Better Markets Bites Dog: Blind Blue Team – Red Team Devotion is Wrong

We’ve been criticized for not being sufficiently one-sided since we opened the doors in 2010. 

We have tried to be substantive, data-driven, fact-based and straight-shooters, calling them as we see them.  We analyze a subject and try to take a position that we believe and can defend as in the public interest, which means protecting investors and consumer while strengthening systemic stability and preventing financial crashes and taxpayer bailouts.  We do this so that we have a vibrant and balanced financial system that supports the real economy, jobs and broad-based prosperity. 

Admittedly, it’s not very exciting.  As the New York Times said, “Better Markets does not march against banks, or bring loudspeakers to their lobbies.  It instead writes detailed comment letters to regulators, meets with them, files friend-of-the-court briefs, puts out studies and testifies before Congress.”  In all these activities, including more than 200 rulemakings, we have focused on what’s in the public interest and what can actually be accomplished.

To the consternation of many, we simply have not taken positions on issues based on whether they are proposed or supported by one party or the other.  Similarly, we refused to only praise one side and criticize the other regardless of the issue.  Sure, we’ve agreed with and praised Democrats much more than Republicans, but that’s because most Democrats have been fighting for financial reform to protect the public interest and most Republicans have been fighting against it, which by intent or not has protected the interests of Wall Street over Main Street.

There’s simply too much Red Team v. Blue Team in Washington.  That view — if you’re not with us 100% of the time, then you’re against us or untrustworthy — is counterproductive in our view.

So we supported President Obama, Treasury Secretary Geithner and many other Democrats in the previous administration as well as Congress and the agencies when we agreed with them, but we also criticized them when we disagreed.  (Regrettably but unsurprisingly, too many of them only remembered when we disagreed.)  We have taken the same attitude to the Trump administration, although we have criticized it a great deal more due to its overwhelming bias in favor of Wall Street and their deregulatory zeal.  But, we have also praised them when appropriate, including SEC Chairman Clayton on money market funds and the consolidated audit trail and CFTC Chairman Giancarlo for his unwavering fight to increase the funding for his agency. 

That is the background for our positive remarks this week regarding the Trump administration’s budget proposals for the SEC and, in particular, the CFTC, as noted by The Washington Post, Politico and The Hill.  Importantly, while applauding the budget requests, we also said “more resources are needed” and “[i]f Congress is serious about protecting investors and markets while promoting capital formation and reducing systemic risk, it will build upon the President’s budget and substantially increase the funding for both the SEC and CFTC.”  All pretty straightforward in our view.

The Federal Reserve Must Strike the Right Balance: Robust and Credible Stress Tests Are Crucial to Preventing the Next Financial Crisis

Stress tests have been one of the Federal Reserve Board’s most significant and indisputable successes since the 2008 financial crash and it must be extremely careful regarding any changes to ensure that its hard-won credibility is not damaged. This is not a theoretical concern.  When Europe implemented what turned out to be “no-stress” stress tests, where banks collapsed shortly after passing those tests, those regulators predictably and appropriately lost all credibility. European stress tests still have little credibility as a result.

The Fed’s stress tests have proven to be exactly the opposite, engendering the confidence of investors, markets, and the public.  No less an authority than Gary Cohn, when he was President of Goldman Sachs and while European banks were under significant pressure, effusively praised the Fed in 2016 for, among other things, its stress tests:

“[US banks were] subject to enormously robust stress tests here in the United States, and I give the Fed enormous credit for what they’ve done in stress testing the major banks here in the United States.”

As a result, US financial firms are now more sufficiently capitalized to absorb losses in adverse economic conditions while still meeting their obligations to creditors, counterparties, and customers looking to borrow funds.  The Board must be extremely careful not to snatch defeat from the jaws of victory here, particularly when the pleas for any such changes are largely self-interested industry complaints with no demonstrated objective or valid basis.

In this context, Better Markets submitted its comment letter on the Fed’s proposed changes to rules regarding the expanded disclosure of the models used in these tests.  As we said, many aspects of the proposal are positive and will add beneficial transparency and rigor to the stress testing process. We nonetheless remain concerned because it is not clear from the proposal that the Fed has struck the right balance between too much and too little disclosure about the stress testing models.  

Sharing the actual formulas that drive the stress tests models can enable banks to game the system, discourage independent risk analysis, and even increase systemic risk by promoting homogenous asset holdings.  A key concern is that, armed with enough detail about the models, banks could adjust their balance sheets on the day of the stress tests to earn a passing grade, and then revert to more risky holdings. This would severely weaken the value of the stress tests, neutering one of the most important post-crisis banking reforms.  These concerns are heightened because the proposal offers little explanation about who is asking for that granular level of transparency and exactly how the proposal strikes the all-important balance.

We have had very productive interactions with the Fed’s Governors and staff over the years, including very recently with the new Vice Chair for Supervision, Randy Quarles.  We are confident that they are all committed to maintaining a robust, effective and credible stress test regime.  However, the devil is in the details.  As the Fed finalizes this proposal, Better Markets will continue to work to make sure that this critical and vital tool is not compromised and that it remains an essential weapon in the financial crisis prevention arsenal.

The Equifax Data Breach May Be Even Worse Than We Thought. 

As the news broke that CFPB’s acting director Mick Mulvaney had halted the CFPB’s investigation of Equifax, the Wall Street Journal reported that the “hack might be worse than you think.”   The story reports that much more sensitive personal information including tax identification numbers, email addresses and drivers’ license numbers, were also compromised.  A must-read report prepared by the staff of Sen. Elizabeth Warren before this latest news detailed the egregious breach and Equifax’s failings.  And at a House subcommittee hearing on “Examining the Current Data Security and Breach Notification Regulatory Regime,” Ranking Member Maxine Waters (CA), along with Reps. William Clay (MO), David Scott (GA) and Denny Heck (WA) all spoke to the issue of national breach notification standards in their questioning.  Remember that right after the scandal broke, Better Markets came out with a call for an Equifax Rule, would require companies to promptly disclose any significant computer hack.

Even More Proof Financial Protection Rules are Working

As we have reported before, banks are doing very well generating revenue, pocketing profits and increasing lending to the real economy, all of which rebut the ceaseless claims of the industry and their lobbyists that the financial protection rules are killing them.  Now there is yet another report confirming that from the Bank for International Settlements’ (BIS) Committee on the Global Financial System, which is made up of senior officials from central banks across the world and is chaired by New York Fed President William Dudley.  Their comprehensive review, “Structural Changes in Banking after the Crisis” combs-through an exhaustive amount of research, documenting how banking systems around the globe responded to the 2008 financial crisis and found that because of the post-crisis regulatory regime, banks have changed their business models and are more resilient today as a result.  So banks are profitable, increasingly lending and much stronger, all years after Dodd Frank and similar international regulations.