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June 30, 2016

Long-term Investors and Innovators Win Along with IEX and more…

Long-term Investors and Innovators Win Along with IEX, But the Fight Has Really Just Begun:  Better Markets’ President and CEO Dennis Kelleher congratulated IEX founder and CEO Brad Katsuyama and President Ronan Ryan in person last week at a Themis Trading/Cowen conference on market structure.  The SEC granting IEX’s exchange application was a big win for IEX, long-term investors and all those who want to compete fairly in the marketplace, but there’s still a long way to go and lots to do. 

There’s tens of billions of dollars at stake and the embedded incumbent industry isn’t going to give that up without a fight and they have just begun to fight.  To them, no battle is ever really lost in the endless quest to protect profits, businesses and bonuses at the expense of everyone and everything else: customers, clients, counterparties, competitors, the markets, taxpayers, etc.  They may suffer setbacks, but they are viewed as temporary and just keep fighting.  That’s why there are more than 30 permanent finance-related lobby trade groups in Washington, DC working full time, year-in and year-out, bending law, rules and policy their way.  (That’s also why Better Markets is there: providing a counter-weight fighting for the public interest.)
It’s like when the Dodd-Frank financial reform law was passed in July 2010; the financial reform advocates all celebrated and went back to their lives; the industry hit the alarm bell, called in reinforcements, hired every breathing lobbyist and lawyer and dug in for trench warfare that continues to this day.  As one of Wall Street’s top lobbyist said at the time, passage of the law was merely “half time.” The same will be true here. 
IEX and its supporters must continue to fight at the SEC and throughout the Washington, DC regulatory and policy-making process to put long-term investors and capital formation for the real economy back at the top of the policy agenda.

Brexit, the “Trust Deficit,” Uncertainty and Financial Reform: Little is certain in the aftermath of Britain’s vote to leave the European Union, but a few things are clearer than others.

First, the vote makes clear that the biggest deficit facing many countries today is the trust deficit.  Needless to say, there is a widening gap between the governing class and voters.  Virtually the entire British establishment, in politics, media, finance, business, etc., all supported the losing remain campaign.  This has two dimensions.  First, too many people believe that the elites are fundamentally disconnected from the lives that they live and unwilling or unable to do anything to make things better.  Second, too many people – with ample basis — simply don’t believe what elected officials say.  This was reinforced when some of the leave campaign leaders began back peddling on some of the key statements they made in the lead up to the vote.  As a result, the trust deficit is widening.
Second, uncertainty is going to be the new normal for some time.  Who will lead the two major parties in Britain?  Will those political civil wars result in governable parties or be temporary band aids?  How will the extreme parties do in the upcoming elections?  Will Britain really leave the EU or will there be a re-vote or non-implementation?  When will any of that be decided?  When will Britain take formal action to leave the EU?  Will Scotland, which voted to remain, leave Great Britain and join the EU?  What will the six counties in the north of Ireland that voted to remain do?  What will be the terms and conditions negotiated between Britain and the EU regarding trade, immigration and all the other issues be?  Will the EU take a very tough stance to discourage other countries from leaving the EU or risk outside free-riders with special deals that will only make the union more unstable?  Those questions and many more will not be answered quickly or clearly, resulting in uncertainty for a protracted period of time.
Third, the implications for financial reform could be profound, even beyond the obvious required restructuring and possible fragmentation of the regulations among the UK/EU and EU/UK and the rest of the world.  There is also the loss of an openness to a markets-based approach to finance and a healthy counterweight to the domination of German and French interests.
Finance in London is a key economic engine (although not as big as finance wants everyone to believe) and Britain has viewed it as a key competitive advantage that it must keep, grow and promote (the national champion syndrome).  However, one of the primary reasons finance has grown so large in London is due to the EU passport rights, enabling the globe’s biggest banks to locate there while having full, virtually unfettered access throughout the EU. 
Leave ends that and is an existential threat to London as a global financial center.  It is difficult to see how London keeps finance without easy access to the EU unless some outsized benefit/inducement is offered like a return to light-touch or no-touch regulation (which Cameron and the Tories began last year by buying into the false choice between economic growth and regulation, by referring to bank regulation as “bank bashing,” and by the ousting of Financial Conduct Authority Chief Martin Wheatley for doing his job). 
The concern would be that London would again ignite a global race to the regulatory bottom, where countries bid against each other to keep finance jobs, revenues and taxes by reducing or eliminating regulations.  While some cavalierly dismiss those concerns (as Barney Jopson and Sam Fleming reported in the Financial Times), they fail to sufficiently weigh the realities of an incoming Leave government, which will also have the task of deciding on Remain-booster Bank of England chief Mark Carney’s reappointment (or not) next year (and he has already come under fire). 
Proving Financial Reform Works and its Critics Wrong, FSOC De-designated GE Capital: The Financial Stability Oversight Council’s (FSOC) action rescinding the designation of GE Capital as a systemically significant nonbank proves that the Dodd Frank financial reform law is working as designed both for taxpayers and the financial system.  Contrary to the nonstop, hysterical claims of industry and its political allies, FSOC has been thorough, deliberative and fair throughout the designation process, focusing carefully on a rigorous data-driven analysis and clear systemic threats.  As a result, it has only designated four institutions in five years, which is actually too few, not too many. 
Proving it is only interested in designating and regulating actual threats, FSOC annually reviews every designation and has made clear it would rescind any designation that was no longer necessary.  It’s actions regarding GE Capital establish that beyond any doubt.  FSOC must now quickly analyze and designate the many other nonbank systemic threats to the jobs, homes and livelihoods of the American people.   De-designation is important, but designation is just as important and FSOC still has a lot of work to do.  

Better Markets’ Amicus Brief in MetLife v. FSOC Seeks to Preserve FSOC’s Critical Role in Preventing Future Financial Crises:  Established under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Financial Stability Oversight Council (FSOC), is the primary regulator that provides comprehensive monitoring of the stability of our nation’s financial system. FSOC is charged with identifying risks to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States’ financial system (for more, read our FSOC fact sheet here.)

  
In April, a Judge of the United States District Court for the District of Columbia reversed a determination by FSOC that deemed MetLife a systemically important financial institution.  As we said at the time, this was a dangerous decision that includes onerous new burdens that will cripple financial reform.  Last week, Better Markets filed an amicus brief showing where the District Court erred in its decision:
  • First, the court misread FSOC’s own designation Guidance and failed to appropriately defer to FSOC’s understanding of what it wrote. 
  • Second, the court second-guessed the thoughtful mix of quantitative and qualitative factors that the FSOC used in evaluating MetLife, insisting, contrary to experts’ judgment, that more quantification was required. 
  • And finally, the court created a cost-benefit-analysis requirement out of thin air despite Congress’s express decision not to include one in the statute.  This is critical because, when it comes to financial regulation, the innocent sounding “cost benefit analysis” becomes “industry cost only analysis,” as we detailed in this report and fact sheet. 

Hopefully the Appeals Court will prioritize preventing another financial crisis, overrule the District Court decision and let FSOC get back to work protecting hardworking American taxpayers from having to endure yet another avoidable bailout.

Better Markets in the News:

Regulators remove ‘too big to fail’ tag from GE Capital: Washington Examiner by Joseph Lawler 6/29/2016

Brexit vote sparks US fears over transatlantic regulation: Financial Times by Barney Jopson, Sam Fleming, Phillip Stafford 6/28/2016

GE Capital is no longer ‘too big to fail,’ regulators say: Washington Post by Renae Merle 6/29/2016

Dodd-Frank backers boosted by GE Capital’s success in shedding ‘systemically important’ label Politco Pro by Victoria Guida 6/30/16

A Slimmed-Down GE Capital Highlights Pros and Cons of “Too Big To Fail” Marketplace by Dan Gorenstein 6/29/16

Regulators pull back ‘systemically important’ label for the first time The Hill by Peter Schroeder 6/29/16

Articles of Interest:

How Housing’s News Players Spiraled Into Banks’ Old Mistakes New York Times by Matthew Goldstein, Rachel Abrams and Ben Protess 6/26/16

Puerto Rico Bill Passes Senate The Wall Street Journal by Nick Timiraos 6/29/16

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