Financial Services Report (1/22)

January 22, 2019

Our Take

Yesterday our nation celebrated Dr. Martin Luther King Day.   Among his popular quotes is that “the arc of the moral universe is long, but it bends towards justice.”  As noted here there is a sense by some that this trajectory only occurs through the force of those seeking to bend it.   In thinking about this, I am reminded me of the perspective from Congressman Tom Lantos, who once told me the goal of our Democratic Congress should be to close the hypocrisy gap – which is what he called the difference between America’s ideals as laid out in the founding documents and the reality of the day.  The effort described in the former is necessary for achieving the later.  However, if history is any guide, these effort needs to be done pragmatically and at a pace that probably disappoints the more ardent supporters of the objectives trying to be achieved.  

That moderation – the natural anthesis to any extreme – has been the model of successful bending that arc – through compromise by those who sought change with those who sought to conserve the status quo.   Now, in an age of Twitter, where ideas and images are instantaneously debated, debunked, antagonized and approved – often depending on one’s political perspective – and it seems with an added element of moral and intellectual superiority – there is little room to attempt to find commonality with one’s opponents.   
To paraphrase the great Dr. King from a speech in 1962, if we don’t communicate with each other it will only lead to continued fear of the “other” and that it is through a “realist position” that combines the perspectives of the optimist and the pessimist in order to find a middle ground to get things done.  


Looking Ahead

Near Term

  • The Shut Down is expected to continue, although Leader McConnell has indicated that he will bring legislation to the floor that would codify the deal offered by the President over the weekend – i.e., wall funding for a 3-year DACA patch and the delay of deportation of TPS.
  • The House Financial Services Committee is expected organize this week.  
  • There are few bills on the Suspension calendar originating out of the Financial Services Committee including one authored by the Chair and Ranking member (see more on this below).

Further Out

  • Whether and where the President will give his State of the Union address, currently scheduled for January 29th, is TBD after Speaker Pelosi indicated her preference that the House chamber will not be available to the President on January 29th unless the funding for the portions of the government currently shut down is secured.


The Past Week

Shutdown Update
As of today, the partial government shutdown is in its 32nd day. With the shutdown lingering on, both the House and Senate cancelled planned “District Work periods” for this week.  However, the end of the funding impasse remains TBD, with both sides continued to publicly dig into their respective positions. 
Last week House Democrats continued to send spending bills to the Senate, although the latest effort, (H.J.Res. 28),  that would reopen shuttered agencies through February 28th, became ensnarled in its additional controversy, as the measure appeared to have been approved by a voice vote, before Republicans indicating that they had wanted a recorded vote.   However, by that point the voice vote had been approved, ultimately requiring a vacating of the passage and delaying final passage to this week.   Earlier in the week, House Democrats and six Republicans had also voted in favor of a CR (H.J.Res.27) that would fund the government through February 1st.  
While more and more economic analysts and experts, including the President’s own Economic Counsel are forecasting a negative impact on economic growth, including the possibility of accelerating the anticipated future recession, due to the shutdown, things remain at an impasse.   However, on Thursday the President signed the Government Employee Fair Treatment Act, which would provide back pay for employees of affected agencies, though not contractors, which may provide some juice to the economy whenever the shutdown concludes.   
Impact on Financial Services
With the Financial Services-General Government bill among those unfunded by Congress, the partial shutdown has impacted a variety of government functions relating to financial services, tax, and trade. A brief recap of shutdown developments in these areas can be found below:
Financial Services

  • On Tuesday, Senator Elizabeth Warren (D-MA) sent a letter to the CEOs of major banks requesting information on how they plan to assist furloughed workers.


  • Reps. Pete Olson (R-TX), Don Beyer (D-VA), and Ed Perlmutter (D-CO) introduced the Financial Relief for Feds Act (HR 545), which would allow federal employees and contractors affected by the shutdown to make penalty free withdrawals from retirement savings accounts.


  • The Wall Street Journal on Friday reported that the funding lapse is preventing the White House from vetting individuals that Senate Minority Leader Chuck Schumer has signed off on to fill Democrat-reserved financial regulatory positions at the SEC and FDIC.


  • On Friday, the White House cancelled an Administration delegation’s planned trip to the World Economic Forum in Davos Switzerland this week.


  • The Internal Revenue Service (IRS) released its revised shutdown plan on Tuesday. The agency will recall 46,000 currently furloughed employees—nearly 60 percent of its workforce—to process tax returns after Administration officials declared earlier this month that returns would be processed on time.


  • On Wednesday, House Ways and Means Committee Chairman Richard Neal (D-MA) sent a letter to Secretary of the Treasury Steven Mnuchin inviting him to testify before the Committee on the shutdown and its impact on taxpayers. The hearing was to take place this Thursday, January 24. However, the Treasury Department immediately indicated that Secretary Mnuchin will not attend, offering instead to send lower level officials more directly involved with the shutdown.


  • U.S. Tax Court canceled has cancelled 13 trial sessions scheduled between January 28 and February 4.


  • On Monday, the Office of the United States Trade Representative announced that President Trump’s various trade negotiations would continue despite the lapse in funding leaving USTR with only 30% of its staff.

Legislative Branch
Waters Outlines HFSC Agenda in CAP Speech
On Wednesday, House Financial Services Committee (HFSC) Chair Maxine Waters (D-CA) delivered a speech at the Center for American Progress where she outlined her financial services priorities for the 116th Congress. Among the several agenda items in the speech, included: (1) “paying very close attention to the growth of financial technology” and considering safeguards to prevent abuses of fintech, particularly with regards to payday lending, discrimination, and protecting the role of community banks and credit unions; (2) reforming the nation’s credit reporting system; (3) listing principles for housing finance reform based around maintaining access to the 30-year fixed rate mortgage; and (4) conducting extensive oversight of the Trump Administration—specifically mentioning oversight of banking regulators, the Consumer Financial Protection Bureau, and the Department of Housing and Development. 
Financial Services Committee Assignments Finalized
On Wednesday, the Democratic Steering and Policy Committee announced Democratic additions to the House Financial Services Committee (HFSC). Of the 16 Democrats added to the Committee, eight are members of the Congressional Progressive Caucus (CPC), five are members of the New Democratic Coalition, and three are unaffiliated with either caucus.  Much of the immediate attention focused on the more vocal additions and their role in the committee.  However, there is still a sizeable contingent of moderate Democrats on the Committee and while the Chair made it clear that there was a new agenda (see above) the reality is that pragmatic compromise on policy issues is still feasible, even with the more leftward tilt of the Committee.
The following Democrats will join the Committee this Congress: Reps. Alma Adams (NC), Cindy Axne (IA), Sean Casten (IL), Madeleine Dean (PA), Tulsi Gabbard (HI), Jesús García (IL), Sylvia Garcia (TX), Al Lawson (FL), Ben McAdams (UT), Alexandria Ocasio-Cortez (NY), Dean Phillips (MN), Katie Porter (CA), Ayanna Pressley (MA), Michael San Nicolas (GU), Rashida Tlaib (MI), Jennifer Wexton (VA).
The announcement followed the Republican Steering Committee’s recommendations of five new HFSC Republicans the previous day: Reps. Anthony Gonzalez (OH), John Rose (TN), Bryan Steil (WI), Lance Gooden (TX), and Denver Riggleman (VA)
Appropriations Subcommittee Assignments Finalized
On Wednesday, House Appropriations Committee Chairwoman Nita Lowey (D-NY) announced Democratic assignments for the 12 Appropriations subcommittees. Among those Committees announced was the Financial Services and General Government (FSGG) Subcommittee—to be Chaired by Rep. Mike Quigley (D-IL)—which has jurisdiction over appropriations for the Treasury Department, the Executive Office of the President, and numerous financial regulators. In addition to Chairman Quigley, the following Democrats will serve on the FSGG Subcommittee: Reps. Jose Serrano (D-NY), Matt Cartwright (D-PA), Sanford Bishop (D-GA), Norma Torres (D-CA), Charlie Crist (D-FL), and Ann Kirkpatrick (D-AZ).
While Appropriations Republicans have yet to finalize subcommittee assignments, Rep. Tom Graves (R-GA) was announced as the FSGG Subcommittee’s Ranking Member on Tuesday.
Democrats Introduce $15 Minimum Wage Bill
On Wednesday, House Speaker Nancy Pelosi (D-CA) unveiled the Raise the Wage Act (text; fact sheet), which would incrementally increase the federal minimum wage—currently $7.25—to $15 by 2024. In addition to the incremental minimum wage increases, the bill also includes provisions indexing future increases in the federal minimum wage to median wage growth and eliminating subminimum wages for tipped workers, teenagers, and individuals with disabilities.
While the legislation is highly unlikely to pass the Republican-controlled Senate, it has already attracted broad support from Democrats in both chambers of Congress—the House version of the bill has 188 Democratic cosponsors and the Senate companion bill introduced by Sen. Bernie Sanders (I-VT) has 31 cosponsors. Speaker Pelosi unveiled the legislation at an event featuring appearances from Education and Labor Committee Chair Bobby Scott (D-VA), House Majority Leader Steny Hoyer (D-MD), Senate Minority Leader Chuck Schumer (D-NY), Sen. Sanders, HELP Committee Chair Patty Murray (D-WA). Two representatives involved in drafting the bill—Blue Dog and New Democrat Rep. Stephanie Murphy (D-FL) and Progressive Caucus Member Donald Norcross (D-NJ)—also appeared at the event, a juxtaposition that highlights the bill’s support across the party’s centrist and progressive wings.
HFSC Leaders Introduce Insider Trading Bill
On Friday, House Financial Services Committee (HFSC) Chairwoman Maxine Waters (D-CA) and Ranking Member Patrick McHenry (R-NC) released the Promoting Transparent Standards for Corporate Insiders Act (HR 624) intended to curb insider trading. The legislation would require the Securities and Exchange Commission (SEC) to review its Rule-10b5-1 to ensure that corporate insiders are unable to indirectly engage in insider trading through changes to their trading plans. Originally passed in the House as part of last year’s JOBS 3.0 capital formation package, the bill is the first bipartisan legislation to be released by HFSC’s new leadership pair. In an accompanying press release, Chairwoman Waters called the bill “the first of what I hope will be many bipartisan bills to strengthen consumer and investor protections in the 116th Congress.”  The bill is scheduled for consideration on the floor this week on the suspension calendar.  
McHenry Asks Financial Regulators for Brexit Update
On Tuesday, following a 433-202 blowout loss on British Prime Minister May’s Brexit Plan, House Financial Services Committee Ranking Member Patrick McHenry (R-NC) sent a letter to leaders of the Treasury Department, Federal Reserve, Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC) asking for an update on how their agencies plan to mitigate consequences of a “no-deal” Brexit withdrawal on U.S. financial markets. The letter recognizes that U.S. regulators have been working with U.S. financial institutions to prepare for the United Kingdom’s imminent departure from the European Union but notes the particular risks associated with a withdrawal executed without an exit plan in place.
Russian Sanctions Resolution Fails in Senate before Symbolic Vote in the Hosue
On Wednesday, the Senate failed to invoke cloture on a resolution of disapproval (S.J.Res.2) preventing the Treasury Department from lifting sanctions on three companies related to Russian oligarch Oleg Deripaska, a close associate of Russian President Vladimir Putin. With 11 Republicans joining Senate Democrats in voting in favor of the resolution, the 57-42 margin fell short of the 60-vote threshold needed to advance the measure.  The following day in a great example of Kabuki Theater, the House passed the resolution on broad bipartisan vote, even though Wednesday’s defeat meant that the  Administration can move forward with lifting the sanctions.
Aging Committee Holds Hearing on Elder Fraud
On Wednesday, the Senate Special Committee on Aging  held a hearing entitled “Fighting Elder Fraud: Progress Made, Work to Be Done” featuring testimony from law enforcement officials and other stakeholders involved in combatting elder fraud. During the hearing, Senators and witnesses discussed a variety of methods to combat elder fraud, including enabling bank employees to report suspicious transactions, interdisciplinary task forces, educational campaigns, and federal-state partnerships.
Now a Presidential Candidate, Warren Keeps Heat on Banks, Mnuchin
On Friday, Sen. Elizabeth Warren (D-MA) sent a letter to Treasury Secretary Steven Mnuchin and the CEOs of the nations’ six largest banks requesting information on a December 23 in which Secretary Mnuchin asked the executives about their banks’ ability to maintain liquidity during a period of potential market downturn. The letter was the recently-declared Presidential Candidates third widely reported letter to be sent last week, following (1) a letter to executives of several large banks asking about their plans to provide assistance to government workers affected by the shutdown; and (2) a letter to Wells Fargo CEO Tim Sloan questioning the bank’s college lending practices and concluding that “Wells Fargo does not belong on college campuses.”
Select Highlights from the Administration
Federal Reserve
Goodfriend Not Among Nominations Sent to Congress, Future in Doubt
On Thursday, Bloomberg reported that President Donald Trump is wavering on re-nominating Carnegie Mellon University Professor Marvin Goodfriend to the Federal Reserve Board of Governors after his nomination languished in the Senate all of last year. Dr. Goodfriend was not on the list of dozens of names for nomination that the White House transmitted to the Senate Wednesday night and faces an uphill battle after a rocky confirmation hearing last year and opposition from Senate Democrats and Sen. Rand Paul (R-KY). Additionally, his inflation hawk reputation clashes with President Trump’s repeated criticisms of Federal Reserve interest rate hikes over the past several months.
Consumer Financial Protection Bureau
Kraninger Asks for “Clear” MLA Authority
On Thursday, Consumer Financial Protection Bureau (CFPB) Director Kathleen Kraninger sent a letter to Congressional leadership urging Congress to clarify CFPB’s authority to supervise compliance with the Military Lending Act (MLA). The letter includes attached draft legislation that would provide CFPB with explicit authority to conduct examinations related to MLA compliance and voices support for legislation (HR 442) sponsored by Rep. Andy Barr (R-KY) that would achieve the same goal. In an accompanying press release, Director Kraninger said this legal tweak would “complement work the Bureau currently does to enforce the MLA.
Last year, Acting CFPB Director Mick Mulvaney ceased supervisory examinations for MLA compliance, saying that MLA is not one of the 19 statutes identified in the Dodd-Frank Act as falling under CFPB’s authority. Since then, Congressional Democrats have heavily criticized the decision, which supplanted Obama era legal opinions that CFPB already has MLA supervision authority. MLA imposes a 36% annual percentage interest rate cap for active duty service members and their dependents.
Reports: CFPB to Scrap Payday Lending Rule Underwriting Requirements
On Monday, media reports emerged that Consumer Financial Protection Bureau (CFPB) is expected to eliminate the 2017 payday lending rule’s underwriting requirements, which require lenders to verify ability to repay while still meeting living expenses. The move would eliminate a core component of the 2017 rule that imposed guardrails on small dollar loans intended to prevent borrows from spiraling into high-interest debt they cannot repay.
Promulgated under Obama appointed CFPB Director Richard Cordray, the payday lending rule has been a target of significant criticism from the Trump Administration and others who allege that it is overly restrictive. Acting White House Chief of Staff Mick Mulvaney had attempted to delay the rule’s implementation as CFPB’s Acting Director and a Treasury Department report this summer recommended the rule’s repeal.
Internal Revenue Service
Final Rule Released for 20% Pass-through Deduction
On Friday, the Internal Revenue Service and Department of the Treasury released final regulations and guidance on the newly created deduction for pass-through business owners. Created as part of last winters’ tax reform push, the deduction allows eligible pass-through business owners—owners of sole proprietorships, partnerships, trusts, and S Corps—to claim a 20% deduction on qualified business income, although certain “service businesses” such as doctors, lawyers, and accountants are generally ineligible. Highlights from the regulation include: (1) allowing income-generating real estate owners to claim the deduction so long as they dedicate at least 250 hours per year to their business and avoid certain lease structures; (2) delineating what types of companies count as “service businesses” and clarifying when certain levels of service-based income affect eligibility to claim the deduction; and (3) making it harder for businesses such as law firms to split operations apart on paper to obtain favorable tax treatment.
IRS Waives Penalty for 2018 Withholding Shortfalls
On Wednesday, the Internal Revenue Service (IRS) announced that it would waive the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of actual tax liability. The move will waive the penalty for taxpayers who pay at least 85 percent of tax liability during 2018—temporarily increasing the usual 90 percent margin of error—and is intended to accommodate unexpected tax liability fluctuations resulting from the Tax Cuts and Jobs Act. As the announcement notes, “although most 2018 tax filers are still expected to get refunds, some taxpayers will unexpectedly owe additional tax when they file their returns.”
Office of the Comptroller of the Currency
Senior Deputy Comptroller Morris Morgan Tapped as OCC COO
On Thursday, the Office of the Comptroller of the Currency (OCC) announced that OCC staffer Morris Morgan would assume the title of the agency’s Chief Operating Officer. The newly created role—which will oversee the divisions of bank supervision, bank supervision policy, economics, compliance and community affairs, and innovation—was created "as part of changes to the agency's executive-reporting structure that result in greater coordination and integration of the agency's bank supervision activities” per an OCC press release. Mr. Morris, who previously served as Senior Deputy Comptroller for large bank supervision, has worked at OCC since 1985.
United States Trade Representative
USTR Promises Exclusion Process if Next Round of China Tariffs Imposed
On Tuesday, several media outlets reported that United States Trade Representative (USTR) Robert Lighthizer sent a letter to two U.S. Senators indicating that USTR would conduct an exclusion process should the Trump Administration raise tariffs currently imposed on $200 billion of Chinese goods from 10% to 25%. Responding to inquiries from Sens. Pat Toomey (R-PA) and Doug Jones (D-AL), the letter pledges that certain products would be able to escape the tariff hike through an exclusion process that considers a product’s availability from other sources, the potential for “severe economic impact” that would result from tariffing the product, and the product’s strategic importance.
While USTR conducted an exclusion process allowing affected importers to avoid 25% tariffs imposed on $50 billion in merchandise in mid-2018, it did not initially have such an exclusion process for the 10% tariffs on an additional $200 billion in merchandise rolled out in September. This second round of tariffs was to be escalated to 25% prior to a “truce” reached between President Trump and Chinese President Xi Jinping at the G20 summit in November. That hike is now on hold until March 2, pending negotiations between the two countries.
China Offered Trillion Dollar Import Hike to End Trade War; Mnuchin Suggests Dropping Tariffs
On Friday, public reports emerged that China proposed a plan to eliminate its trade surplus with the United States during negotiations to end the trade standoff between the two countries earlier this month. Under the proposal, China would increase its exports of US goods by $1 trillion dollars over the next six years and eliminate its $323 billion dollar trade surplus with the United States by 2024. U.S. officials reportedly countered the offer by demanding the trade surplus be eliminated within two years.
The Dow Jones Industrial Average soared more than 300 points on the news Friday. The development marked the second major indication last week of cooling tensions between the two economic giants following Thursday reports that Treasury Secretary Steven Mnuchin has suggested lifting tariffs imposed on China in order to expedite negotiations. Discussions between the two countries are set to resume at the end of this month when Vice Premier Liu He visits Washington.
Basal Committee on Bank Supervision
Basel Committee Releases Market Risk Capital Requirements
On Monday, the Basel Committee on Banking Supervision—an international standards-setting body composed of central bank governors—released revisions to its minimum capital requirements market risk framework (text). While the new framework is expected to increase banks’ total market risk capital requirements by an average 22 percent over current requirements, this revision is widely seen as more accommodative to banks than a 2016 version of a framework which would have had nearly twice the impact. Additionally, banks will now have more flexibility to use their own computer models for calculating capital requirements compared to the 2016 framework.
The framework—set to go into effect in January 2022—is expected to have modest effects on overall capital held by banks, although its impacts on reserves will be more pronounced among giant trading banks.

 This Week’s Schedule

As of the publication of this newsletter there were no significant events scheduled for this week