Maxine Takes Helm at House Financial Svcs. (November 30)

Update 315:  Rough Waters Ahead for Banks?
Maxine Takes Helm at House Financial Svcs.  

The gavel passing from retiring Rep. Jeb Hensarling (R-TX) to Rep. Maxine Waters (CA) at the House Financial Services Committee augurs one of the clearest sea changes in policy and style a U.S. House Committee will see in the 116th Congress.  

Accordingly, we have a closer look today at what these changes under Waters imply regarding  particular policy priorities among the legislative agenda and issues before the Committee.

Good weekends, all…




The Immovable Waters

Rep. Waters’ bedrock issues have long been housing, consumer protection, and big bank regulation. In the 115th Congress, Waters focused on protecting the Community Reinvestment Act, designed to prevent discriminatory credit practices, and guarantee fair housing protections.

A number of bills introduced by Waters during the current Congress (capping a six-year tenure as Ranking Member of HFSC) indicate her key priorities, including:


  • Public Housing Tenant Protection and Reinvestment Act of 2017 — H.R. 3160: The bill reforms the public housing demolition and disposition rules to require one-for-one replacement and tenant protections, and provides public housing agencies with additional resources and flexibility to preserve public housing.



  • Comprehensive Consumer Credit Reporting Reform Act of 2017 — H.R. 3755: The bill enhances requirements on consumer reporting agencies, like Equifax, TransUnion, and Experian, to better ensure that the information on credit reports is accurate and complete.


  • Megabank Accountability and Consequences Act — H.R.3937: The bill would give authority to federal banking regulators to break up banks that mistreat their customers.
  • Consumers First ActH.R.6972: The bill would reverse the harmful changes to the Consumer Financial Protection Bureau imposed by the Trump Administration and restore the agency’s supervisory and enforcement powers.

  • Restoring Fair Housing Protections Eliminated by HUD Act of 2018H.R.6220 The bill would restore several fair housing protections that HUD Sec. Ben Carson eliminated.

Blue-Moon Bipartisanship?

During her tenure as Ranking Member on the Committee, Rep. Waters supported bipartisan legislation, notably the third iteration of the JOBS and Investor Confidence Act (aka JOBS 3.0; see our take on that package here). The bill includes provisions aimed at “decreasing the regulatory burden” for some financial institutions, as well as others that aim to increase protections for consumers.

In a similar vein, she partnered with Sen. Sherrod Brown on S. 1491, the Community Lender Regulatory Relief and Consumer Protection Act of 2015. The bill would give banks and credit unions with under $10 billion in assets relief from the Consumer Financial Protection Bureau’s (CFPB) “Qualified Mortgage” rule.

Appealing to Waters’ passion for housing reform, the measure would make permanent expired provisions that protect tenants from eviction when their landlord or property owner has entered foreclosure. When it comes to her bedrock issues, Waters may be more willing to compromise to ensure she reaches her legislative goals.

She has also reached across the aisle to work with Republicans to reauthorize the Export-Import Bank, and used her political savvy to get Republicans on board with a reauthorization of the National Flood Insurance Program. While she will look to make some strides in these areas as Financial Services Chair, she has expressed firm and progressive stances regarding systemic risk and oversight.

Mitigating Systemic Risk

Importantly, Rep. Waters at the helm of the HFSC means two things for systemic risk:

  • the “tide” of financial sector deregulatory passing the Committee is “at an end”
  • regulators and agencies should be prepared to will have their feet held to the fire more often

Heading into the next Congress, a key item on Waters’ agenda will be monitoring systemic and other risks in big banks. The financial industry has enjoyed several months of continuous deregulatory activity under an HFSC headed by Rep. Hensarling and a Republican-controlled Congress. Under her leadership, the Committee will be limited in its ability to stall measures at the federal regulator level, but it will be able to increase oversight and change rhetoric to keep a check on agency overreach.

In the words of Waters, “as we saw in the last crisis, it is the average hard-working Americans that will suffer the consequences if Washington deregulates Wall Street megabanks again.”

Oversight in Her Sights

A robust oversight agenda will accompany the legislative priorities of the Committee under Waters. This agenda will likely focus on four distinct areas: firms, rulemaking, agencies, and the presidency.

On the firms, Waters has expressed indignation about the slap-on-the-wrist treatment of Wells Fargo in light of the improper and unfair foreclosures on its customers. Many were erroneously denied loan modifications to lower their mortgage payments.

A Democrat-controlled House cannot do much in the way of affirmative rulemaking, but it will no longer have to play defense against further attempts at deregulation. Much of Waters’ oversight in this area will be over agencies, ensuring that the Trump appointee-controlled CFPB, FSOC, and OFR are operating according to their original statutory purposes and with the resources they need. This will likely take the form of hearings, subpoenas, and investigations.

Waters has been steadfast in her position that investigation into the president’s alleged illegal financial dealings is on her agenda, but it’s not her top priority. In a Bloomberg interview earlier this month, Rep. Waters was clear that she would use her authority to get more information, using subpoenas if necessary, but was far more eager to discuss Wells Fargo and the CFPB.

An Able Veteran who Came to Legislate

Waters is a skilled and seasoned legislator. Her turn with the gavel at HFSC is very welcome news and signals the end of the tide of deregulation. It also signals an end to a period of free-reign for regulators (or should we say deregulators) dogmatically pursuing an agenda that puts Wall Street megabanks ahead of ordinary Americans. Her agenda will be limited by the Republican-controlled Senate, but it will set the tone and pave the way for future legislation that will curb the rollbacks of Dodd-Frank that have occured in recent years.


Kraninger Confirmed for CFPB (August 24)

Update 294 — Kraninger Confirmed for CFPB; Other Key Noms Cleared by Senate Banking

A mixed bag of nominees for a broad range of critical federal regulatory agency positions cleared the Senate Banking Committee yesterday.  All of them, if confirmed by the full Senate, would serve well into a putative second Trump term or into the next administration.

Some of the nominees were not controversial; others made it clear that Republicans remain determined to decimate agencies and rules created after the financial crisis.  Kathy Kraninger, widely viewed as Acting-Director Mick Mulvaney’s protégé, was the most controversial nominee, but Senate Banking advanced her nomination anyway. The full Senate confirmation vote is another matter.  

More below.  Good weekends all…




•   Kathy Kraninger, Director, CFPB

Kathy Kraninger’s nomination to head the Consumer Financial Protection Bureau (CFPB) was advanced by the Committee in a razor-thin 13-12 vote along party lines. There was strong opposition to her nomination and a number of Democratic Senators spoke out during the hearing to highlight, in no uncertain terms, her unsuitability for the position.

The Bureau has come under fire for being “unconstitutionally structured” (Judge Brett Kavanaugh’s opinion in a 2016 D.C. appellate court ruling), suggesting the President should be allowed to interfere in the agency’s mandate. During her confirmation hearing, Kraninger stated that it is not her duty to answer the constitutionality question: “the director has a responsibility to carry out the law as it is written and run the agency as it is established.”

Despite her platitudes, Kraninger’s nomination will reinforce the trajectory of the agency under Mulvaney’s stewardship. Ranking Member Sherrod Brown noted her concerning admiration for Mulvaney’s current policies, which are sabotaging and undermining the Bureau. Sen. Catherine Cortez Masto summed-up Mulvaney’s tenure during yesterday’s Committee hearing: “CFPB has been repurposed to serve the interests of Wall Street and payday lenders.”

The CFPB was created in the aftermath of the financial crisis to stand up for the little guy and make sure consumers have an advocate against special interests and big banks. With Mulvaney-stooge Kraninger at the helm, the mission of the CFPB is in jeopardy, and yesterday’s confirmation is a blow to Americans asking the question: Who is fighting for me? The date for the final vote before the full Senate is unclear but could be by the end of September.

•   Dino Falaschetti, Director, OFR (Treasury)

The Committee also advanced Dino Falaschetti with a favorable nomination by voice vote to be Director of the Office of Financial Research (OFR). Falaschetti has spent the past several years working as Chief Economist to Chair of the House Financial Services Committee, Jeb Hensarling.

OFR is the research arm of the Financial Stability Oversight Council (FSOC), which is charged with identifying “potential emerging threats to the financial stability of the United States.” One of its most important tools is the power to designate a non-bank financial institution as a systemically important financial institution (SIFI) and subject it to “enhanced prudential standards” devised by the Fed Board of Governors.

Throughout its eight years of existence, FSOC, with the help of OFR, has used its designation authority four times to classify American International Group, Inc. (AIG), General Electric Capital Corporation, Inc. (GE), Prudential Financial, Inc., and MetLife, Inc., as non-bank SIFIs. GE and AIG have since had their designation removed and Prudential’s non-bank SIFI designation is also being re-considered.

Dr. Falaschetti’s current boss, Rep. Hensarling, has called for the abolition of OFR, but Falaschetti indicated in his testimony that he would adopt an “analytical and impartial” approach to his role as director of OFR. His approach will be crucial to ensuring that OFR remains an entity that identifies financial risks before they are upon us as opposed to one that is committed to removing designations.

•   Kimberly Reed, President, Ex-Im Bank

Kimberly Reed was unanimously advanced by the Committee to lead the Export-Import Bank (EXIM) as president. Her nomination now moves to the Senate floor for approval. Reed previously headed the Community Development Financial Institutions Fund of the Treasury Department and served as senior advisor to former Treasury secretaries Henry Paulson and John Snow.

Some members of the Committee, particularly Sen. Heitkamp, took time to emphasize the importance of EXIM and the impact of its state of limbo on the US economy. Due to congressional infighting, the EXIM charter lapsed in 2015 for five months.  While the charter was reauthorized, some Senate Republicans (Sens. Pat Toomey and Richard Shelby) have blocked nominees for the Board of Directors, leaving EXIM short of the required 3 out of 5 members for a quorum. (Without a quorum, the Bank is unable to approve individual credit transactions over $10 million.)

Reed cleared the Committee once before in December of 2017 when she was nominated to serve as First Vice President of the Bank, but that vote was 20-3, with GOP Sens. Shelby, Toomey, and Sasse voting against. Her unanimous approval yesterday is a good sign for the full Senate vote.

$45B worth of export credit financing is stuck in the pipeline due to the lack of a board quorum. Reed’s approval is the first step towards getting EXIM back to a fully functional state, but as Ranking Member Brown noted in his testimony, two more board members are needed for a quorum and “Sen. McConnell won’t schedule the nominees for a floor vote again because of some extremist ideologues in the Republican party.”

•   Elad Roisman: Commissioner, SEC

Elad Roisman was advanced with little controversy to become a member of the Securities and Exchange Commission (SEC). Roisman, the current chief counsel to the Senate Banking Committee, played a key role in the development and drafting of S.2155, the bipartisan legislation passed earlier this year aimed at rolling back parts of the Dodd-Frank Act (DFA).

In his July testimony, Ranking Member Brown emphasized that, if confirmed, Roisman should focus on enforcement, because of the recent downward trend in this area within the SEC. Roisman noted that, if confirmed, he would focus on enforcement to make sure the agency is doing all it can to promote investor confidence. During the same hearing, Roisman stated: “There’s a perception that the markets are rigged against the little guy and I think it’s important for the SEC to try to dispel that notion and one of the ways they can do that is by having a strong enforcement program. A program that holds regulated entities and individuals accountable.”

Roisman will replace former SEC Commissioner Michael Piwowar, who departed the agency on July 7. Roisman, along with Hester Peirce, will be one of the two Republican members of the 5-member Commission. Interestingly, prior to their nominations to serve as SEC commissioners, Roisman, Peirce and Piwowar all served as members of the Senate Banking Committee staff under former Chairman Richard C. Shelby.

The Bureau of Consumer Financial Protection?

Although some of these confirmed nominees appear harmless, a close eye will have to be kept on them moving forward, especially Kraninger. The crown jewel of DFA, the CFPB, is now in the hands of someone who follows closely in the footsteps of Mulvaney, undoubtedly creating a large potential risk to the integrity of the bureau. In one of his more petty attacks on CFPB, Mulvaney changed the sign outside the agency’s HQ to BCFP in an attempt to emphasize the BUREAUcracy and de-emphasize the Consumer. Kraninger’s nomination is further confirmation that consumers do not come first for the Trump Administration.

Trump’s Financial Regulators: One Year in and Changing the Game Already (Feb. 28)

Update 252 — Trump’s Financial Regulators: One Year in and Changing the Game Already

From consumer protection to regulation of firms, the financial regulatory landscape has changed markedly in some areas and is stillborn in others. Trump regulators have made a variety of decisions that has escaped broader notice.

We take a tour of the financial agencies and review major policy and rule making decisions as well as the resulting overall impact of the Trump administration on the financial regulatory world, providing some context for the debate coming up on S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, now slated for Senate floor action next week.



FSOC Shedding Designations

During the Obama years, Financial Stability Oversight Council (FSOC) designated four companies as systemically important non-financial institutions in addition to the large banks that are statutorily designated. These included American International Group (AIG), General Electric Capital Corporation (GE Capital), Prudential Financial, Inc., and MetLife, Inc. These designations were short lived. GE Capital was delisted in June, 2016 after it was spun off from its parent company and deemed no longer interconnected enough to warrant SIFI regulation.

Since President Trump has assumed office, FSOC has moved assertively to delist the insurance companies that were at the heart of the 2008 financial Crisis.

Last September, the Council delisted AIG from its list of systemically important non-financial institutions. While the move won the vote of Janet Yellen, many commenters raised concern for the deregulation of a company that was at the heart of the financial crisis. MetLife challenged it’s SIFI status in court, and had its designation rescinded by District Court Judge Rosemary Collyer in March of 2016. Last month, MetLife and FSOC filed a joint motion to dismiss the federal government’s appeal of that decision.

All indications are that Prudential, the last nonfinancial SIFI, may soon find regulatory relief as well. Last week, FSOC made good on its promise to reexamine Prudential’s designation status. While a final decision on the matter is not expected until later in 2018, the company is lobby hard that its designation is unwarranted. Given the deregulatory zeal of Trump’s FSOC, don’t be surprised to see the nonbank SIFI list at zero before the year is out.



Fed Makes Regulatory Accommodations

  • Living Will Deadline Extension

At the end of September, the Fed issued an accommodating rule on living will submissions, allowing eight of the biggest banks to wait until July, 2019 to submit remediated living will plans to fix weaknesses in earlier submissions. Resolution planning is a key Dodd-Frank Act systemic protection, requiring the largest banks to plan their own failure so the financial system does not plunge into crisis if one banks fails. The groups of banks that benefit from the ruling include the nation’s largest: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs Group, JP Morgan Chase, Morgan Stanley, State Street Corporation, and Wells Fargo.

  • CCAR Transparency

The word “transparency” has been used frequently in conversations about new approaches to financial regulation. Fed Chair Jay Powell has repeatedly floated the concept as imperative in his reevaluation systemic risk rules. In December, the Fed solicited public comment on its proposals to increase transparency of its CCAR stress testing. These proposals include disclosing the Fed’s modeled range of loss rates for loans held by banks subject to CCAR, portfolios of loans used under stress testing scenarios, and an in-depth description of the Fed’s models, including equations used and variables that influence the outcome of the models.

Just this month, the Fed moved forward to release its scenarios for both CCAR and DFAST stress testing. This year the severely adverse scenario, the most stressful condition tested, will simulate a global recession during which the unemployment rate increases from 4 percent to 10 percent and interest rates on treasuries increase substantially. Now that the banks subject to CCAR have these conditions, they can prepare their balance sheet for the test.

  • Fed Restricts Wells Fargo

In a surprise move, the Fed at the beginning of February that Wells Fargo not be permitted to grow beyond its asset size at the conclusion of 2017. This after a lengthy public revelation about consumer abuses and compliance failures. Most notably, the nearly $2 trillion bank created more than 1.5 million fake checking and savings accounts, as well as 500,000 credit cards that were unauthorized. The edict was Chair Yellen’s final act.



Leadership Change at the OCC and FDIC

  • Undoing Obama Era Safeguards

Trump has filled key financial industry regulators positions at a glacial pace since assuming office. It wasn’t until November 27th that Joseph Otting was sworn in as Comptroller at the OCC. However, the agency has since taking up the charge against the Volcker rule on Wall Street’s behalf. The OCC has also begun the process of weakening its enforcement of the Community Reinvestment Act and softening its position against leveraged lending.

Trump’s appointee to run the FDIC, Jelena McWilliams, was cleared by the Senate Banking Committee with only Elizabeth Warren expressing concerns over the former Fifth Third Bank executive taking charge of the agency. McWilliams has spent time on the Hill as chief council for the same committee that approved her nomination, and at the Fed. While she has been guarded about her regulatory views she has expressed interest in relieving regulatory burden from “community banks” and will play a significant role in the rumored rewrite of the Volcker Rule.

The news has not been all bad at the OCC. Just last month, the bureau levied a $70 million fine on Citibank for failure to adhere to a 2012 directive regarding money laundering. On top of that, the most recent round of indictments from Mueller’s team should draw the attention of the OCC to “Lender B”, which appears to have ventured beyond the law in it’s issuance of loans to Paul Manafort.



The SEC: 180 Degree Turn

Securities and Exchange Commission (SEC) Chair Jay Clayton has pursued fewer penalties under the Trump Administration.  Chair Clayton has expressed that the penalties hurt shareholders and not just the individuals who have been responsible for wrongdoing.

Under Chair Clayton, the SEC has done what Michael Piwowar, a Republican appointee, calls “a full 180” in regulatory enforcement. Between the Obama and Trump Administrations there has been a stark contrast in enforcement. From January to September 2016, the Obama administration issued several regulatory punishments worth $702 million, where the Trump administration only issued around $100 million in punishments from January to September 2017.



CFTC Pullback from DFA Enforcement

Like the SEC under Chair Jay Clayton, the Commodities and Futures Trade Commission (CFTC) under Chair J. Chris Giancarlo has pursued a broad agenda aimed at deregulation and fewer enforcement actions in the derivatives markets.

  • Pullback from Dodd-Frank

Giancarlo’s plan to roll-back Dodd-Frank regulations entitled “Reg Reform 2.0,” features the intent to roll-back Title VII protections. At a Senate Agriculture Committee hearing earlier in February, Sen. Tina Smith (D-MN) questioned Chair Giancarlo about this roll back could increase the risk of a financial crisis. Giancarlo replied that while Title VII is being implemented by the CFTC, many of the reforms are not working and that the Commissioners will look at every section to either strike or significantly reduce regulations.

  • Decline of Enforcement Actions

Chair Giancarlo has also taken far fewer enforcement actions than his predecessors. Sen. Sherrod Brown called the inaction “a deliberate pullback in enforcement.” During the fiscal year that ended in September, 2017, enforcement actions totaled 49, down from 68 the previous year, and the total fines issued were just $413 million, down from $1.29 billion the previous year.

Enforcement actions may, however, be on a rebound. The CFTC announced yesterday that it is expected to file “more than 10” fraud and market-manipulation cases in the coming weeks. Perhaps Chair Giancarlo, a former Obama appointee, understands the importance of enforcement after all.



CFPB: Hostile Takeover

An obsession of conservatives since its inception, the Consumer Financial Protection Bureau (CFPB) has been under steady assault since Trump assumed office. While last month’s legal challenge to the agencies legitimacy fell short in D.C. Court of Appeals (read more in Update 247), managing director Mick Mulvaney has been doing his best to undermine the agency from the inside. Upon assuming office, Mulvaney issued a letter to regulators explaining that he would refuse to “push the line” in order to protect consumers. Three months into his tenure it appears that this means doing everything in his power to make the CFPB dysfunctional.

In December, Mulvaney directed the bureau to freeze the collection of any personally identifiable information from companies it supervises. The move ostensibly about addressing cybersecurity concerns, but Sen. Warren, one of the CFPB’s most vocal defenders, argued the freeze was more about sabotage than substance. Ending the collection of personally identifiable information could potentially slow fraud investigations and cripple the CFPB’s enforcement functions.

All indications are that Mulvaney does not plan on stopping with data freezes. Last month, he issued a Request for Information about the Bureau’s Civil Investigative Demands in order to collect suggestions on how to “improve outcomes for both consumers and covered entities.”  Given Mulvaney’s tenure thus far this strongly suggests an even greater deregulatory push to come at the CFPB.  Expect similar rollbacks at the other regulatory bodies as Trump appointees slowly but surely take over and enact the administration’s agenda at the Fed, OCC, FDIC, SEC, and CFTC.

Fin Reg Agency Review (Jun. 22)

Update 186 — Fin Reg Agency Review:
Wrecking Crew for Administrative State?
This morning, Chris Giancarlo appeared before the Senate Agriculture Committee for his confirmation hearing to lead the Commodities Futures Trading Commission.  At this juncture, the ideological profile of the administration’s nominees and appointees to serve on the financial regulatory agencies is gaining an unmistakeable hue.
We wanted to take this opportunity to review the state-of-play on the leadership transitions of five such agencies — key components of what Steve Bannon refers to as the administrative state.  To paraphrase Tolstoy, every unhappy agency is unhappy in its own way.  Details below.
SEC: The Recusal Chairman
Jay Clayton’s ascension to Chair of the SEC has been dogged by questions about commitments to former clients.  His support for reversing regulations has been noted with concern.  He led Goldman Sachs’ plea for a government bailout during the financial crisis.  His close ties to Goldman Sachs and Deutsche Bank mean he must recuse himself for two years from enforcement votes dealing with these entities.  He is also closely connected with Volkswagen and Valeant Pharmaceuticals.
Clayton may have the most free time of any SEC chief in history.  In his Senate confirmation earing, Clayton assured the Committee that he would be an honest enforcer in eliminating fraudulent practices.  Unable to see past his experience working for firms currently under investigation, 37 Democratic members opposed his nomination.
CFTC: Giancarlo’s Vision
Democratic Commodities Futures Trading Commission Member Sharon Bowen announced her forthcoming departure on Tuesday.  She expressed frustration that only two of the agencies’ five commissioner seats have been filled and said the vacancies render important policy decisions impossible. Bowen summarized the predicament of the agency as “intolerable.”
President Trump nominated Acting CFTC Chair Chris Giancarlo to become official Chair in March.  At the time, Giancarlo unveiled plans to change CFTC’s mission to that of fostering economic growth and to “right-sizing” its regulatory approach. He also introduced plans to change the way CFTC conducts market surveillance, creating a new “chief market intelligence office.” In the same speech, he criticized DFA swaps trading rules and pledged to review the fintech sector.  Giancarlo is expected to be an active member of FSOC, believing the body to fail to consider what he believes to be the constraining effect of regulation.
In today’s confirmation hearing, Giancarlo changed his tune to supporting Title VII of the DFA based on his practical experience of 14 years. Title VII of the DFA outlines central clearing of swaps, swaps data reporting, and regulating swaps trading. He repeatedly stated his support and his desire to keep the title completely intact.
When asked about regulatory reform by multiple Democrat senators, he explained his want to modernize regulations that are out of date and increase the efficiency of putting them into place. The project he created in adherence to Trump’s EO on regulation, called Project KISS, aims to look at the practical application of rules and see if they can be applied in a less costly manner and achieve the same goals.
Don’t be fooled. Despite his seemingly reasonable remarks, Giancarlo is one of the most far right of the administration’s nominees.  He is a champion for the view that Dodd-Frank regulations are a drag on economic growth.
FDIC:  A Familiar Choice
President Trump will appoint James Clinger to replace Martin Gruenberg as FDIC Chairman when Gruenberg’s term expires in November.   Clinger has worked for years on Capitol Hill, contributing substantially to the Gramm-Leach-Bliley Act to repeal Glass-Steagal.  Notably, Clinger worked on the Committee staff of Financial Services Chair Jeb Hensarling of CHOICE Act fame.
FDIC is responsible for regulating thousands of community banks.  With respect to Dodd-Frank, the FDIC is key in overseeing large bank living wills and in administering OLA should Title II of DFA be invoked to wind down a systemically important firm.  The CHOICE Act would eliminate OLA.
OCC:  Turning Tables, Revolving Doors
The administration has already maneuvered to put its Acting Comptroller of the Currency in place.  Former bank attorney Keith Noreika was appointed as the top deputy in the OCC before the administration fired Obama’s appointed Comptroller, paving Noreika’s way to serve as Acting Comptroller.  Trump got his temporary man by sidestepping the Senate consent process.  Senator Van Hollen was sure to bring this up in today’s SBC hearing and indeed asked if Noreika would sign the Trump administration’s ethics pledge on preserving the public trust.  Noreika flatly said he would not.
Steve Mnuchin’s old stomping ground at OneWest is looking like the newest launching pad for public sector service. Joseph Otting is the most recent alumnus to be nominated for a major regulatory post when the White House tapped Otting to lead the Office of the Comptroller of the Currency.  He may become the administration’s de-regulatory czar, as his agency is tasked with “reducing the regulatory burden,” among other responsibilities.
When the financial crisis hit, Otting’s OneWest foreclosed on thousands of homeowners via questionable practices. From 2011 to 2015, Otting became closely acquainted with OCC, as his firm took a lengthy four years to meet the compliance concerns of the agency.
Now that the tables have turned, can Otting serve as an honest enforcer?  As Senator Brown puts it, “the president’s choice for watchdog of America’s largest banks is someone who signed a consent order — over shady foreclosure practices — with the very agency he’s been selected to run.”
CFPB:  Reform at Your Peril
There is no clearer battle line in Washington on financial regulation than the one between the GOP and the Consumer Financial Protection Bureau. Republicans regularly trash its “swanky” office, its poorly-defined definitions of abusive practices, and the Federal Reserve funding that keeps it running.
But President Trump has not indicated that he will ask for the resignation of Richard Cordray, the still-serving inaugural Director of the agency created by Dodd-Frank.  This is surprising restraint for a person so admired for firing  people.  Could be negligence.
Last week’s Treasury Department report issued severe criticism of the CFPB’s MO, pointing to the shirking of “notice-and-comment rulemaking,” the lack of “clear regulatory standards,” and the lack of clarity in defining unfair, deceptive, and abusive practises.  The report made several recommendations with these criticisms in mind.
Cordray’s term does not expire until July 2018, but the administration joined a legal challenge to remove Corday in March. Sharp CFPB critic Randy Neugebauer is viewed as a possible replacement.

What’s up with the SEC? (July 11)

Mike & Co.,

Last week, tersely-worded letters from prominent Senators brought the SEC back into focus.  Issues with the SEC’s proposed regulations have been raised before by Sens. Warren and Brown, who have gone so far as to challenge Chair White’s leadership abilities and intentions. Issues at the SEC are further complicated by the continued vacancies of two seats on the five-member Commission, with little prospect for progress in the Senate.

This update examines the state of play regarding salient outstanding rules at the SEC, what may be accomplished this year, and what will likely be postponed until after the election.




The Chief Rules on the Docket

Specifically, the status of the following four SEC rules or proposals is examined:

  • Disclosure Effectiveness Initiative
  • Open-End Fund Liquidity Risk Management Programs (liquidity risk rule)
  • Use of Derivatives by Registered Investment Companies and Business Development Companies (derivatives rule)
  • . Fiduciary Rule (not yet officially proposed)

Revamping the Rules?

Last month, the SEC announced an upcoming vote on July 13 to propose amendments to address “redundant, duplicative, overlapping, outdated, or superseded disclosure requirements.” This Disclosure Effectiveness Initiative is seen by some as part of the SEC’s implementation of the FAST Act of 2015, primarily a transportation funding act, which directed the agency to consider ways to modernize and simplify disclosures.   

Sen. Warren has strongly criticized this move to constrain regulation, outlining concerns about the number of public disclosures require in a July 7 letter accusing the agency of masking this initiative as a “pro-investor effort to address information overload,” saying this problem of too much public information doesn’t exist.  Other organizations, like Pubic Citizen, have expressed concerns about consolidation of the rules when greater disclosure is widely demanded.  The SEC Investor Advisory Committee expressed reassurance last month after Chair Mary Jo White claimed the initiative’s goal is to broaden regulatory understanding by investors, rather than reduce disclosures.

Sen. Warren’s strong comments are consistent with her recent interactions with the SEC, calling White’s performance as Chair as “extremely disappointing” at a Senate Banking hearing in June.  Only hours after Sen. Warren released her most recent letter, the agency announced its intention to proceed with its efforts to consolidate regulations, and Chair White stated in May the SEC’s dedication to disclosure effectiveness.

Sen. Brown also addressed proposed SEC rules last week, focusing instead on encouraging Chair White to strengthen two current rule drafts.  The first, pertaining to liquidity risk, would address hazards arising from mutual funds with illiquid securities difficult to sell in times of stress.  Brown urged this rule be revamped to require comprehensive liquidity disclosures and include explicit instructions on how funds should classify assets.  He also sought greater oversight of derivatives trading, asking the SEC to provide detailed instructions on the determination of risk-based coverage, as well as a definition of stressed conditions.   Brown argued this helps investors gain valuable information on how their money is used.  Both of these rules remain open for public comment. Chair White in a May speech announced her intention to “promptly finalize these rules.”

With regard to the fiduciary rule, Chair White has maintained her support for a uniform fiduciary standard between the SEC and the Department of Labor.  She did indicate in March that the two agencies have separate mandates, and as such cannot promise that any SEC fiduciary proposal would be identical to that under the DOL.

The SEC projected this past May that a fiduciary standard on both investment advisors and brokers could be proposed by April 2017.  For such a rule to go into effect, Chairman White would need the support of at least two more Commissioners, which could be difficult given the current vacancies on the Commission.

Continued Vacancies

The five-member Commission remains short by two officials, with the nominations of Hester Peirce (R) and Lisa Fairfax (D) stalled in the Senate.  After some initial delay, Senate Banking did approve the two nominees by voice vote, but the Senate floor has yet to address the vacancies.  One culprit appears to be an unidentified Democratic senator, who put a “hold” on Peirce’s nomination, effectively blocking her confirmation vote unless overruled by 60 senators.  Sens. Warren and Schumer have also both openly opposed Peirce’s nomination.

Given the tendency to confirm a Democrat and a Republican nominee in tandem to ensure partisan balance, Fairfax’s nomination is now stalled as well. The lack of a full Commission for the SEC has a major bearing on how well the agency can fulfill its mandate, particularly as agency rules require a minimum of three Commissioners to attend all votes.

It appears increasingly unlikely that these two seats will be filled before the November election and the SEC will thus remain thwarted until 2017.

Institutional Struggles in Context 

The SEC has not been portrayed in a favorable light in recent months and the administration felt it had to defend the agency.  Following Sen. Warren’s sharp critiques in June, the White House stepped in and spoke up in the Chair’s defense, maintaining that she is the right person to head the SEC.  In a way, the Commission is being “Garlanded,” denied a full bench, consequently disappointing key constituents like Congress, and, rightly or wrongly, getting pilloried in the process.

The Warner-Warren Derivatives Reform Bill (July 6)

Mike & Co.,

Last week, Sens. Warner and Warren, along with Rep. Elijah Cummings, announced the Derivatives Oversight and Taxpayer Protection Act (S. 3188, H.R. 5592), , a bill to strengthen the CFTC’s power to regulate derivatives transactions and increase the agency’s budget by changing the source of its appropriations.

Yesterday, the bill’s three sponsors followed up by releasing open letters to two systemically important derivatives clearing organizations, requesting information on those firms’ orderly resolution documents.

More on the bill, its impact, and its broader role and significance below.




The bill’s announcement drew notice in part because Sen. Warner signed on as an original cosponsor.  Sen. Warren is not a stranger to bringing together varied groups of lawmakers to get things done, but Warner’s presence speaks to the importance of this bill as a blueprint for Democrats’ future regulatory plans.

The derivatives market is massive – with an estimated nominal value of $400 trillion in the United States alone.  Not only is its size impressive, but it can make  derivative instruments a major source of volatility in the market.

Economists have pointed to reckless derivatives trading on mortgages and related products as a major contributing factor to the 2008 crisis.  To prevent that from happening again, Dodd-Frank endowed the CFTC with broad new powers to regulate and oversee derivatives trading but left the funding for this critical task up to Congressional appropriations.  DFA also left open certain loopholes for derivatives traders and left it up to the CFTC to determine how it calculated capital requirements.

What’s in it? 

Broadening CFTC Oversight

  •  Updating the CFTC’s enforcement authority so that the agency can impose meaningful civil penalties on firms that break the law and deter misconduct by repeat offenders.
  •  Closing the cross-border loophole, which currently allows big financial firms with operations abroad to circumvent many key CFTC requirements.
  •  Ending the exemption of certain foreign exchange swaps from CFTC jurisdiction, ensuring adequate oversight of a key derivatives market.
  •  Banning the use of closeout netting for purposes of calculating minimum capital requirements.
  •  Strengthening the CFTC’s margin rule by requiring the posting of initial margin in inter-affiliate swaps.
  •  Authorizes the CFTC to collect fees from the entities it regulates.  While the agency will still be subject to the appropriations process, having a pool of funds to point lawmakers toward may help increase the CFTC budget in the long run.

What’s Not? 

A provision reinstating the swaps operations push-out mandate from DFA was removed as part of a deal to secure Sen. Warner’s support.  The mandate was originally suspended during the 2014 cromnibus negotiations.  That may not please progressive Democrats.

Is the Bill DOA? 

As long as the GOP controls Congress.  The largest Wall Street banks account for 95 percent of the U.S. market for derivatives and can be expected to fight tooth and nail to prevent any increase in their regulatory requirements.  Such strong opposition, coupled with the relatively scarce few days left in the current Congress, add up to a dim future for the Warner-Warren bill in 2016.

But bills like this can do a great deal of good simply by being introduced, open a conversation about one of the most significant and volatile financial instruments, and setting an agenda for reform.  Importantly, they offer a valuable political opportunity for candidates seeking the mantle of reform to stump on.

Derivatives and Systemic Risk 

As part of the bill roll-out, Senators Warner and Warren and Rep Cummings wrote open letters to two major derivatives clearinghouses – CME Group and Intercontinental Exchange – seeking information about their recovery and resolution plans.   The two companies are arguably systemically important derivative clearing organizations, and as such could be considered obligated to prepare resolution plans “that would be implemented as needed to guide their orderly failure.”

The letter requests the firms’ final recovery and resolution plans, and specific information on whether the plans have been reviewed by federal regulators, which events trigger the plans’ execution, how clearing services are isolated from other activities, and to what extent the firms have addressed the systemic risks they may face.

The Bill in the Campaign Context

Even though Congress won’t move on the Warner-Warren bill in 2016, it is a stand out proposal for continuing the work that the DFA started.  It reinforces the HRC mantra of defending and building upon Dodd-Frank in a manner that supports middle-America and prevents a repeat of the 2008 crisis.

As Senator from New York, HRC called for greater oversight on derivatives trading in the early days of the financial crisis.  In a November 2007 speech, she said “We need to start addressing the risks posed by derivatives and other complex financial products … derivatives and products like them are posing real risks to families, as Wall Street writes down tens of billions of dollars in investments.”

Per the campaign:  “HRC and the Democratic Party believe that we need to take on excessive risks in the financial system and hold people accountable for financial misdeeds…. we Democrats agree that we need to build on and strengthen Dodd-Frank and go further.

Bottom line:  if you believe in the above, there’s almost no good reason not to support or endorse this bill.

The Curious Case of Ex-Im (June 28)

Mike & Co. —

Prospects for productive activity in Congress seem to be slipping away palpably these days.  There are far more significant examples, but we look at one relevant case of obstruction and delay that also foreshadows some central and fundamental differences that the fall campaign is likely to revolve around.

The example is a useful one as well because it provides a glimpse into a gaping vulnerability for GOP presumptive Presidential nominee Donald Trump, relating to the structure, if not business model, of his campaign.




The Curious Case of Ex-Im

By March, the Senate Banking Committee had earned the distinction of being the only committee to hold no votes on any nominees before it throughout the entirety of this Congress.  Chair Richard Shelby was facing a difficult primary battle against a young opponent on his right flank.  The incumbent Chair promised that once he had dispatched his primary opponent, the Committee could get back to work and begin to hold hearings on the nominees sent to it.

While Shelby did win his primary contest, his committee has approved only a third  (6 of 17) of the nominees before it.  Not one of these has yet had a confirmation vote from the full Senate.

Some Noms More Equal Than Others

Nominees before Senate Banking have been held up for two stated reasons: ideological allegiance and political pragmatism.  But there is a pattern: Shelby is happy to allow SEC or Treasury Department nominees through Senate Banking but he won’t allow a vote for nominees to the Federal Reserve or Ex-Im Bank Boards.

Sen. Shelby is part of a vocal minority of conservative lawmakers who believe the Bank’s operations endanger the free market and its loans put taxpayers at unnecessary risk.  This is the same group of Senators who managed  to block legislation renewing the Bank’s charter last year, leading to a months-long halt of much of the activity within the agency.

Now, despite a majority in both parties and both houses of Congress coming forward to renew the bank’s charter last December, one person has been able to keep and has single-handedly kept Ex-Im hamstrung.

Unlike his blockade against Federal Reserve nominees (which he says will be lifted if Obama nominates a Vice-Chair for Oversight to the Fed), it’s unclear what, if anything, might persuade Sen. Shelby to relent on Ex-Im.   He says only that he “believes his actions are in the best interest of the American taxpayer,” and that “the bank is more about corporate welfare than advancing our economy.

Ex-Im in a Trumpian Context 

Relatedly, and at least equally concerning, presumptive GOP nominee Donald Trump said in 2015:

“I don’t like [the Ex-Im Bank] because I don’t think it’s necessary. It’s a one-way street also. It’s sort of a feather bedding for politicians and others, and a few companies. And these are companies that can do very well without it. So I don’t like it. I think it’s a lot of excess baggage. I think it’s unnecessary. And when you think about free enterprise, it’s really not free enterprise. I’d be against it.”

“Feather bedding” is an ironic choice of expression.  To date, Trump-linked businesses account for 17 percent of all campaign expenses.  He had paid almost $11 million to Trump organizations for these expenses since launching his campaign a year ago.  According to campaign finance experts, it’s difficult to tell if he’s breaking the law in doing so, but it’s not difficult to see the hypocrisy of Trump calling the Ex-Im Bank “feather bedding” for politicians.

According to the Associated Press, Trump has directed over $6 million to his business ventures and family members over the past year, as disclosed to the Federal Election Commission. Trump has also boasted in the past that he may be the “first presidential candidate to run and make money on it.”

Historical Background 

The Export-Import Bank was established during the Great Depression to help finance purchases of American exports by foreign customers.  Since its creation, it has helped finance billions of dollars in international trade between American companies and foreign clients.  Dozens of other countries followed our lead and established their on export-promotion agencies.

Consequences of a Hamstrung Ex-Im

The Bank has a five member board of directors, but for several months only two of those seats have been occupied.  Without a quorum, or three members, the board cannot approve any loan package totaling more than $10 million.  Since there is no alternative way to approve of large loan packages, the bank is effectively hamstrung to give out large loan packages for customers.

This presents a problem: while about 98 percent of recent loan applications are for less than $10 million, and therefor can move out of the bank without approval by the board, a full two-thirds of its loans by dollar value come in the form of loans over the $10 million threshold.  Right now the bank has more than 30 such large-value loan packages, totaling over $20 billion, in its backlog.

The consequences for American manufacturing jobs have been clear.  Last September, G.E. announced a flurry of moves: creating up to 1,000 jobs in the Czech Republic to produce turboprop aircraft engines; shifting 500 power-project jobs from Texas, South Carolina, Maine and New York to France, Hungary and China; promising 1,000 energy-sector jobs in Britain, whose export bank will finance up to $12 billion in G.E. sales to Brazil, Ghana, India and Mozambique; and relocating 350 engine manufacturing jobs from Waukesha, Wis., to a new factory in Canada.

Other nations’ export-credit agencies are “rolling out the red carpet,” said John G. Rice, the G.E. vice chairman, so instead of exporting products, these companies are exporting jobs to keep up.  In fact, Mr. Shelby’s own state is far from exempt. Boeing, a major user of Ex-Im loan packages for sales to developing nations especially, employs 2,750 workers directly in Alabama.  The company claims it spent $532.3 million in the state in 2015 and helped to indirectly support 17,000 jobs there through its operations.