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December 2, 2019

ICYMI: Top News From The Thanksgiving Holiday


Meet the Man [Randy Quarles] Loosening Bank Regulation, One Detail at a Time,” by Jeanna Smialek in the New York Times on November 29, 2019. 

This is a terrific profile of the Vice Chairman for Supervision of the Federal Reserve, Randy Quarles, his frequent meetings with Wall Street and its representatives, and his far-reaching deregulatory actions – all promoted with innocuous if not beneficial sounding motives like “efficiency,” “recalibrating,” “refining,” “tweaks,” “adjustments,” and “tailoring.” However, under these non-threatening labels are an ideological predisposition against financial protection rules which looks a lot like the pre-2008 crash view of letting Wall Street regulate and police itself, which simply isn’t possible as unimaginable riches overwhelm morals, judgement, controls, management, regulators and, ultimately, the law itself.  

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As if anyone needs reminding of what happened last time, take a look at this November 26th piece in the Financial Times

…about “a group of 23 former [AIGFP] staff … fighting through the London courts to force AIG to pay [them more than $100 million in 2008] crisis-era bonuses. Had [AIG] gone bust [as it would have without a $185 billion bailout], they would get nothing.” That’s right: people who worked in the very group that recklessly sold massive quantities of CDS without setting aside any loss reserves (and whose senior executive said he couldn’t see “losing one dollar” from the CDS positions) want to be paid bonuses even though those CDS sales bankrupted AIG, necessitated the bailout, and poured gasoline on the financial crash igniting an historic crisis.

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Almost Half of All of America’s Banks Have Less Than Satisfactory Federal Reserve Supervisory Ratings,” by Mayra Rodriguez Valladares in Forbes on November 30, 2019. 

If you’re not reading Mayra on a regular basis, you simply can’t be current on what’s going on in finance. Here, she takes a hard look at the Federal Reserve’s second annual “Supervision and Regulation Report,” released on Thanksgiving eve when virtually no one is paying attention, and notes a concerning discrepancy between the positive first 13 or so pages with the facts that come later in the report. Specifically, she highlights that “45% of US banks with more than $100 billion in assets have supervisory ratings that are less than satisfactory” and that, “over the last year, the percentage of outstanding governance and control issues supervisory findings has increased slightly.” This should be particularly troubling for the reasons she details, but also because, as Jeanna reports in the article above on Randy Quarles, he also wants to weaken, er, tweak the Fed’s supervisory practices, going so far as to “urge lawyers to look into whether banks are treated fairly.”

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Corporate debt nears a record $10 trillion and borrowing binge poses new risks,” by David Lynch in the Washington Post on November 29, 2019. 

Given the country is now in the record-breaking longest post-war expansion, artificially juiced by the Fed’s low interest rates and QE purchases plus Trump’s sugar-high tax cuts and the bipartisan debt-financed spending spree, “some regulators and investors say the borrowing [binge] has gone on too long and could send financial markets plunging when the next recession hits, dealing the economy a blow at a time when it would already be wobbling.” Relatedly, Joe Rennison reported on November 29, 2019 in the Financial Times that “US distresses debt flashes warning sign for investors.” This precarious situation, added to Mayra’s insights above, raises deep questions about the Fed’s deregulation detailed in the first article above.

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Goldman Sachs seeks to rebrand as wealth takes center stage in the Democratic presidential race,” by Tory Newmyer in the Washington Post on November 30, 2019. 

Hard to believe, but Goldman Sachs is sponsoring Democratic presidential candidate forums in Iowa, but not directly under its own name which is still viewed with suspicion if not disdain for its long history of predatory and illegal conduct. Instead, the forums are sponsored by its charitable “10,000 Small Businesses” program. That’s apparently why really no one took note of Goldman’s role – until Tory. This isn’t surprising because corporate interests disguising their influence peddling and brand-building behind charitable activities is meant to be unnoticed. Goldman and others should, of course, be applauded for their charitable activities, but they should also be understood for what they are: vehicles to curry favor, access and influence with powerful public officials while trying to make people think they are just another Main Street bank that cares about small business lending rather than the 99% of their other Wall Street business that pays their bonuses.

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European banks slash $280 billion from main US businesses,” by Laura Noonan in the Financial Times on November 24, 2019. 

She details how foreign banks operating in the US are engaging in regulatory arbitrage within the US by moving their assets from their US regulated holding companies to their foreign regulated US branches. This once again puts US taxpayers potentially on the hook to bailout foreign banks, which is what happened in 2008 when the Fed provided trillions of dollars in rescue programs to foreign banks. This effectively substituted US taxpayers for foreign taxpayers, who would have had to bail out their own failing banks if the Fed did not. 

The article discusses Deutsche Bank, which is a shameless recidivist at regulatory gamesmanship with its U.S. operations, in addition to its history of recklessness that caused it to receive massive bailouts from the U.S., as we detailed here and here. US regulators should act quickly to stop this.

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Self-interest demands better policing of limited liability,” by Jonathan Ford in the Financial Times on December 1, 2019.

He discusses the well-known predatory conduct/looting practices of private equity and the perverse incentives of executive comp, but with an interesting twist in a thought-provoking new academic paper from Charles Goodhart and Rosa Lastra. As he notes, “they propose breaking down equity holders into two categories: insiders and outsiders.” Both the column and the paper are well worth reading.

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Statement on SunTrust/BB&T Merger by Martin J. Gruenberg, Member, FDIC Board of Directors, November 19, 2019.

While the Fed and FDIC approved the merger of SunTrust and BB&T, FDIC Director Gruenberg issued a very important statement on the financial stability implications, noting that “the proposed merger would result in the sixth largest insured depository institution and the eighth largest bank holding company in the United States.” To put that in context, he reviews the failures of Washington Mutual and IndyMac during the 2008 financial crisis. Regarding WaMu, with over $300 billion in assets making it the largest failure in FDIC history, he details the particular and to some extent unique circumstances that enabled that failure to be handled without any loss to the Deposit Insurance Fund (DIF). That is in stark contrast to IndyMac, a $30 billion thrift, which “was the most costly failure in the FDIC’s history, resulting in a $12.4 billion loss to the DIF” in addition to imposing losses on $2.6 billion of uninsured deposits. Thinking about the next financial crisis informed by this history and the size and activities of the merged banks, Director Gruenberg raises very serious financial stability concerns about the merged bank and the ability of the FDIC to resolve it in the future without significant losses. He also highlights, among other things, the importance of maintaining “the prudential and resolution plan requirements that have been adopted, not weakening them.” 

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