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The Finance 202: Jay Clayton faces a rocky road from SEC chair to Manhattan U.S. attorney

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with Brent D. Griffiths

Any possible hopes Jay Clayton had of transitioning smoothly from serving as a top Wall Street regulator in Washington to Wall Street’s top cop in New York were dashed as soon as they were revealed over the weekend.

The former corporate lawyer has attempted to maintain a low-drama profile atop the Securities and Exchange Commission. But he was thrust into a firestorm with the revelation President Trump wants him to serve as the U.S. attorney for the Southern District of New York.

The man who had been in that post, Geoffrey Berman, had no intention of going quietly when Attorney General William P. Barr tried to fire him Friday night, setting up a high-stakes standoff within the Justice Department over control of the office conducting probes into multiple Trump associates. Berman agreed to step aside effective immediately Saturday afternoon when Barr acceded to elevating Berman’s deputy, Audrey Strauss, as his temporary replacement.

Now, the Trump administration appears to be in an uneasy detente with the famously independent New York prosecutor’s office.

The shakeup casts Clayton’s fate into limbo.

Responsibility for advancing Clayton’s nomination rests with Senate Judiciary Committee Chairman Lindsey O. Graham (R-S.C.). But Graham is deferring to New York’s two Democratic senators, Charles E. Schumer and Kirsten Gillibrand. Both called on Clayton to withdraw.

“In a vacuum, Clayton would get the support of some Senate Democrats who see him as a moderate and a good guy,” Capital Alpha’s Ian Katz wrote in a Sunday note. “But this is no vacuum. This is a political circus, with Clayton — fairly or not — now seen by Democrats as the Trump administration’s workaround to avoid independent investigations of its allies.”

If Clayton gets a hearing, Democrats will zero in on his long list of conflicts.

Critics were quick to point out that Clayton has no experience as a prosecutor. Indeed, he has told friends part of the appeal of the post for him is that it offers “a way to establish his litigation credentials,” according to the New York Times’s Matthew Goldstein and Ben Protess.

But Senate Democrats are likely to focus on what Clayton was doing with his career in the private sector instead, in particular, his defense of some of Wall Street’s biggest names as a partner at the white-shoe firm of Sullivan & Cromwell.

“When he took the job at the SEC in 2017, Clayton agreed to recuse himself from cases involving Deutsche Bank and other clients he had previously represented for two years," Renae Merle writes. “While at Sullivan & Cromwell, he advised Goldman Sachs and Barclays Capital.” The roster also includes Swiss banking giant UBS, Japanese holding company SoftBank Group, hedge fund Pershing Square, and billionaire hedge fund manager Paul Tudor Jones.

Deutsche Bank in particular would be a sticking point. “The German bank has repeatedly run afoul of federal and state laws and was implicated in large money laundering schemes, Renae writes. “It is also at the center of a battle between the Trump administration and House Democrats over the release of the president’s financial records. The bank has played critical role in Trump’s real estate business, lending him more than $360 million since 2012."

Dennis Kelleher — president of Better Markets, which advocates for tougher regulation of the financial services industry — calls Clayton “the most conflicted SEC chairman in the history of the SEC, maybe since Joe Kennedy. His disclosure list was a mile long and included a who’s who of Wall Street's biggest firms. I’m sure its a coincidence, but none of those former clients have been shaking in their boots worrying about SEC enforcement during Chair Clayton’s tenure.”

Clayton’s announced intention to seek the New York post renders him a lame duck at the SEC's helm.

As Katz writes: “The circumstances will color a lot of what the SEC does until the situation is resolved. Not only is Clayton a short-timer, but he’s a short-timer in the middle of a controversy.”

It marks a change of pace for Clayton, who has eschewed big enforcement actions at the agency and mostly avoided the limelight. He’s not a registered Republican and did not contribute to Trump’s campaign in 2016. Nevertheless, he has golfed with the president several times, including as recently as earlier this month at Trump’s club in Bedminster, N.J., per the Times.

On June 19, Trump officials announced Manhattan Attorney General Geoffrey Berman would be stepping down. Berman quickly contradicted the claim. (Video: The Washington Post)

“Widely expected to be a deregulator, he has instead been selective about pruning rules and, in some cases, increased restrictions on the brokerage and money-management industries,” the Wall Street Journal’s Dave Michaels writes. “He also oversaw an effort to rein in data and transaction fees charged by stock exchanges. That effort has been controversial and not completely successful, with the SEC losing two recent cases before a federal appeals court that said regulators lacked the authority to tinker with the fees charged by exchanges.”

Clayton could face public questioning this week. He is set to participate in a virtual event on market structure hosted by MIT this afternoon and another focused on disclosures hosted by FCLTGlobal on Tuesday.

Market movers

Futures point to a strong open. 

Investors appear to be betting on a continued recovery despite new coronavirus cases. “U.S. stocks look poised to extend last week’s rally,” Bloomberg's Michael Hunter writes. “The dollar weakened, while gold neared a seven-year high. Gains across retail and health-care shares helped the Stoxx Europe 600 Index erase an early retreat. Hong Kong stocks slumped after China moved to tighten oversight of the city. Crude oil hovered below $40 a barrel in New York… Equity markets have steadied in recent weeks and the S&P 500 is within 10% of its pre-pandemic peak.”

Companies are hoarding cash. “Giant companies from McDonald’s Corp. to Intel Corp. are husbanding cash, cutting costs and tapping debt, all moves that bolster their resilience amid persistent uncertainty wrought by the new coronavirus,” WSJ's Thomas Gryta and Theo Francis write. “At the same time, corporate leaders and investors are gauging when it will make sense to economize less and spend more to avoid losing out to rivals once the recovery begins in earnest…

“As the pandemic swept the U.S., large companies significantly increased cash and short-term investments as well as total debt—much more rapidly than they did in the preceding quarters, according to a Wall Street Journal analysis of financial data from S&P Global Market Intelligence. For S&P 500 companies, the median increase in cash and short-term investments was 13.9% in the March quarter, compared with less than 4.1% in the prior three quarters, the analysis found.”

Home mortgage delinquencies hit peak since 2011. “U.S. home-mortgage delinquencies climbed in May to the highest level since November 2011 as the pandemic’s toll on personal finances deepened,” Bloomberg's John Gittelsohn writes. "The number of borrowers more than 30 days late swelled to 4.3 million, up 723,000 from the previous month, according to property information service Black Knight Inc. More than 8% of all U.S. mortgages were past due or in foreclosure.

“The increase in delinquencies was smaller than the 1.6 million jump in April, when the economy ground to a halt nationwide. Still, the path ahead is clouded by the spread of new Covid-19 cases, uncertainty over business reopenings and the looming expiration of benefits that have helped jobless homeowners avert delinquency.”

Fed adds coronavirus scenarios to this year's bank stress tests (CNBC)

Coronavirus fallout

Vast federal aid during the pandemic has capped poverty.

That does not mean vulnerable families aren't struggling: “An unprecedented expansion of federal aid has prevented the rise in poverty that experts predicted this year when the coronavirus sent unemployment to the highest level since the Great Depression, two new studies suggest. The assistance could even cause official measures of poverty to fall,” the New York Times's Jason DeParle reports.

“The studies carry important caveats. Many Americans have suffered hunger or other hardships amid long delays in receiving the assistance, and much of the aid is scheduled to expire next month. Millions of people have been excluded from receiving any help, especially undocumented migrants, who often have American children.”

States are seeing a spike in cases as they reopen: “California and some other large states are experiencing a sharp climb in new coronavirus cases just weeks into a gradual economic reopening, filling hospital beds and intensive care units in an uneven surge that many public health officers predicted months ago,” Scott Wilson reports from Santa Rosa, Calif.

“Last week, Texas, Florida, Arizona and at least seven other states reported their highest weekly infection-rate averages. But there is little sign that states are reconsidering politically popular decisions to open the economy. In parts of California, where more than 5,000 have died of the virus, people will be allowed to see movies in theaters this weekend for the first time since the stay-at-home orders began in early March.”

Most states now have rising cases, Pantheon Macroeconomics chief economist Ian Shepherdson notes. “The 7-day moving average number of new cases has increased in 28 states over the past week, mostly in the South and West,” he writes. 

More from the U.S.:
  • At least 2,270,000 cases have been reported; at least 118,000 have died
  • New Yorkers can now return to office, but most aren't: “Most companies are taking a cautious approach. Some are keeping offices closed, while others are opening them at reduced occupancy and allowing employees to decide if they prefer to keep working from home,” WSJ's Konrad Putzier reports. Some companies may not be fully back before Labor Day and others may wait for schools to reopen.
  • Vaccine efforts focus on older adults: “Health experts are worried about whether coronavirus vaccines under development will adequately protect the elderly, sparking efforts to make sure there are shots that can help the vulnerable group,” WSJ's Jared S. Hopkins reports.
The corporate front: 
  • American Airlines plans $1.5 billion stock, convertible sale: The airline is bracing “its balance sheet with $3.5 billion in new financing, diverging from its recent reliance on federal aid …,” Bloomberg's Mary Schlangenstein, Crystal Tse, and Gillian Tan report. “American’s actions show the broad range of tools airlines are using to bolster balance sheets amid a hesitant return to flying …”
  • Banks are awash in money: “It’s the banking world’s version of the rich getting richer,” CNBC's Hugh Son reports. “The wall of money flowing into banks has no precedent in history: in April alone, deposits grew by $865 billion, more than the previous record for an entire year.”
  • Tech industry takes note of Apple's big conference going virtual: “Now tech companies are trying to create worthy virtual versions of events for the software developers, business partners and customers powering their operations by broadcasting keynote speeches, question-and-answer sessions and more over live video,” WSJ's Sarah E. Needleman and Tripp Mickle report.

Money on the Hill

Senate Republicans are still struggling over what to do next.

Lawmakers have said they will reevaluate the situation next month: “Joining Democrats and the White House to pass another bill could help speed a rebound from recession in an election year that is shaping up to be challenging for the party. But the prospect of more aid has started to alienate conservative supporters wary of large-scale spending. That has pushed some Republican senators to hope that the economy recovers without more fiscal support, even as Covid-19 cases are rising in some states,” WSJ's Andrew Duehren and Richard Rubin report.

“Republicans have postponed deliberations until mid-July, just weeks before unemployed Americans are scheduled to stop receiving the extra $600 a week in jobless payments that the $2.2 trillion Cares Act gave them. That leaves little time to forge a consensus and reach an agreement with Democrats and the White House.”

Campaign 2020

Biden outraised Trump in May, but he still lags behind overall.

President Obama is scheduled to headline an online fundrasier this week: “Biden and the Democratic National Committee hit an all-time monthly fundraising record in May, bringing in $80.8 million. That total topped Trump and the Republican National Committee, which together raised $74 million over the same period,” Politico's Elena Schneider and Zach Montellaro report.

"But Trump — who has been able to jointly fundraise with the Republican Party at higher levels as the Republican presidential nominee for months — leads Biden in cash on hand, $265 million to $122.2 million, an all-important number that shows how much the candidate and committee can still spend. Notably, May was the first full month Biden raised money in tandem with the DNC, drafting off of a joint fundraising agreement that allowed individual donors to give more than $620,000.

Trump tracker

ICYMI: SBA and Treasury caved on PPP's transparency.

After pressure from Congress, we'll now get disclosures for loans above $150,000: “The Treasury Department and Small Business Administration said Friday they would disclose business names, addresses, demographic data, number of jobs supported and other details. Specific loan amounts won’t be disclosed, but the government will place each loan in one of five size categories ranging from $150,000 to the maximum loan amount of $10 million, the agencies said,” WSJ's Ryan Tracy reports.

“Treasury Secretary Steven Mnuchin had previously resisted disclosing loan-level data for the $670 billion program, saying disclosing specific loan amounts would be tantamount to disclosing confidential business information since the amounts are based on monthly payroll. For loans of less than $150,000, the agencies said they would disclose summary information broken down by ZIP Code, industry, business type and various demographic categories.The agencies didn’t say when the data would be released.”

Kevin Hassett will leave the White House, again. 

The economist is set to make his second exit this summer, according to Hans Nichols of Axios. The former chair of the Council of Economic Advisers returned in March to help with the White House's response to the pandemic. “Hassett has shown an ability to translate economic numbers into tangible terms for the president, steering Trump to support more stimulus and relief. His departure could cede power to administration officials who oppose a $2 trillion package and worry about the deficit,” Nichols writes. 

Hassett's exit will deprive the president of another voice defending him on cable TV. It also drains more in-house expertise ahead of the election. Andrew Olmem, a deputy on the National Economic Council, left his post on Friday.”

When superpowers collide

China suspends poultry imports from Tyson Foods plant with coronavirus outbreak.

The move signals a new potential threat to meat plants around the world: “All products from the plant in Springdale, Arkansas, where Tyson is based, that are about to arrive in China or have arrived at the country’s ports will be seized by customs. The suspension … is an about face from just a few days ago, when Chinese officials said food was unlikely to be responsible for a fresh virus outbreak in Beijing,” Bloomberg News's Marion Dakers and Michael Hirtzer report.

“If China continues to suspend shipments based on coronavirus cases reported at processing plants, it could also threaten to undermine promised agricultural purchases as part of the Washington-Beijing trade deal. Tyson in a statement Sunday said it was looking into the report and cited that the World Health Organization and the Centers for Disease Control and Prevention say there’s no evidence that virus transmission is associated with food.”

Tariffs are better than sanctions, Trump says defending his China policy: Asked why he hadn't yet enacted Treasury sanctions against Chinese Communist Party officials or entities tied to the camps where the Chinese government detains Uighurs and other Muslim minorities, Trump replied, ‘Well, we were in the middle of a major trade deal,’ ” Axios's Jonathan Swan reports.

Trump continued, "And when you're in the middle of a negotiation and then all of a sudden you start throwing additional sanctions on — we've done a lot. I put tariffs on China, which are far worse than any sanction you can think of."

Huawei's 5G dominance threatened by U.S. policy: “When Huawei Technologies Co. was banned last year from buying American parts, the Chinese tech giant had a workaround: make greater use of its own chips,” the Wall Street Journal's Dan Strumpf reports.

“That strategy is in jeopardy after the Commerce Department last month restricted chip makers globally who use U.S. technology from supplying semiconductors to Huawei, a rule that covers virtually all builders of high-end chips. Huawei faces the prospect of losing dozens of critical components that go into 5G base stations, according to a teardown of a Huawei-made base station by California-based research firm EJL Wireless Research. Base stations are a set of boxes that are typically mounted on towers or buildings and connect cellphones to a wireless network.”

Daybook

Today:

  • U.S. existing home sales for May are released
  • The House Education and Labor Committee holds a hearing on how covid-19 widened racial inequalities in education, health and the workforce
  • Dean Foods Co is among the notable companies reporting its earnings, per Yahoo Finance

Tuesday:

  • The Senate Banking Committee holds a hearing on the Ex-Im bank, president and chairman Kimberly Reed is set to testify
  • The House Budget Committee holds a hearing on covid-19 and health and wealth inequality
  • La-Z-Boy Inc is among the notable companies reporting its earnings

Wednesday:

  • J.C. Penney, Pier 1 Imports, KB Home and Winnebago Industries Inc are among the notable companies reporting their earnings

Thursday:

  • The Labor Department releases the latest weekly jobless claims
  • Nike, Rite Aid and Darden Restaurants Inc are among the notable companies reporting their earnings

The funnies

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Bull session

Former national security adviser John Bolton’s interview with Martha Raddatz touched on a wide number of topics. Here are four of the most noteworthy moments. (Video: The Washington Post)
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