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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The following posts are the ten most read on this blog in the last month.

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FSOC | Delisting AIG Oct 5, 2017

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TAXES | Using the Budget to Reform Oct 5, 2017

TAX REFORM | Business Taxes Sep 19, 2017

UNIONS | Oct. 18–First American Trade Unions, 1648... Oct 18, 2013 10 comments

R.I.P. | Sep. 3–Andrew Kay, Kaypro-IBM (Comment) Sep 7, 2014

PORT AUTHORITY | Chris Ward Speaks Out Sep 12, 2008

MALONEY | Dem Electeds in Sag Harbor Jul 8, 2015

FSOC | Delisting AIG

FSOC Delisted AIG, One of Only Two Nonbank SIFIs

The following is a belated posting of an interesting report by Dana Chasin (Update 209) on the FSOC’s De-Designation Decision, posted here by permission:

The Update takes its own “tax holiday” to look at last Friday's Financial Stability Oversight Council (FSOC) under-the-radar vote to de-designate AIG as a Systemically Important Financial Institution (SIFI) and the rationales provided by seven of the ten FSOC members. 

The Council’s 68-page report – the most comprehensive snapshot of the current financial regulatory leadership and administration’s thinking on systemic risk – attributes the decision to material changes in the company’s size, complexity, and risk profile since its designation. Now only one non-bank financial company, Prudential Financial, maintains its SIFI designation. 

Was this decision merely the operation of law or is it the result of a clear Trump agenda to diminish or eliminate FSOC’s impact? What does the vote breakdown tell us? More below.

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The Votes

The Council voted 6-3 to rescind its 2013 designation of AIG as a SIFI. All four Trump appointees on the FSOC voted in favor of delisting, while the Obama-era appointees were split. SEC chairman Jay Clayton recused himself from Friday’s vote in order to avoid a conflict of interests, raising a key legal question about the vote. Fed Chair Janet Yellen voted in favor. 

•  All Those In Favor

–Keith A. Noreika, Acting Comptroller of the Currency: Noreika, an Obama-era appointee, voted in favor of rescission. He does not believe non-bank financial institutions should be regulated as SIFIs.

–J. Mark McWatters, Chairman of the National Credit Union Administration: McWatters voted in favor of rescission on the grounds that AIG today is a far different company than in 2009 when he examined the company as part of the Congressional TARP Oversight Committee. Notably, he fails to acknowledge that AIG’s baseline SIFI designation occurred in 2013, not 2009.    

–J. Christopher Giancarlo, Chairman of the Commodities Futures Trading Commission: Giancarlo explained that AIG’s decreased derivatives liabilities, lending liabilities, capital markets downsizing, and ceasing of swaps activity led to his decision to vote yes.

–S. Roy Woodall, Jr., the Independent Member Having Insurance Expertise: Woodall, an Obama appointee, criticized FSOC’s rescission document as confusing and deviant from the statutory test to determine whether the company poses a risk to financial stability. On the grounds of this statutory test, however, he does not believe AIG to be a SIFI, writing that it is half the size it was during the crisis. 

–Janet Yellen, Chair of the Federal Reserve: Fed Chair Janet Yellen, the most prominent Obama-era appointee on the Council, voted in favor of rescission on the grounds that AIG’s downsizing efforts render is no longer too big to fail.

Steven Mnuchin, Treasury Secretary: Mnuchin praised FSOC’s decision of rescind AIG’s designation, claiming that it showed the Council’s commitment to removing companies that are no longer systemically risky. (The Council is housed in the Treasury.)

•  The Dissenters

–Richard Cordray, Director of the Bureau of Consumer Financial Protection: As a member of the 2013 Council, Cordray does not believe AIG has made true reduction changes based on planning but has shrunk due to a failed business model and weakened financial market.

–Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation: Dissented for three reasons – an increase of liabilities/assets in other areas of AIG like life insurance and annuities, an inconsistent determination of the Council, and continued irresolvability due to AIG’s size and operations.

–Melvin L. Watt, Director of the Federal Housing Finance Agency:  the two legal standards for FSOC designation were not given independent reviews. If FSOC reviewed AIG under the other standard (size, scope, etc.,) then the Council would have found AIG is still in need of enhanced supervision.

AIG’s Material Changes

Many see FSOC’s decision as a manifestation of Trump’s deregulatory agenda. The FSOC here was fulfilling its legal obligation to re-evaluate its designations annually. At the time of designation, the FSOC concluded that AIG posed significant systemic risk primarily because of its exposure to financial intermediaries, its inability to conduct an orderly liquidation of its assets, the company’s “financial contagion” risk in insurance markets, and its general complexity.

Friday’s announcement comes after more than a year of interaction between AIG and FSOC and an official request for de-designation on July 7, 2017. FSOC’s re-evaluation focused on “material changes” since the Council’s previous review. 

Since 2012, AIG has:

• decreased its debt by 58 percent since 2012
• decreased its asset size from $547 to $498 bn
• divested billions including $30 billion with divestiture of ILFC assets
• sold non-core operations and businesses including ILFC, AIG Advisor Group, and United Guaranty Corporation

FSOC’s Determination

FSOC based its determination of designation of AIG in 2013 on three transmission channels of negative effects on the financial market:

• Exposure: material impact on creditors, counterparties, investors, etc.
• Asset liquidation: liquidation in such a way that asset prices and markets are affected.
• Critical function/service: entity no longer provides services that are relied upon.

At that time, AIG produced negative risk most frequently and powerfully through excessive exposure and asset liquidation. The decision to rescind the company’s designation was due to the reconstruction and reduction of various high-risk practices.

Capital market/institutional exposures lead to a cascading effect if a non-bank experiences distress later on. Therefore, AIG reduced its total assets, total debt outstanding, short-term debt, and securities lending from their 2012 levels. Also, the complexity of AIG rendered it irresolvable in 2013. The Council considered that the company has simplified its total assets, multi-jurisdictional operations, and global financial impact in order to address this. Yet, it maintained that the entity is still complex and requires further efforts.

State of Play

•  One Last Shadow Banking SIFI 

After Friday, Prudential Financial is only nonbank financial company to bear a SIFI designation. The institution is the largest nonbank by by asset size at $784 billion – over $285 billion larger than AIG. As FSOC must re-evaluate all designations each year, we could soon see the announcement of its de-designation.

•  Trump Decision on MetLife Appeal Expected

Metlife challenged its SIFI designation and won de-designation in court. President Obama’s justice department appealed the decision. The Trump could announce that it will not move forward with the appeal at any point.

•  Two-Thirds Requirement Satisfied? 

Clayton’s recusal might be legally significant. Section 113(d) of DFA requires two thirds of serving FSOC members to vote yes for a SIFI rescission. If Clayton is considered to be a serving voting member FSOC, then FSOC has ten serving members. Six of ten is not a two thirds majority. This would open up a question about the legal standing of AIG’s de-designation.