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The Fed isn’t typically a font of Friday night news dumps. But Janet L. Yellen wrapped up her final day on the job leading the central bank by dropping a bombshell: She smacked down Wells Fargo, issuing an order that bars the scandal-plagued, abuse-prone bank from growing until it cleans up its act.
The penalty will cost Wells Fargo $300 million to $400 million this year in after-tax profits by its own reckoning (though that is less than 2 percent of what it earned last year and a fraction of its $3.4 billion tax cut windfall). It has to submit a plan for overhauling its corporate governance within 60 days and will replace four of its 16 board members by the end of the year.
More than that, though, the unprecedented move by the Fed represents a shot across the industry’s bow. The policymaking gears in the Trump era have been spinning in sync to relieve pressure on banks. Yellen’s mic drop — as Capital Alpha’s Ian Katz described it in a Sunday note — is a reminder that regulators can still inflict pain on wayward firms. “Lawmakers make noise and create headlines,” but don’t pass much, Katz writes. “Regulators are the ones that can put the hammer down. The Fed just put the Fear of God into bank boardrooms across the country. And that’s exactly what it wants to do.”
That take is confirmed in a behind-the-scenes account by the New York Times of how Fed regulators hammered out the penalty in consultation with executives from the bank: “The settlement is an attempt by the Fed to impress upon banks that their boards of directors should be vigorous, independent watchdogs — and if they fail, there will be consequences. That reflects a shift from regulators’ historically hands-off approach to corporate boards, and the boards’ role is likely to grow in importance as regulators appointed by President Trump and Republicans in Congress generally loosen the reins on big banks.”
Sen. Elizabeth Warren (D-Mass.) — Wells Fargo’s most vociferous critic, who met twice with Yellen last year urging her to use the Fed’s’ authority to purge the bank’s board — approvingly tweeted that the decision “hits them where it hurts:”
Chair Yellen’s decision today to freeze the growth of Wells Fargo until it shapes up also demonstrates that we have the tools to rein in Wall Street – if our regulators have the guts to use them. This one hits them where it hurts.— Elizabeth Warren (@SenWarren) February 3, 2018
And she put the firm’s travails in the context of the Trump administration’s broader deregulatory push:
The massive fraud at Wells Fargo showed the whole country that we need more accountability on Wall Street. But for more than a year, we've watched as @realDonaldTrump and his government have raced to turn the big banks loose again to once again threaten our whole economy.— Elizabeth Warren (@SenWarren) February 3, 2018
But Trump has whacked at Wells, too. He took to Twitter in December to swat down a report that Mick Mulvaney, his budget director and stand-in at the Consumer Financial Protection Bureau, was considering waiving tens of millions of dollars in fines against the bank:
Fines and penalties against Wells Fargo Bank for their bad acts against their customers and others will not be dropped, as has incorrectly been reported, but will be pursued and, if anything, substantially increased. I will cut Regs but make penalties severe when caught cheating!— Donald J. Trump (@realDonaldTrump) December 8, 2017
And Jay Powell, Trump’s pick to succeed Yellen, taking the Fed’s helm today, voted with her to impose the penalty on the bank. As the Times piece notes, he was the top Fed official negotiating with the bank — and has given no indication of daylight with the figure he’s replacing.
He talked up the need for bank boards to exercise better oversight in an August speech: “Across a range of responsibilities, we simply expect much more of boards of directors than ever before. There is no reason to expect that to change.” And asked specifically about Wells Fargo during his confirmation hearing last year, Powell pointed to his “concern that institutions are still having problems with bad behavior, bad conduct toward consumers.”
Wells Fargo is also facing a potential crackdown from the Office of the Comptroller of the Currency over inadequate risk controls — which could result in tens of millions of dollars in extra penalty payments, the Wall Street Journal reported last month. And there could be more where that came from, Ken Usdin, a bank equity analyst at Jefferies, wrote in a note over the weekend.
At the Fed, Powell will have his hands full enough just trying to calibrate monetary policy to ensure healthy, sustainable economic growth, a challenge underscored by last week's sell-off. And Randy Quarles, who will take the lead shaping the central bank's approach to regulation, has recused himself from matters dealing with Wells Fargo, owing to family ties to the bank.
But the institution remains the driving force in Washington behind policing the industry’s behavior. Yellen's grace note demonstrates that even as some rules are getting looser, regulators still wield what bankers should consider a bracing amount of discretion in applying them.
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— It keeps going. WSJ's Riva Gold and Kenan Machado: "A selloff in world stocks continued Monday after expectations of rising inflation and climbing government bond yields interrupted a recent rally. The Stoxx Europe 600 fell 1% in morning trading after its worst week in two years, following a steep drop in Japanese stocks and declines of over 1% in Australia, South Korea and Taiwan. Futures pointed to a 0.3% opening loss for the Dow Jones Industrial Average after it fell 2.5% Friday in high-volume trading, its biggest one-day decline since the Brexit vote in June 2016.
After a very strong start to 2018, major indexes have taken a step back and implied volatility has reached its highest level in over a year, as strong wage figures in the monthly U.S. jobs report Friday have added to concerns about a pickup in inflation. The labor market delivered the biggest annual increase in wages since the end of the recession. Stefan Hofer, chief investment strategist at LGT Bank Asia, said that while wage rises shouldn’t be unexpected given the booming job market, it is the speed of the increase that has caught the market by surprise.'"
— Dow's worst day since Brexit. CNN Money's Matt Egan: "The Dow closed down 666 points, or 2.5%, its biggest percentage decline since the Brexit turmoil in June 2016 and steepest point decline since the 2008 financial crisis. A strong jobs report showed wage growth is finally starting to pick up. That's great news for workers, but it reinforced investors' concern about inflation and the bond market... The sell-off knocked the Dow well below 26,000. Both the Dow and S&P 500 suffered their biggest weekly drops since early 2016 -- roughly 4% each. Political turmoil is adding to the uncertainty. Market analysts pointed to the clash between the Trump administration and the FBI as another concern." It was the ninth 600-plus point drop in history, CNBC notes.
But some perspective, from Michael Batnick, of Ritholz Wealth Management: "The S&P 500 had been within 3% of an all-time high- even on an intra-day basis- for an incredible 202 straight days. This is almost twice as long as the second longest streak which occurred from 1995 to 1996. The streak ended on Friday, when the index fell 3.93% from its recent highs... The S&P 500 is still up 3.3% through the first five weeks of the year, which even the most brazen bulls should be cool with, considering that stocks were up 20% in 2017 and the last time they had a down year, the iPad had yet to be invented."
From Bloomberg's Tracy Alloway, on the bond market:
Recent bond market sell-off, in historical perspective. Via Deutsche Bank: pic.twitter.com/GT3H4Cxb7H— Tracy Alloway (@tracyalloway) February 4, 2018
— And earnings still look strong. WSJ's Michael Wursthorn and Corrie Driebusch: "Investors have plenty of things to worry about after stocks suffered their steepest weekly decline in two years. Earnings isn’t one of them. With about half of the companies in the S&P 500 having reported fourth-quarter results, roughly 80% have beaten Wall Street’s revenue expectations. That is the highest percentage since at least the third quarter of 2008, when FactSet started tracking the metric. The companies in the index are on track to grow revenue 7.5% and earnings 13% from a year earlier, both improvements from the third quarter."
From Bloomberg's Michael McKee:
Dow is down 508 points and that's a 1.96% drop.— Michael McKee (@mckonomy) February 2, 2018
Oct. 19, 1987 the Dow fell 508 points and that was a 22.6% drop
— Yellen calls stocks pricey. In an interview with CBS News taped Friday morning, the outgoing Fed chair had this to say about asset prices: "Well, I don't want to say too high. But I do want to say high. Price-earnings ratios are near the high end of their historical ranges. If you look at commercial real estate prices, they are quite high relative to rents. Now, is that a bubble or is too high? And there it's very hard to tell. But it is a source of some concern that asset valuations are so high." (She acknowledged feeling "disappointment" at not getting a second term... But Yellen already has her next gig lined up: She's joining the Brookings Institutions' Hutchins Center on Fiscal and Monetary Policy, also home to her predecessor, Ben Bernanke.)
From The Hill's Sylvan Lane:
February 23, 2017: Treasury Secretary Steven Mnuchin tells CNBC that the status of the stock market is "absolutely" a reflection of the Trump admin's economic policy.https://t.co/qw7QNkTEnT pic.twitter.com/wpIcagzUtB— Sylvan Lane (@SylvanLane) February 2, 2018
From The Post's Catherine Rampell:
presidents don't control stock markets BUT since Trump keeps foolishly wanting to compare his track record to Obama's: here's where they both stand in comparable periods of their presidencies pic.twitter.com/0uFOAIN8zB— Catherine Rampell (@crampell) February 2, 2018
POWELL'S FIRST DAY:
— Takes the helm amid uncertainty. NYT's Binyamin Appelbaum: "... Powell, who will be sworn in Monday as the Federal Reserve’s 16th chairman, is stepping into his new role as a half-decade of economic tranquility is beginning to show some signs of strain. The Fed has gradually been increasing interest rates to maintain control of inflation, and markets are starting to notice. Stock prices fell Friday as investors contemplated higher rates with a tightening labor market.
Mr. Powell, charged with keeping the economy in the safe space between overheating and recession, arrives on that high wire as a relative unknown. He is a lawyer by training and an investor by trade in a role reserved almost exclusively for economists in recent decades. He has said that he plans to continue the Fed’s gradual retreat from the economic stimulus campaign it mounted after the 2008 financial crisis, and markets have taken him at his word. It is harder to predict how he would respond to faster growth — or to a financial crisis."
— Powell's challenge, per former Treasury Secretary Larry Summers, is "working out how to achieve growth that is both adequate and financially sustainable. Even with very low interest rates, the normal level of private saving consistently and substantially exceeds the normal level of private investment in the United States. And the differential is magnified by inflows of foreign capital. This creates a deflationary tendency that can be offset only by budget deficits or financial conditions that artificially depress saving and increase investment... There is a difficult balance to be struck. Except in the aftermath of recessions, it has been a long time since the U.S. economy grew well with a stable financial foundation."
And from Fortune's Alan Murray: "The Fed’s main job is intangible—to ensure confidence in money, markets and the economy. But Friday’s 665 point drop in the Dow measured confidence contracting. Traders are suddenly worried about interest rates (although anyone older than 30 has to be amused that 2.85% on the Treasury 10-year is a source of panic), worried about inflation (although after the last decade of stagnant wages, Friday’s 2.9% rise should be cheered, not jeered), and worried about a tax-fueled spike in growth... A more legitimate reason for concern was last week’s report showing productivity fell in the fourth quarter—since ultimately, rising productivity is the only way growth can be sustained... In any event, probably wise to buckle up. The Fed’s historic, decade-long experiment with hyper-low interest rates is coming to an end. And the return to normalcy is likely to be anything but normal."
From the NYT's Binyamin Appelbaum:
Janet Yellen leaves on a winning streak: This is the first time that the economy has added jobs during every month of a Federal Reserve chair's tenure.— Binyamin Appelbaum (@BCAppelbaum) February 2, 2018
— Shutdown showdown redux. CNN's Sarah Mucha and Ted Barrett: "Lawmakers are up against two key deadlines that were put in place as part of the negotiations to reopen the government last month, creating a short window to show substantial signs of progress on a deal to protect undocumented immigrants who came to this country as children and their families. Immigration negotiators say they've taken steps in the right direction, but no deal to address the contentious issue has thus far emerged.
The first deadline is Thursday, when government funding runs out. The second is to reach a long-stalled deal on immigration before Senate Majority Leader Mitch McConnell opens a promised freewheeling floor debate to try to settle the contentious issue. Congressional leader from both parties have said they don't foresee a second shutdown, but as of Sunday evening, it's not clear if congressional leaders have the votes to pass such a measure through both the Senate and the House."
— Ryan deletes crumby tweet. The Post's Avi Selk: "Never mind all the Democrats who call the GOP’s tax bill a deficit-busting giveaway to the rich; House Speaker Paul D. Ryan has been enthusiastically promoting it as a middle-class tax windfall. He’s been coaching other Republican lawmakers to sell the $1.5 trillion tax cut to voters, and telling people on Twitter to check their paychecks for wage hikes. The bill — which was deeply unpopular when it passed along party lines in December — is now breaking even in a new opinion poll. So Saturday morning, by way of good news, Ryan’s Twitter account shared a story about a secretary taking home a cool $6 a month in tax savings... The tweet was deleted within hours, probably guaranteeing it will never be forgotten, and leaving people baffled as to why Ryan ever thought it would make a good advertisement for the tax plan’s supposed middle-class benefit. It’s true that the bill is stingy to people at the bottom of the pay scale. In fact, the average tax break for someone making $25,400 a year or less happens to be $60 — the exact price of a Gold Star Costco membership."
The tweet, screen-grabbed for posterity:
— Where the corporate tax cut is going. Bloomberg's Matthew Townsend: "Trump’s corporate tax cuts are already having a big impact. The main takeaway at the halfway point of earnings season is that corporations are going to make more money -- lots more -- as their statutory tax rate gets axed to 21 percent from 35 percent. Corporate chiefs already are making plans for the windfall, with some detailing specific investments in infrastructure or technology along with their one-time charges and benefits. So far a record 75 percent of companies have raised their profit guidance, according to strategists at JPMorgan Chase & Co. Taking into account the benefits of lower corporate taxes, Wall Street expects U.S. firms to increase capital expenditures by as much as 6.8 percent this year -- more than five times the projected growth in 2017."
— Tax law may spur divorces. Politico's Brian Faler: "Lawyers are counseling couples considering divorce to do it this year — before a 76-year-old deduction for alimony payments is wiped out in 2019 under the Tax Cuts and Jobs Act... Potential divorcees have all of 2018 to use the alimony deduction as a bargaining chip in their negotiations with estranged spouses. The deduction substantially reduces the cost of alimony payments — for people in the highest income-tax bracket, it means every dollar they pay to support a former spouse really costs them a little more than 60 cents."
— Ways and Means spox to private equity lobby. Emily Schillinger, most recently communications director for the House Ways and Means Committee, is joining the American Investment Council as its new vice president of public affairs, per a release.
— Federal borrowing spikes. The Post's Heather Long: "It was another crazy news week, so it's understandable if you missed a small but important announcement from the Treasury Department: The federal government is on track to borrow nearly $1 trillion this fiscal year — Trump's first full year in charge of the budget. That's almost double what the government borrowed in fiscal year 2017... Treasury mainly attributed the increase to the 'fiscal outlook.' The Congressional Budget Office was more blunt. In a report this week, the CBO said tax receipts are going to be lower because of the new tax law. The uptick in borrowing is yet another complication in the heated debates in Congress over whether to spend more money on infrastructure, the military, disaster relief and other domestic programs. The deficit is already up significantly, even before Congress allots more money to any of these areas."
— Liberals press Trump on NAFTA. Washington Examiner's Sean Higgins: "A group of liberal lawmakers led by Sens. Bernie Sanders and Elizabeth Warren wrote President Trump Friday urging him to continue to push for reforms to the North American Free Trade Agreement. The requests from the Vermont independent and Massachusetts Democrat included major changes to the 1993 U.S.-Canada-Mexico trade deal's investor-state dispute settlement system and rules for country of origin labeling, areas where their goals overlap with the president's although they did not acknowledge that in the letter... In addition to Sanders and Warren, the letter was signed by Democratic Sens. Jeff Merkley of Oregon, Edward Markey of Massachusetts, and Kirsten Gillibrand of New York."
— GOP lawmakers disown the memo. The Post's Elise Viebeck and Shane Harris: "Democrats spent the weekend pushing back against the claim by President Trump and some Republicans that corruption has poisoned the investigation led by special counsel Robert S. Mueller III into possible coordination between the Trump campaign and the Kremlin during the 2016 election. Democrats and some Republicans worry that this view, buttressed by the GOP memo, will lead Trump to fire Mueller or Deputy Attorney General Rod J. Rosenstein, who oversees the Russia probe. Calling on Trump not to interfere in Mueller’s investigation, four Republican members of the House Intelligence Committee dismissed on Sunday the idea that the memo’s criticism of how the FBI handled certain surveillance applications undermines the special counsel’s work."
Trump claimed vindication:
This memo totally vindicates “Trump” in probe. But the Russian Witch Hunt goes on and on. Their was no Collusion and there was no Obstruction (the word now used because, after one year of looking endlessly and finding NOTHING, collusion is dead). This is an American disgrace!— Donald J. Trump (@realDonaldTrump) February 3, 2018
— Panel votes on releasing Dem memo today. NYT's Nicholas Fandos: "Democrats have said their 10-page memo corrects mischaracterizations by the Republicans and adds crucial context to actions by the F.B.I. and the Justice Department in obtaining a secret Foreign Intelligence Surveillance Court order to wiretap the former Trump aide, Carter Page... The Democratic document, if the Intelligence Committee votes to release it, would be subject to the same review by the president. An official said on Sunday that the White House was open to releasing it pending an examination to protect intelligence sources and methods."
— How Amazon tamed Wall Street. NYT's Michael Corkery and Nick Wingfield: "For most analysts, the end is not yet in sight. When the investment firm D.A. Davidson & Company predicted last month that Amazon’s shares could rise to $1,800, Morgan Stanley upped the ante the next day, forecasting a possible $2,100 share price... In a business environment that demands, and rewards, quarterly profits and short-term strategic thinking, Amazon showed extraordinary resolve in focusing on long-term goals, somehow persuading investors to go along. Over its first decade in existence, including long stretches where it consistently reported losses, Amazon enjoyed a luxury afforded few companies: leeway."
SUPER BOWL ECONOMICS:
— Republicans tuning out. NYT's Kevin Quealy: "If some viewers choose to skip the Super Bowl this year, one man you might blame – or credit – is President Trump. The 2017-18 season was one of division for the N.F.L., as it struggled with protests, lower ratings and declining support among its core fans. But how Republicans say they feel about the league depends a lot on how long it has been since Mr. Trump last put the issue of player protests in the national spotlight. Until this week, Republicans’ favorability ratings toward the N.F.L. had regained nearly half of the ground lost after Mr. Trump’s remarks four months ago, when he said N.F.L. owners should fire players who kneel during the national anthem and encouraged spectators to walk out of stadiums in protest. But by mentioning the national anthem in his first State of the Union address this week, Mr. Trump appears to have cost the league some support, according to daily online surveys conducted by Morning Consult, a polling and media company."
Philadelphia median income $36K— Wu-Tang Financial (@Wu_Tang_Finance) February 5, 2018
Boston ; $103K
Justice in the trump era
From Zero Hedge, anticipating some destructive celebrations in Philadelphia:
Philly GDP set for a major Keynesian boost tonight— zerohedge (@zerohedge) February 5, 2018
— Mulvaney eases up on Equifax. Reuters's Patrick Rucker: Mick Mulvaney, head of the Consumer Financial Protection Bureau, has pulled back from a full-scale probe of how Equifax Inc failed to protect the personal data of millions of consumers, according to people familiar with the matter. Equifax said in September that hackers stole personal data it had collected on some 143 million Americans. Richard Cordray, then the CFPB director, authorized an investigation that month, said former officials familiar with the probe... Three sources say, though, Mulvaney, the new CFPB chief, has not ordered subpoenas against Equifax or sought sworn testimony from executives, routine steps when launching a full-scale probe. Meanwhile the CFPB has shelved plans for on-the-ground tests of how Equifax protects data, an idea backed by Cordray. The CFPB also recently rebuffed bank regulators at the Federal Reserve, Federal Deposit Insurance Corp and Office of the Comptroller of the Currency when they offered to help with on-site exams of credit bureaus, said two sources familiar with the matter."
Also relaxes payday rules. NYT's Alan Rappeport: "In mid-April, hundreds of members of the payday lending industry will head to Florida for their annual retreat featuring golf and networking at a plush resort just outside Miami. The resort just happens to be the Trump National Doral Golf Club. It will cap a year in which the industry has gone from villain to victor, the result of a concentrated lobbying campaign that has culminated in the Trump administration’s loosening regulatory grip on payday lenders and a far friendlier approach by the industry’s nemesis, the Consumer Financial Protection Bureau... Two weeks ago, Mr. Mulvaney put the brakes on a contentious rule, ushered in by Mr. Cordray, that was set to impose tight restrictions on short-term payday loans. He ended a case that the bureau initiated last year against a group of payday lenders in Kansas accused of charging interest rates of nearly 1,000 percent. Last week, Mr. Mulvaney scrapped an investigation into the marketing and lending practices of World Acceptance Corporation, a lender based in South Carolina that donated $4,500 to Mr. Mulvaney’s previous congressional campaigns through its political action committee."
The Post's Philip Bump on "Trump's favorite indicator of his success just took a beating:"
- The House Committee on Rules holds a hearing on various measures.
- Treasury Secertary Steven Mnuchin testifies before the House Financial Services committee for a hearing on “The Annual Report of the Financial Stability Oversight Council” on Tuesday.
- The Inter-American Dialogue holds an event on “The United States and Mexico in the Trump Era” on Tuesday.
- The House Agriculture Committee holds a public hearing on “The State of the Rural Economy” on Tuesday.
- SEC chairman Jay Clayton and CFTC chairman J. Christopher Giancarlo will testify during a Senate Banking, House and Urban Affairs Committee hearing on “Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission” on Tuesday.
- The Senate Judiciary Committee holds a hearing on “Fighting Illicit International Financial Networks Through Transparency” on Tuesday.
- The Senate Health, Education, Labor and Pensions Subcommittee on Primary Health and Retirement Security holds a hearing on the gig economy and retirement savings on Tuesday.
- The Asia Society holds an event on “The Broken Multilateral Trade Dispute System” on Wednesday.
- The Hudson Institute holds an event on “The Chinese Economics and Trade Challenge to the West: German and U.S. Perspectives” on Wednesday.
- The Urban Institute holds an event on the role of financial technology in financial service markets on Thursday.
- The Washington International Trade Association holds an event on the congressional trade agenda on Friday.
- The Peterson Institute for International Economics hosts an event on “Charting Europe’s Path Forward” on Feb. 13.
From The Post's Tom Toles:
House Majority Leader Kevin McCarthy (R-Calif.) often tells the story of when he ran his own small business. Here's what really happened:
Rep. Trey Gowdy (R-S.C.) said Republicans' controversial Nunes memo won't have an effect on the Russia investigation:
On Saturday Night Live, Cecily Strong as Melania Trump is visited by former first ladies:
And watch SNL's "Fox & Friends" cold open: