnuchin has expressed interest in restoring aspects of the Banking (Glass-Steagall) Act of 1933.]

With some banks backing key portions of the 2010 law, such as the need to preserve the Financial Stability Oversight Council and the Orderly Liquidation Authority from Titles I and II, the bill's road to the President's desk will not be an easy one. If it passes the House, the Senate will almost certainly reject it.

Related Posts: Economic Hotspots . Banking (Glass-Steagall) Act of 1933 . Dodd-Frank Act .