Insights

Financial Services Report (1/28)

January 28, 2019

Our Take

While over, it is clear that the shutdown will be like a proverbial elephant in a room, and  the point of discussion for at least another week as Democrats hope to continue to use it as an example of the President's inability to govern.   This will transpire while all sides continue to negotiate a more permanent solution, so hopefully the politics that paralyzed negotiations have shifted such that a more permanent solution will be found before the short-term patch the President signed on Friday expires.  There is no better personification of the dysfunction of Washington, DC than the failure of Congress and the President to agree to its funding obligations.  Generally speaking, the fact that the public continues to send ideologues to Congress who view politics from a win-lose perspective doesn't bode well for any major improvements in this regard.   Though, as noted below, the moderate New Dems now have over 100 members in the House.  Here's hoping that the Justice Democrats are willing to recognize that they are better off having incremental gains with New Dems in the tent, than primarying them an all but ensuring a return to a Republican majority.  

 

Looking Ahead

Near Term

  • On Monday, the Federal Accounting Standards Board (FASB) will host a roundtable in an effort to address concerns from the industry related to the organization’s Credit Expected Credit Loss (CECL) accounting rules.  This issue, and specifically a foll0w-up hearing on the subcommittee hearing on this issue from last year, was among the many suggestions that Ranking Member Patrick McHenry sent to Chair Waters earlier this week.
  • There are a series of financial services related bills on the House floor this week, all of which are coming up under the suspension calendar.  Among them are the H.R. 624, the insider trading bill that Chair Waters and Ranking Member McHenry introduced, and which was supposed to be on the floor last week.     In addition, on Tuesday, the House is scheduled to take up H. Res 77, a non-binding sense of Congress that “financial institutions and other companies should work proactively with their customers affected by the shutdown of the Federal Government who may be facing short-term financial hardship and long-term damage to their creditworthiness through no fault of their own.”
  • Also calling attention to the impact of the shutdown will be two hearings, one at the Energy and Commerce Committee and one at the Education and Labor Committee.
  • The Senate Judiciary Committee is scheduled to vote on William Barr to become the next Attorney General later this week.

Further Out

  • As discussed in more detail below, published media reports indicate that the House Financial Services Committee is planning on holding a hearing on Credit Reporting Agencies in late February and then another hearing with the CEOs of Americas largest banks in late March or early April.
  • The suspension of the debt limit will expire on March 1st, though Treasury is expected to utilize the extraordinary measures available to postpone the actual threat of a breach into the summer. 

 

The Past Week

Legislative Branch
Shut Down Update
After 35 days, the longest partial shut-down of the Federal government ended when the President Trump announced that would sign a short term (3 week) funding measure absent the inclusion of any money for a new border wall.  Shortly thereafter, both the House and Senate passed the legislation by voice vote and the President signed the bill into law Friday evening.     The temporary solution came at the end of another tense week in shutdown-weary Washington. On Thursday, two funding bills—one including President Trump’s proposal to couple government funding with $5.7 billion for a border wall and temporary protections for DACA recipients and the other consisting of a three-week CR—each failed to reach the 60-vote cloture threshold in the Senate, with the President’s DACA proposal receiving less support than a clean CR.  Then on Friday, following the announcement of Presidential campaign aide Roger Stone’s indictment, and multiple reports of flight delays around the country, the President made his announcement, which as immediately panned by the pundits of the far right.   How that reaction will impact future negotiations, and whether we will all simply be back in the same place in three weeks remains unclear.   
 
House
Meeks Introduces Legislation to Support those Impacted by the Shutdown
This past week, Rep. Greg Meeks (D-NY)—the appointed Chair of the House Financial Services Subcommittee on Consumer Protection and Financial Institutions, introduced two pieces of legislation to assist individuals who have suffered negative financial impacts due to the partial government shutdown.  First, the Federal Workers Banking Assistance Act, that would provide banks Community Reinvestment Act (CRA) credit for modifying or making low-interest loans to federal employees and others impacted by the loss of a paycheck.  Second, the Federal Worker Credit Protection Act, a bill that would allow furloughed workers to request that credit reporting agencies remove negative credit information from their credit reports if the negative information occurred because of the individual’s inability to receive a paycheck due to the shutdown.  With the shutdown, at least temporarily over, it is unclear whether these bills will move through the legislative process.
 
Financial Services Committee Subcommittee Leaders Finalized.
On Thursday, House Financial Services Committee (HFSC) announced chairmen and ranking members of the Committee’s freshly reorganized subcommittees. Subcommittee leadership is as follows, with the full subcommittee roster expected to be announced in the coming days.

Subcommittee on Investor Protection, Entrepreneurship and Capital Markets: Chair Carolyn Maloney (D-NY); Ranking Member Bill Huizenga (R-MI)

Subcommittee on Consumer Protection and Financial Institutions: Chair Greg Meeks (D-NY); Ranking Member Blaine Luetkemeyer (R-MO)

Subcommittee on Housing, Community Development and Insurance: Chair Lacy Clay (D-MO); Ranking Member Sean Duffy (R-WI)

Subcommittee on National Security, International Development and Monetary Policy: Chair Emanuel Cleaver (D-MO); Ranking Member Steve Stivers (R-OH)

Subcommittee on Diversity and Inclusion : Chair Joyce Beatty (D-OH); Ranking Member Ann Wagner (R-MO)

Subcommittee on Oversight and Investigations: Chair Al Green (D-TX); Ranking Member Andy Barr (R-KY)

Reports of Future Financial Services Committee Hearings Leaked
On Friday, media reports emerged that House Financial Services Committee (HFSC) Chairwoman Maxine Waters (D-CA) plans to call the CEOs of the nation’s largest banks—likely including JP Morgan, Bank of America, Citi, Wells Fargo, Goldman Sachs and Morgan Stanley—to testify before the committee for a hearing expected to occur by this spring. The news followed reports earlier in the week of other planned oversight actions of financial institutions: (1) a tentatively scheduled February 26 hearing with top executives from the three major credit reporting agencies that could potentially cover data breaches and credit reporting practices; and (2) an in-the-works joint investigation with the Intelligence Committee into Deutsche Bank’s affiliations with President Trump.
 
McHenry Outlines his Thoughts on Financial Services Committee Agenda
On Wednesday, House Financial Services Committee (HFSC) Ranking Member Patrick McHenry (R-NC) sent a letter to Chairwoman Maxine Waters (D-CA) urging her to consider a dozen topics for potential committee hearings.  They are: (1) Brexit’s impact on global markets; (2) the Export-Import Bank; (3) cybersecurity and the financial sector; (4) Chinese lending practices and their relationship to international institutions; (5) implementation of the Foreign Investment Risk Review Modernization Act (FIRRMA); (6) unwinding the Federal Reserve’s balance sheet; (7) long-term reauthorization of the National Flood Insurance Program (NFIP); (8) modernization of Bank Secrecy Act/Anti-Money Laundering (BSA/AML) regulations; (9) Terrorism Risk Insurance (TRIA); (10) ending government conservatorship of mortgage finance agencies; (11) fintech regulation; and (12) the Financial Accounting Standards Board’s (FASB) Current Expected Credit Loss Standard (CECL).
 
New Dems Induct Nine More Members
On Wednesday, the New Democratic Coalition inducted nine new Members, bringing total number of the coalition of centrist Democrats to over 100 members. Notably, the new additions mean that 40 of the 60 House Democratic Freshmen are now members of the coalition, meaning that the group is also now the largest ideological caucus in the House. Commenting on the coalition’s growth, New Democrats Chair Derek Kilmer said “We are laser-focused on our common denominator: we are here to get something done. New Democrats are eager to grow the pie, create jobs in every part of the country, and build an economy where businesses innovate.”   How the group intends to, or is able to, leverage its numbers within the caucus will clearly play out over the coming weeks and months. 
 
Duffy Introduces Reciprocal Trade Act
On Thursday, Rep. Sean Duffy (R-WI) and 18 Republican cosponsors introduced the U.S. Reciprocal Trade Act (HR 764), which would provide the President with broad authority to increase tariffs on countries he or she determines to have overly restrictive trade practices. While the legislation is highly unlikely to become law, it has gained coverage over the past several weeks in light of the White House’s reported involvement in drafting the bill, which was expected to be announced at the State of the Union address this week. Over the past year, President Trump has faced pushback from Members of both parties over his aggressive application of tariff authorities, prompting several legislative proposals aimed at reigning in the President’s tariff powers, for instance as they relate to national security.
 
Senate
Warren Presses Regulators on Impact of Shutdown
On Wednesday, Senator Elizabeth Warren sent letters to the SEC, CFTC and Federal Reserve Board, peppering them with questions about how the shutdown has impacted their ability to regulate the economy or perform the basic functions of their jobs.   The questions appeared to be aimed at obtaining data to compare how the regulators acted normally and under the shut down (i.e., number of filings reviewed by the SEC a year ago vs. during the shutdown).  The letters requested a response by February 2nd, and now that the shutdown is, for the time being, over, there will be employees back in the offices able to respond.   
 
Warren Reportedly Working with Economists on Wealth Tax
On Thursday, in a clear signal that the Democratic primary is going to be, in part, focused on inequality issues, it was leaked that Senator Warren (D-MA) is considering announcing a proposal for an “Ultra-Millionaire tax.” The proposal would impose a 2% annual tax on household net worth between $50 million and $1 billion and a 3% tax on household net worth above $1 billion, and include anti-evasion measures such as an increase in the IRS enforcement budget, a minimum audit rate for affected taxpayers, and a 40% “exit tax” on wealthy taxpayers renouncing their citizenship.
 
Select Highlights from the Administration
The White House
White House Economic Council Indicates Shutdown may Slow Economic Growth
On Wednesday, Council of Economic Advisor (CEA) Chairman Kevin Hassett in a CNN interview raised the possibility that the U.S. economic growth this quarter may fall to zero percent depending on how long the shutdown lasts.   Apparently, the CEA had projected 1.7-percent annualized GDP growth for the first quarter and had also estimated that each week of the shutdown could shave 0.1 percentage points off that total.  Under that estimate if the shut down had lasted another month it would have completely stalled the country’s economic growth.  With the shutdown ending after 7 weeks, it will likely only translate to a .7% impact.
 
China Truce “Miles and Miles” Away
On Tuesday, Secretary of Commerce Wilbur Ross said in a CNBC interview that the United States and China are still “miles and miles” apart in negotiations to resolve trade tensions between the two countries. Additionally, he cautioned against placing high expectations on ministerial level talks between United States Trade Representative (USTR) Robert Lighthizer and Chinese Vice Premier Liu He scheduled for this week, saying: “people shouldn’t think that the events of next week are going to be the solution to all of the issues between the United States and China. It’s too complicated a topic.”
 
The comments came after the Administration reportedly cancelled a planned meeting with Chinese officials last week due to outstanding disagreements over the enforcement of intellectual property rules. However, White House Economic Advisor Larry Kudlow denied that any meeting was cancelled and said that no meeting had been scheduled prior to Vice Premier Liu’s visit to Washington this week. Under the terms of a “truce” agreed to in at the G20 summit in November, the Trump Administration has delayed escalating tariffs on $200 billion in Chinese goods until March 1, a deadline that is now five weeks away.
 
Kudlow Says Fed Nominees Up in Air
On Thursday, National Economic Council Director Larry Kudlow said that President Trump is seeking nominees to the Federal Reserve Board of Governors who are sympathetic to his view that strong economic growth doesn’t necessarily cause inflation. Speaking to reporters at the White House, Mr. Kudlow commented “the White House wants highly capable competent people who understand that you can have strong economic growth without higher inflation, it’s just that basic.”
 
During the interview, Mr. Kudlow also commented that the board has “a couple open seats,” lending credence to reports that the White House is wavering on renominating Carnegie Mellon University economist Marvin Goodfriend to one of the two open slots on the Fed Board.
 
Federal Housing Finance Agency
Otting Says GSE Overhaul On Its Way
On Thursday, Politico obtained remarks given by Acting Federal Housing Finance Agency (FHFA) Director Joseph Otting in which he said that the White Hosue would release a plan to resolve government control over Mortgage giants Fannie Mae and Freddie Mac in the coming weeks. Speaking to FHFA employees, Mr. Otting indicated that the plan would be released towards the end of this month and that it would likely be implemented under existing FHFA powers rather than through new legislation.    Congressionally Democrats quickly took interest in the reported plan. On Friday, House Financial Services Committee Chairwoman Maxine Waters (D-CA) and Senate Banking Committee Ranking Member Sherrod Brown (D-OH) sent a letter to Mr. Otting requesting a detailed outline of the plan no later than February 1.
 
Consumer Financial Protection Bureau
CFPB Settles With Online Lender Enova
On Friday, the Consumer Financial Protection Bureau (CFPB) announced it had reached a consent order with Enova International resolving allegations that the online lender debited consumers’ bank accounts without authorization in violation of the Consumer Financial Protection Act. While the Bureau acknowledged that consumers had authorized Enova to deduct payments from certain accounts, it found that the company in many instances debited different accounts than authorized and that the company had failed to honor loan extensions it granted to consumers. Under the terms of the consent order, Enova is barred from making or initiating electronic fund transfers without valid authorization and must pay a $3.2 million civil penalty.
 
CFPB Announces New Senior Leadership
On Friday, the CFPB announced five staff changes at the Bureau, including the hiring of Andrew Duke, a former senior staffer for former Financial Services Chairman Jeb Hensarling as the Policy Associate Director for External Affairs.   The other changes included Lora McCray, as the Director for the Office of Minority and Women Inclusion.  Ms. McCray joined the CFPB after being the Assistant Vice President, Diversity and Inclusion at the Federal Reserve Bank of Boston.  In addition it was announced that Delicia Reynolds Hand will serve as Deputy Associate Director for External Affairs, Laura Fiene will serve as West Regional Director and Marisol Garibay will serve as the Acting Chief Communications Officer.
 
Commodity Futures Trading Commission
CFTC to Consider Cross-Border Derivative Rule; Extend Swap Execution Facility Comment Deadline
On Friday, Commodity Futures Trading Commission (CFTC) Chairman Christopher Giancarlo said that CFTC will start work on a new cross-border derivative rule as soon as the Commission reopens from the government shutdown. In comments to an American Bar Association conference (delivered remotely due to shutdown-imposed travel limitations), Chairman Giancarlo commented that "the intention is to replace the cross-border guidance issued by the CFTC in 2013 and the cross-border rules proposed in 2016, as well as address certain positions taken in CFTC staff advisories and no-action letters."
 
Also in the speech, Chairman Giancarlo indicated that CFTC would extended the comment period on the agency’s proposed rules for swap execution facilities until March 15 (previously February 13). Earlier in the week, media outlets had reported that Chairman Giancarlo would abandon the agency’s November proposal—dealing with the electronic platforms over which investors execute swaps—amid pushback from industry stakeholders who have already made the transition to 2014 rules.

 

Next Week’s Schedule

 

Mon. (1/28)

  • FASB Roundtable on CECL – 8:30 AM – The Financial Accounting Standards Board (FASB) will host a public roundtable meeting to gather additional views on the credit losses standard and to discuss the current expected credit losses (CECL) model." Details here.

 
Tues. (1/29)

  • Hearing: House Budget Committee on the CBO's Budget and Economic Outlook – 10:00 AM – The House Budget Committee will hold a hearing to examine the Congressional Budget Office's (CBO) budget and economic outlook. Details here.
  • Business Meeting: Senate Judiciary Committee – 2:30 PM – The Senate Judiciary Committee will hold an executive business meeting to vote on pending nominations, including the nomination of William Barr to be U.S. Attorney General. Details here.
  • Hearing: Senate Budget Committee on the CBO's Budget and Economic Outlook – 2:30 PM – The Senate Budget Committee will hold a hearing to examine the Congressional Budget Office's (CBO) budget and economic outlook. Details here.

 
Wed. (1/30)

  • No events scheduled.

 
Thurs. (1/31)

  • Hearing: Energy and Commerce on the Shutdown – 10:00 AM – The House Energy and Commerce Committee will hold a hearing that examines the shutdown's impact on federal workers, public health, the environment, and consumers. Details here.
  • Hearing: Education and Labor on the Shutdown – 10:15 AM – The House Education and Labor Committee will hold a hearing entitled "Consequences of the Shutdown: Endangering Students, Workers, Families, and Communities." Details here.

 
Fri. (2/1)