With the 10th anniversary of Lehman Brothers' collapse arriving Saturday, policymakers and industry insiders are reviving the debate over the regulation -- or the lack thereof -- of Wall Street. And over what could bring about the next financial crisis.
Here’s one bracing fact to keep in mind: Since the 2008 financial crisis, 30 percent of the lawmakers and 40 percent of the top staffers involved in forging the congressional response to the meltdown have gone to work for the industry. The figures, unearthed by my colleague Jeff Stein, point to the coziness between the regulators and the regulated. It's evident in a Washington debate now centered not over whether to tighten the screws applied since the crisis — but in how far to go in loosening them.
The details, from Jeff’s story:
The Post analysis found that Wall Street, K Street and firms representing financial interests have hired at least 15 of the 47 lawmakers who left Congress after serving on the House Financial Services Committee and Senate Banking Committee in August 2008, just before the financial crisis entered its most intense chapter. That number includes six of the 10 senators to leave Congress after serving on the Banking Committee. Seventeen of the 40 most senior staffers who served on the House Financial Services Committee in August 2008, as well as 15 of the 40 senior staff who served on the Senate Banking Committee at that time, later joined or took jobs representing a large financial institution.
Just as significant, but unreflected in those numbers, are the Obama-era executive branch officials who have similarly gone on to jobs in the industry. As Jeff notes, that roster includes former Treasury secretary Tim Geithner (now at private equity firm Warburg Pincus), his successor, Jack Lew (at private equity firm Lindsay Goldberg), and former Securities and Exchange Commission chair Mary Schapiro (who serves on the board of Morgan Stanley).
Geithner — along with former Federal Reserve Chairman Ben Bernanke and Hank Paulson, President Bush’s last Treasury Secretary — argued Friday in the New York Times that the congressional response went too far in stripping regulators of their bailout authority. “Among these changes, the FDIC can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed’s emergency lending powers have been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds,” they write. “These powers were critical in stopping the 2008 panic.”
The trio also pointed to a more diffuse threat: Losing the healthy fear of risk the crisis instilled. Policymakers need to “resist calls to eliminate safeguards as the memory of the crisis fades. For those working to keep our financial system resilient, the enemy is forgetting,” they write.
But for the most part, it doesn’t appear policymakers spinning through the revolving door for jobs at the firms they once oversaw have brought with them any hard-earned caution. That sense has receded elsewhere, too, as The Wall Street Journal's Greg Ip noted over the weekend. “One of the lessons of financial history is that risk-taking never disappears, it just changes shape, often to slip past the institutional and psychological defenses erected after the last crisis,” Ip writes. “Banks are certainly stronger than before the crisis, but innovation continues apace in the less-regulated ‘shadow’ banking system. For example, in 2014, regulators cracked down on bank lending to highly leveraged companies. A study by three economists at the Federal Reserve Bank of New York found that leveraged lending migrated to investment banks, private-equity funds and business development companies, many of whom borrowed from banks. So it’s not clear if the financial system is safer as a result.”
Ip issued a warning earlier this year about the rising threat posed by a laxer attitude toward the industry, writing that “federal regulators and legislators are… watering down, narrowing or declining to enforce rules passed after the financial crisis. The changes are modest and don’t foreshadow a crisis any time soon. But the timing is definitely awkward. They will stimulate lending and risk-taking at a time when the industry is lowering its own standards amid a near-record economic expansion.”
He pointed the deregulatory zeal of some of President Trump's key appointees, including Mick Mulvaney. As acting head of the Consumer Financial Protection Bureau, Mulvaney has dramatically scaled back enforcement of regulations; fired advisory board members; and most recently prompted the resignation of the administration's top student lending watchdog.
And as the crisis-era policymakers’ moves into the industry indicate, the sector is once again flexing its lobbying muscle in Washington.
“A prime example: the push for the Federal Reserve to reconsider its capital surcharge for global systemically important banks, an additional capital requirement for the country’s eight largest banks,” American Banker’s Victoria Finkle wrote last month. “While Fed officials have not indicated that they have any immediate plans to recalibrate the surcharge, the fight is one that solely affects the industry’s largest institutions — a constituency that has garnered little traction in policymaking circles in recent years. It’s a sign, observers say, that the biggest banks are starting to reassert themselves, after absorbing much of the blame for the financial crisis a decade ago.”
Or as Camden Fine, former head of the Independent Community Bankers of America, told Finkle: “They’ve come out of the shadows… They’re becoming more vocal, more aggressive, more strident about the issues that are top priorities to them.”
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— President Trump to Ford: Build cars in the U.S. Bloomberg News's Gabrielle Coppola: “In a tweet Sunday, Trump said Ford’s decision not to import a new sport-utility vehicle from China means the Focus Active ‘can now be built in the U.S.A.’ The automaker has already said it has no plans to restart production elsewhere. Ford said Aug. 31 the Trump administration’s 25 percent levy on China-built autos undermined the profitability of the car. Ford stood by its decision. ‘It would not be profitable to build the Focus Active in the U.S. given an expected annual sales volume of fewer than 50,000 units and its competitive segment,’ Mike Levine, a spokesman for the company, tweeted in response to the president’s tweet.”
“Ford has abruptly killed a plan to sell a Chinese-made small vehicle in the U.S. because of the prospect of higher U.S. Tariffs.” CNBC. This is just the beginning. This car can now be BUILT IN THE U.S.A. and Ford will pay no tariffs!— Donald J. Trump (@realDonaldTrump) September 9, 2018
— China says it will respond. Reuters: “China will respond if the United States takes any new steps on trade, the foreign ministry said on Monday, after [Trump] warned he was ready to slap tariffs on virtually all Chinese imports into the United States. On Friday, Trump said he was ready to levy additional taxes on practically all Chinese imports, threatening duties on $267 billion of goods over and above planned tariffs on $200 billion of Chinese products. ‘If the U.S. side obstinately clings to its course and takes any new tariff measures against China, then the Chinese side will inevitably take countermeasures to resolutely protect our legitimate rights,’ Foreign Ministry spokesman Geng Shuang told a regular briefing, when asked about Trump’s warning.”
Their economy looks vulnerable. Bloomberg News: “China’s chances of escaping the trade conflict with the U.S. with only minor damage to its economy just got slimmer... While economists see the immediate impact of trade tension as limited, the effect on economic confidence may be larger, warned former People’s Bank of China Governor Zhou Xiaochuan. Trade data for August released Saturday echoed both the cause and effect of the standoff with the U.S. — the surplus with the U.S. rose to a record, while overall export growth slowed. A lone bright spot may be faster-than-expected import growth, signaling that domestic demand in the world’s second-largest economy is holding up for now.”
Chinese consumers are skittish, as new car sales indicate. They dropped for the third straight month in August, per Bloomberg.
Beijing appeals to Wall Street. The Financial Times's Tom Mitchell: "The Chinese government is inviting Wall Street’s top bankers to a hastily arranged meeting in Beijing as [Trump] threatens to impose punitive tariffs on all Chinese exports to the US. According to three people briefed on the initiative, Chinese Communist party officials have invited the heads of America’s leading financial institutions to attend a 'China-US Financial Roundtable' in Beijing on September 16, followed by a meeting with Wang Qishan, vice-president of China. Chinese officials hope the new group, which will be jointly chaired by [Zhou] and John Thornton, the former Goldman Sachs executive who now chairs mining group Barrick Gold, will meet every six months to discuss Sino-US relations and advise the Chinese government on financial and economic reforms."
— U.S., EU talkers meet. AFP: “Top officials from the US and EU meet in Brussels on Monday in an effort to iron out differences on trade talks announced to great fanfare this summer... Under pressure from France, the Europeans firmly reject that farming goods be included in trade negotiations and Europe's top trade official Cecilia Malmstrom will attempt to clear up the matter with US counterpart Robert Lighthizer... Officials have set very low expectations for the meeting, which is the first of several expected sitdowns to map out on which sectors common ground can be found.”
— Perdue seeks concessions from Canada. Reuters's David Lawder: “Canada must end its low-price milk proteins policy to reach a U.S.-Canadian deal to update the North American Free Trade Agreement, U.S. Agriculture Secretary Sonny Perdue said. Canada has encouraged overproduction and flooded export markets for milk proteins used in cheese and yogurt, hurting U.S. dairy farmers, Perdue said in an interview aired on Sunday on C-SPAN television. ‘Our farmers don’t have access to the Canadian markets the way that they have access to us. Class 7 has to go. It can’t be renamed something or called something else,’ Perdue said when asked about dairy concessions needed to reach a NAFTA deal, referring to a new milk class created last year by Canada to price milk ingredients such as protein concentrates, skim milk and whole milk powder.”
— Abe says he'll defend free trade against Trump. Bloomberg: Japanese Prime Minister Shinzo Abe pledged to champion free trade in his first policy speech since U.S. President Donald Trump renewed pressure on the country to sign a bilateral trade deal. 'Tit-for-tat trade sanctions don’t benefit any country,' Abe told a gathering of lawmakers from the ruling Liberal Democratic Party on Monday, without mentioning Trump by name. 'Now is the time for Japan to take the lead in creating the rules of the new era as a flag-bearer for free trade.' On Friday, Trump told reporters that Japan would have a “big problem” if it didn’t reach a new trade deal with the U.S."
— Trump eyes Fannie lawyer for WH counsel. Axios's Jonathan Swan: "Trump was bluffing when he tweeted that he knows the successor to White House counsel Don McGahn, and instead he is vacillating about new legal leaders as he girds for open warfare with Democrats and Robert Mueller. The newest name on the president's mind: Fannie Mae general counsel Brian Brooks... This is, by far, Trump's most important current staffing decision. The climax of Mueller's probe lies ahead... Brooks has been recommended by Treasury Secretary Steven Mnuchin, a friend from working together at OneWest, a California bank. Brooks was considered for deputy at Treasury, but withdrew from consideration for reasons that are still unclear."
- “Pence says he never discussed removing Trump from office.” The Washington Post's Felicia Sonmez.
- “Trump to provide written answers under oath in Summer Zervos defamation lawsuit.” The Washington Post's Elise Viebeck.
— Blue-collar jobs surge. The Washington Post's Heather Long and Andrew Van Dam: “Blue-collar jobs are growing at their fastest rate in more than 30 years, helping fuel a hiring boom in many small towns and rural areas that are strong supporters of [Trump] ahead of November's midterm elections. Jobs in goods-producing industries — mining, construction, and manufacturing — grew 3.3 percent in the year preceding July, the best rate since 1984, according to a Washington Post analysis. ... The biggest drivers of the blue-collar hiring surge are the rebound in oil prices, the need to rebuild after disasters such as Hurricanes Irma and Harvey, and rising demand generated by a growing economy. ... The good times might not last. Some economists warn the long-term trends still favor big cities and digitally focused industries. There are signs growth may be tapering off in some blue-collar sectors: Home sales have cooled this summer and manufacturers are fearful Trump’s trade war will erase their competitive edge.”
— Markets face pressure. Reuters's Marc Jones: “World shares were flirting with their longest run of declines since early 2016 on Monday, hit by rising anxiety about the U.S.-China trade war and another interest rate increase by the Federal Reserve later this month. ... Traders were bracing for a potential escalation in the Sino-U.S. tariff row after [Trump] raised the stakes in the dispute on Friday. ... On top of that, strong U.S. jobs numbers on Friday had bolstered bets on a higher dollar on expectations the Federal Reserve will keep raising U.S. interest rates. ‘It’s more of the same, markets continue to be under pressure from a whole host of headwinds,’ said fund manager GAM’s Investment Director of emerging market equities, Tim Love.”
— SEC in crypto crackdown. Bloomberg's Jesse Westbrook: "The U.S. Securities and Exchange Commission temporarily suspended trading in two securities linked to cryptocurrencies on Sunday, citing investor confusion regarding the assets. The halted securities are Bitcoin Tracker One and Ether Tracker One, the regulator said in a statement. The suspension started Sunday and will last through Sept. 20, according to the statement. Brokers who allow customers to trade Bitcoin Tracker One and Ether Tracker One or offer quotes on the securities during the halt could be subject to enforcement actions, the SEC said."
— Moonves to resign. The Post's Steven Zeitchik, Alex Horton and Sarah Ellison: “Leslie Moonves, the powerful longtime chairman and chief executive of CBS, will resign his position in the wake of sexual-assault allegations, concluding a whirlwind six weeks that saw him fall from a perch as one of the country’s most respected media titans. The company announced the news in a statement late Sunday, saying that CBS chief operating officer Joseph Ianniello will take over as interim CEO and president — both Moonves’ titles — as the company looks for a permanent replacement for its longtime chief. Moonves had seemed bulletproof as of just six weeks ago, regarded as one of the entertainment world’s most sterling executives. But sexual-misconduct allegations by six women in The New Yorker in July led to the board hiring outside lawyers to conduct an investigation into Moonves and activists to call for his removal. On the magazine's website Sunday, an additional six women alleged behavior that includes sexual misconduct, harassment and retaliation.”
— Asset managers struggle in China. WSJ's Stella Yifan Xie: “Some of the world’s largest asset managers have gotten a rough welcome in China. No sooner did fund managers like BlackRock Inc. and Fidelity International roll out their inaugural Chinese stock funds for wealthy domestic investors than the country’s markets started sliding — the Shanghai Composite index has fallen 19% this year. ... Although the new BlackRock and Fidelity stock funds have outperformed the broader Chinese market, they — and most of their global peers’ new China funds — remain in the red. ... BlackRock’s inaugural Chinese stock fund for domestic investors, which debuted in July, was down by close to 8% by mid-August, according to people familiar with the matter.”
— Leaders near deal to avert shutdown. WSJ's Kristina Peterson: "Congressional negotiators are expected to secure a deal Monday on a package of three spending bills for the upcoming fiscal year, setting in motion GOP leaders’ plans to avoid a partial government shutdown at month’s end. The efforts to keep the government funded come amid uncertainty over whether [Trump] is willing to defer a fight with Democrats over border-wall funding until after the midterm elections. Lawmakers on the House Appropriations Committee said they expected the House to vote this week on the trio of bills, known as a 'minibus,' that would include funding for the departments of Energy and Veterans Affairs and the legislative branch of government."
— Vulnerable GOPers balk at tax vote. Politico's Nancy Cook and Bernie Becker: "The White House and top congressional Republicans want to push for a House vote on a second round of tax cuts ahead of the midterms in hopes of bolstering their economic pitch to voters — but they’re running into opposition within their own party. GOP leaders conceived of the second tax bill as a messaging win that would put Democrats on their heels ahead of the midterms, forcing them to vote against tax relief for the middle class. But the concerns over the bill are largely flowing from the Republican side, mainly from members fighting to keep hold of seats in suburban districts where [Trump] is most unpopular — and that are key to the GOP’s hopes of keeping their majority... Top House leaders will unveil the second tax overhaul bill this week. "
- Senate Banking Committee hearing on “countering Russia” on Sept. 12.
- Commission on Security and Cooperation in Europe briefing on free-trade zones on Sept. 12.
- Senate Banking Committee hearing on the “implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act” on Sept. 13.
- Senate Agriculture Committee hearing on U.S. agricultural trade on Sept. 13.
- Senate Budget Committee hearing on transparency at the Congressional Budget Office on Sept. 13.
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