The Finance 202: Trump-era rollback of Dodd-Frank leaps forward

The idea is to more narrowly target the most burdensome rules to the banks that pose the gravest risk to the entire financial system. Federal Reserve Chairman Jay Powell said in a statement the plan “seeks to maintain a middle ground for those firms that are clearly in the middle.” 

The plan drew a dissenting vote from Lael Brainard, an Obama-appointed Fed governor, who said in a statement that it will “weaken the buffers that are core to the resilience of our system” and raise “the risk that American taxpayers will be on the hook.”

And while Wall Street megabanks missed out in this round, the Fed is signaling they could see some of their own rules relaxed soon. The central bank is considering watering down the reporting requirement for their annual stress tests and lowering a surcharge they pay to help maintain their capital cushions. 

“The proposal makes clear that the relief is targeted for the firms whose business models and funding strategies pose less risk to the financial system while the [global systemically important banks] will remain subject to the stricter regulation imposed following the financial crisis,” says Adam Gilbert, PwC’s Financial Services global regulatory leader. “With respect to the capital surcharge for GSIBs, a decade after the crisis there may be more of an open mind to reflect on its design and potential modifications.” 

The Fed’s Wednesday proposal splits banks into tiers: 

• The lowest, those with assets between $100 billion and $250 billion, would no longer have to hold certain liquid assets to protect against a cash crunch. And they could be excused from stress tests. 
• Those with more than $250 billion — or less but with certain risky assets — would be subject to standards that the Fed would tailor to their risk profiles. They would also enjoy lighter liquidity requirements. 
• A third category would apply tougher standards to banks with “global scale” but raise the threshold to qualify for that treatment from $250 billion in assets or $10 billion in foreign exposure to $700 billion or $75 billion in foreign exposure. 
• Eight Wall Street giants make up the fourth tier, and they’d see no relief under this proposal. 

Here's a look at which banks fall into each category, via Reuters’s Pete Schroeder: 

The proposal earned praise from outgoing House Financial Services Chairman Jeb Hensarling (R-Tex.), who said in a statement he wishes it went further but it nevertheless provides “much needed clarity.” And Consumer Bankers Association President Richard Hunt called it a “a positive step toward making regulations more aligned with the risks posed by activities instead of basing everything on an arbitrary number pulled from a hat.”

Greg Baer, president and CEO of the Bank Policy Institute, which represents the biggest banks, said the plan doesn’t do enough to “tailor regulations based on banks’ risk profiles” and called it disappointing. 

Others argued that the decision is wrongheaded and potentially dangerous. Here was Jason Furman, former chairman of the Council of Economic Advisers:

And Michael Barr, who served as the Treasury Department’s assistant secretary for financial institutions in the two years following the financial collapse: 

Former Fed chair Janet Yellen told the Financial Times over the weekend the post-crisis regulatory regime is unfinished and needs to be strengthened, not diminished: “Among the key vulnerabilities are lending to indebted, less creditworthy corporate borrowers, which Yellen sees as a source of potential systemic risk. ‘There are a lot of holes,’ she says. ‘We should not feel the financial stability glass is full.’”

— The market's red October. The Wall Street Journal's Michael Wursthorn: “A brutal October selloff across stocks and bonds has tested investors’ resolve and the durability of the more than nine-year-old bull market. Even after the S&P 500 rallied nearly 3% over the final two days of the month, the index in October still notched its most violent pullback in more than seven years. Stocks around the world lost about $5 trillion in value, according to S&P Dow Jones Indices, as shares in Europe and Asia also tumbled. The tumult left the Dow Jones Industrial Average and S&P 500 clinging to slim gains for the year as a whole. The indexes finished the month down 5.1% and 6.9%, respectively. It was the worst October for the S&P 500 since 2008."

But investors aren't too worried. WSJ's Gunjan Banerji: “An unusual dynamic in options markets is signaling that investors aren’t panicking despite October’s stock-market drubbing: Expectations for volatility are greater in individual companies than the broader market. This earnings season, options investors are pricing in some of the biggest swings from specific stocks since 2015, according to Credit Suisse Group. They have been singling out names like Facebook Inc. and General Electric Co. in expectation of outsize moves after earnings reports . . . The heightened volatility in individual shares is an indication that the October stock swoon has been driven more by idiosyncratic concerns related to specific company earnings than widespread worries about the economy, according to Mandy Xu, a derivatives strategist at Credit Suisse, in a note this week . . . Measures of volatility in oil, currencies and U.S. interest rates also remain relatively low — another sign that investors aren’t as fearful as the month’s declines might indicate.”

— Wages perk up but inflation bites. The Washington Post's Heather Long: "U.S. workers are seeing the largest nominal wage increase in a decade, the Labor Department reported Wednesday, as companies compete harder for employees than they did in recent years. Wages rose 2.9 percent from September 2017 to September 2018, according to the Labor Department’s Employment Cost Index for civilian workers, a widely watched measure of pay that does not take inflation into account.

"That is the biggest increase — not adjusted for inflation — since the year that ended in September 2008. Prices have risen significantly in the past year, especially for gas and rent. Adjusted for inflation, workers’ wages grew 0.6 percent over the year, making the increase the largest since 2016, according to the Labor Department. Sluggish pay growth has been one of the biggest problems in this recovery, but employers are finally having to hike wages at a more normal level typically seen during good economic times."

— U.S. among world's friendliest nations for business. WSJ's Josh Zumbrun: “The U.S. fell two spots, dropping to eighth place, in the World Bank’s annual ranking of the world’s economies for their ease of doing business, as the American business environment was eclipsed by Norway and the Caucasus nation of Georgia. For the third year in a row, New Zealand, Singapore and Denmark took the top three spots. Hong Kong and South Korea followed at fourth and fifth — and have alternated holding the fourth place spot since 2015.

"The World Bank’s rankings, which calculate the ease of opening and operating businesses, complying with taxes, and other aspects of an economy’s regulatory environment, are closely watched by businesses and policy makers around the world, with countries frequently orienting their domestic reforms around attempts to rise in the rankings . . . The U.S. receives very high marks in categories ranked by the index, such as the ease of getting credit, resolving bankruptcies and enforcing contracts.”

U.S Debt Sales Top Crisis-Era Levels as Fiscal Bump Spurs Growth (Bloomberg)

How the U.S. midterm elections could ripple through markets (Reuters)

TRADE FLY-AROUND:

— Asia feels trade war pain. Reuters's Marius Zaharia: "The economic impact of the intensifying trade war between Washington and Beijing appeared to deepen last month with factory activity and export orders weakening across Asia, but analysts warned the worst was yet to come. In a sign conditions for exporters and factories were deteriorating, manufacturing surveys showed marginal growth in China, a slowdown in South Korea and Indonesia and a contraction in activity in Malaysia and Taiwan.

"Those figures follow weaker-than-expected industrial production data from Japan and South Korea on Wednesday, with output in the latter shrinking the most in over 1-1/2 years. By contrast, the U.S. ISM manufacturing survey for October due later on Thursday was expected to show a much faster growth pace than in Asia, albeit a tad slower than in September, supporting the outlook for further Federal Reserve rate hikes."

As China considers additional stimulus. Bloomberg News: “China’s leadership signaled that further stimulus measures are being planned, as disappointing economic data showed that the current piecemeal approach isn’t working. The nation’s economic situation is changing, downward pressure is increasing, and the government needs to take timely steps to counter this, according to a statement from a Politburo meeting Wednesday chaired by President Xi Jinping . . . The world’s second largest economy is being damaged by its trade war with the U.S. and a domestic debt cleanup. 

"With those pressing constraints, officials have added modest policy support so far, ranging from tax cuts to regulatory relief, rather than repeating the fiscal firepower seen after a previous slowdown. Investors seem unpersuaded by the drip-feed approach with the yuan hovering around a decade low and stocks sliding . . . JPMorgan Chase & Co. CEO Jamie Dimon said escalating trade tensions between the U.S. and China are increasingly starting to resemble a trade war, rather than just a ‘skirmish.’ ”

— Warren probes tariff exclusions. WSJ's Josh Zumbrun writes that Sen. Elizabeth Warren (D-Mass.) is questioning Commerce Secretary Wilbur Ross about exclusions to the metals tariffs his department granted to Chinese-owned and Japanese-owned companies with U.S. subsidiaries: "The Commerce Department said in a statement that Sen. Warren’s analysis ‘betrays a lack of understanding of the exclusion process’ which, it said, was designed to allow entities in the U.S., regardless of ownership, to apply for exclusions if the steel could not come from U.S. sources.”

MELTDOWN WATCH:

• “Trump agrees to turn over his calendar in Summer Zervos defamation suit.” The Washington Post's Elise Viebeck.

• “Trump denies he’s already in a Mueller subpoena fight.” Politico’s Darren Samuelsohn. 

SAUDI ARABIA FALLOUT:

• “Turkish prosecutor says Khashoggi was strangled and dismembered in Saudi Consulate.” The Post's Louisa Loveluck and Kareem Fahim.
• “Republican senators ask Trump to end nuclear energy talks with Saudi Arabia.” The Post's Karoun Demirjian.

Meanwhile, former Sen. Norm Coleman (R-Minn.) made clear he intends to continue lobbying for the Saudis:

— GM announces buyouts. The Associated Press's Tom Krisher: “General Motors will attempt to cut costs by offering buyouts to about 18,000 white-collar workers in North America. The company made the offer Wednesday to salaried workers with 12 or more years of service. The announcement comes on the same day that GM reported a $2.5 billion third-quarter profit. The company says in a prepared statement that although it is performing well, it wants to continue to reduce costs while the company and the economy are strong. . . . The company has about 50,000 salaried workers in the U.S., Canada and Mexico.”

— Moody's downgrades GE. Bloomberg News's Claire Boston and Natasha Rausch: “General Electric Co.’s credit rating was cut by Moody’s Investors Service, a day after the manufacturer said the outlook was deteriorating at its marquee power division. Moody’s lowered its long-term rating on GE two notches to Baa1, or three steps over junk, following a similar reduction four weeks ago by S&P Global Ratings. GE’s cash flow is under pressure as its power-equipment unit struggles with falling demand for gas turbines and a drop in orders, Moody’s said in a report Wednesday. ‘The weaker-than-expected performance at Power is not only attributable to a considerable drop in market demand and ensuing heightened competition, but also to GE’s misjudgment of financial prospects and operational missteps,’ Moody’s said. ‘As a result, GE’s free cash flow (after dividends) will likely be very weak in 2018, even with good performance at GE Aviation and GE Healthcare.’”

— Former JPMorgan finance chief takes on Deutsche Bank. WSJ: "A New York-based activist hedge fund has taken a stake in Deutsche Bank AG DB 0.31% , betting the German lender’s new chief executive can revive its sagging profits by pursuing a turnaround strategy investors so far have found unconvincing. Hudson Executive Capital LP, led by former JPMorgan Chase & Co. finance chief Douglas Braunstein, said it has built about a 3.1% stake in Deutsche Bank common shares. The investment, Hudson’s biggest so far, was made in recent months as Deutsche Bank shares plumbed all-time lows. The roughly $620 million stake makes Hudson a top-five shareholder, and the first new one of size since the bank’s latest restructuring and CEO change in April."

— Private equity firms hunt for talent.  WSJ's Liz Hoffman and Miriam Gottfried: “Private-equity titans are used to competing for billion-dollar buyouts. Now they are squaring off for 22-year-old spreadsheet crunchers. An industrywide scramble is under way this week to hire young investment bankers. The instigator was Thoma Bravo LLC, which extended its first job offers this past weekend, according to people familiar with the matter. Word spread quickly to rivals, and by Monday interviews were under way at nearly every big firm, including Blackstone Group LP, Apollo Global Management LLC, Carlyle Group LP and TPG . . . The candidates graduated college as recently as last spring and landed at Wall Street investment-banking desks just weeks ago. Those lucky enough to get offers will finish their two-year bank analyst programs and start at private-equity firms in the summer of 2020, with salaries that can exceed $300,000. (Junior bankers in analyst programs typically make in the low six figures, including bonuses.)”

— #MeToo alters executives' contracts. The Post's Jena McGregor: “Employment lawyers and executive compensation experts say some companies have begun tweaking employment agreements with top executives, being more explicit about sexual harassment in the wording of severance arrangements or in their language about what constitutes ‘cause’ for termination — which can allow them to avoid paying severance or accelerating the vesting of stock when someone is shown the door. ‘Employers want to make sure that “for cause” language is buttoned up when it comes to sexual harassment or sexual misconduct,’ said Melissa Osipoff, an employment lawyer with Fisher Phillips in New York. ‘Not only does the company not want to pay those things to an executive going out the door who may have engaged in sexual harassment; it’s also there to create an incentive’ for executives to avoid such behavior. ... Employment agreements spell out the terms under which an employee will receive a severance payment, and often apply only to certain highly valued or high-profile employees, such as a chief executive or a top media personality.”

Google employees to walk out to protest treatment of women (AP)

— About that middle-class tax cut. The Post's Damian Paletta: "Trump and a top House Republican on Wednesday issued an unusual joint statement committing to pursuing tax cuts for middle-class families in 2019, a much slower time frame than Trump said was in the works last week. 'We are committed to delivering an additional 10 percent tax cut to middle-class workers across the country,' Trump and Rep. Kevin Brady (R-Tex.), chairman of the House Ways and Means Committee, said in the joint statement. 'And we intend to take swift action on this legislation at the start' of the new Congress next year. Trump said last week that he would pursue a 10 percent tax cut and deliver some sort of resolution this week, though he gave no further details about how that would happen."

— Wall Street props up moderate Dems. Bloomberg's Elizabeth Dexheimer: "Wall Street is opening its checkbook to soften the blow from a blue wave. For the first time in a decade, the securities and investment industries are spending more on Democrats than Republicans ahead of the Nov. 6 midterm elections. Bankers are also giving to Democrats. A big part of that is anti-Trump, but a lot of the money is flowing to moderate Democrats, a sign Wall Street is seeking Washington allies to temper the impact of progressives such as Representative Maxine Waters and Senator Elizabeth Warren, who are poised to hit the industry with subpoenas and tougher oversight."

While business lobbyists walk back help for the GOP establishment. Politico's Maggie Severns and Lorraine Woellert: "The U.S. Chamber of Commerce, long an aggressive defender of establishment Republicans, has given conservative insurgents cause for glee after it cut back primary spending this election cycle. The Club for Growth, a small-government group often at odds with the nation's biggest business lobby, predicts that November's midterms will add as many as 15 Republican lawmakers to the 30-member Freedom Caucus, the uncompromising conservative bloc that doesn’t hesitate to buck congressional GOP leaders... Rather than fighting them off, the Chamber slashed its primary-season expenditures this cycle, spending just $3.6 million on political communications for its preferred candidates, compared to $11 million and $14 million in 2014 and 2016 respectively, according to federal election data.

— Fortune 500 companies lean red. Axios put together an interactive look at how giving by top companies has broken down this cycle and finds a "slim majority" has gone to Republicans:

Coming soon

• Federal Reserve Vice Chairman for Supervision Randal Quarles delivers  a speech on financial regulation at the Brookings Institution on Nov. 9 in Washington.
• Senate Judiciary Committee hearing titled “Big bank bankruptcy: 10 years after Lehman Brothers” on Nov. 13.
• Senate Banking Committee hearing on “Oversight of pilot programs at Fannie Mae and Freddie Mac” on Nov. 14.
• Federal Reserve Vice Chairman for Supervision Randal Quarles appears before the Senate Banking Committee on Nov. 15.
• The National Economists Club holds an event titled “US Outlook: Exploring the Key Debates” on Nov. 15 in Washington.

— From The Post's Tom Toles: “Trump treats the US military like they are his toy soldiers.”

There is nothing Trump won't “look into”:

Celebrities keep threatening to ditch the U.S. for Canada:

Out of gas, mission over for Kepler telescope: