Financial Services Report

Our Take

Monday, May 29^th, in addition to being Memorial Day would have been the 100^th Birthday of President John F. Kennedy.   As I was putting this week’s update together I may have scrolled through twitter a few times to procrastinate.   I came across the following – which I am assuming is true, because you know, it’s on the Internet.  According to historian Michael Beschloss, these were to be the final words of a speech that the President was to give in Austin Texas on November 22, 1963.

"Neither the fanatics nor the faint hearted are needed.  And our duty as a Party is not to our Party alone, but to the nation, and indeed, all mankind.  Our duty is not merely the preservation of political power, but the preservation of peace and freedom.  So let us not be petty when our cause is great.  Let us not quarrel amongst ourselves when our Nation’s future is at stake.  Let us stand together with renewed confidence and cause – united in heritage of the past and our hopes for the future – and determined that this land we love shall lead all mankind into new frontiers of peace and abundance." 
 
On a weekend, and week where we reflect on those who gave their lives for our country it is always important to remind oneself about the values they were willing to die for.
 
Looking Ahead

Near Term

• The House and Senate are in Recess this week for the Memorial Day break.   When they return the House is expected to take up its Dodd-Frank Reform Bill, a/k/a the CHOICE Act.   Amendments for this legislation are due on Friday and it should be interesting to see what messaging amendments are offered by the Democrats, as well as whether any substantive changes are allowed by the Republicans.  The Senate Banking Committee will continue to proceed with moving nominations, and is also expected to hold hearings on GSE reform as Chairman Crapo has indicated that housing finance reform continues to be one of his top priorities.

Further Out

• Despite earlier predictions that the extraordinary measures would last through the end of the fiscal years, it now appears that Treasury Secretary Mnuchin is requesting an extension of the debt ceiling before the start of August.  This accelerated time frame will likely add more turbulence to an already bumpy legislative process.  

The Past Week

Legislative Branch
House
Ways and Means Holds BAT Hearing; GOP Divisions Emerge.
On Tuesday, the House Ways and Means Committee held a hearing entitled “Increasing U.S. Competitiveness and Preventing American Jobs from Moving Overseas,” focused on the border-adjustment tax (BAT) element to any tax reform package. Democrats on the committee were joined by some skeptical Republican members about the feasibility of a BAT, while leadership and most rank-and-file members remained steadfast in their support of the provision. Reps. Mike Kelly (R-PA), Pat Tiberi (R-OH), Erik Paulsen (R-MN), and Jim Renacci (R-OH) are among the Republicans who have offered concerns on the proposal.   
 
Mnuchin Advocates for Clean Debt Ceiling, Tax Reform, in Ways and Means Hearing
On Wednesday, the House Ways and Means Committee followed its BAT hearing with one featuring Treasury Secretary Steven Mnuchin to defend and describe the President’s budget and tax reform as a whole. Not surprisingly, Republicans remained divided on the border-adjustment tax (BAT), and Mnuchin was ambiguous on the Administration’s position in searching for additional revenue raisers. However, the Treasury Secretary reiterated that he was committed to a revenue-neutral proposal, assuming dynamic scoring, that would be largely reliant on economic growth and base broadening. Additionally, Mnuchin took the opportunity to advocate for a clean debt ceiling hike though he accelerated the time frame to before the start of the August recess.   
 
Capuano, Jones Introduce Bipartisan Glass-Steagall Bill
Last week, Reps. Michael Capuano (D-MA) and Walter Jones (R-NC) jointly introduced legislation to reinstate the barrier between commercial and investment banks, commonly referred to as the Glass-Steagall Act. Their bill would prohibit traditional depository banks from investing in structured and synthetic products, reverse regulatory interpretations made in the 1980s and 1990s that allowed banks greater freedom to operate in both sectors, and institute a five-year transition period for banks to comply with the law. The original Glass-Steagall Act was repealed at the end of the Clinton Administration.
 
House Dems Ask Deutsche Bank for Information on Loans to Trump Family
Last week, Democrats on the House Financial Services Committee took the unusual step of asking Deutsche Bank for documents related to President Trump and his family as Congress seeks answers on the White House’s alleged ties with Russia. Specifically, the lawmakers ask if loans made by the bank were “in any way connected to Russia.”
 
Draft Flood Insurance Bills Circulate Among Panel Republicans
On Friday, House Financial Services Committee circulated draft bills aimed to reauthorize and reform the National Flood Insurance Program. According to the documents, the program would be reauthorized for five years while introducing reforms aiming to improve its financial stability. A breakdown of the specifics in the draft bills can be found here.
 
Senate
Banking Panel Moves Treasury Nominees to Senate Floor
On Tuesday, the Senate Banking Committee approved a series of nominees, sending their consideration to the Senate floor for final consideration. Some Democrats opposed the nominations over the Administration’s ongoing scandal related to ties to Russia, as well as the Treasury Department’s alleged failure to fulfill document requests. Senate Intelligence Vice-Chair Mark Warner (D-VA) said that he would oppose Treasury nominations until the Department sent information related to the Russia probe to the intelligence panel. The specific nominees approved include Sigal Mandelker, to be Treasury undersecretary for terrorism and financial crimes; Mira Ricardel, to be Commerce undersecretary for export administration; Marshall Billingslea, to be Treasury assistant secretary for terrorist financing; and Heath Tarbert, to be Treasury assistant secretary for international markets and development.
 
Senate Finance Holds Hearing with Mnuchin on Budget, Tax Reform
The Senate Finance Committee heard testimony from Treasury Secretary Steven Mnuchin on Thursday, ostensibly in response to the Treasury Department’s budget request, but with most discussion focused on the Administration’s nascent tax reform proposal. Mnuchin offered few new details on the proposal, saying that he had “some concerns” on the border-adjustment tax that has divided Republicans, and that the Department is “looking at everything” to serve as additional funding mechanisms for tax rate reductions. Senate Finance Chairman Orrin Hatch (R-UT) rejected criticisms of using the budget reconciliation process for tax reform, while Democrats called the underlying financial projections of both the President’s budget and a tax reform package.
 
Select Highlights from the Administration
The White House
White House Budget Released – Massive Cuts as Expected but Some Regulators Spared
On Wednesday, Trump Administration unveiled its $4.1 trillion budget for the 2018 fiscal year, dubbed “A Foundation for American Greatness” The release of this full budget further fleshes out proposals initially outlined in the Administration’s “skinny budget,” and generally speaking offers sharp reductions for many domestic discretionary spending programs.   As was widely panned in the press, the proposal would secure a balanced budget within 10 years.   As with previous administrations, the White House’s proposal was met with a great degree of skepticism on Capitol Hill, for example, as Senate Budget Chairman Michael Enzi (R-WY) called the proposal “just suggestions,” it does serve as a reference point for future spending considerations and negotiations between the parties.  
 
In terms of federal regulators, while the CFPB was assumed to be moved into regular appropriations, both the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), were mostly spared from deep cuts as their budgets were left flat.   Interestingly, the CFTC responded by asking for a $31.5 million boost from its current $250 million budget.
 
Department of Labor
Acosta Announces That He Will Not Delay Fiduciary Rule
In an op-ed published in the Wall Street Journal Tuesday night, Secretary of Labor Alexander Acosta announced that he would not seek to delay the implementation of the controversial fiduciary rule beyond its current June 9 implementation date. Industry groups have vehemently fought the rule, saying that its process of ensuring that advisers act in their clients’ best interest is overly burdensome and unworkable. Despite some support for that view in the White House, Acosta elected to stick with the June 9 date, citing “no principled legal basis” to push it back further. The Secretary also pledged to solicit additional public comment on the rule, and to work with the SEC in possibly altering the rule in the future.
 
Office of Management and Budget (OMB)
Mulvaney Says Debt Ceiling Deadline Earlier than Anticipated;
In testimony to Congress last week, OMB Director Mick Mulvaney said that tax receipts are coming in slower than expected and that a debt ceiling raise may be necessary than initial projections predicted – sometime in October. The date allegedly could be as early as mid-August, which would necessitate congressional action before their traditional recess in August. In a hearing of his own, Treasury Secretary Steven Mnuchin implored lawmakers to pursue a “clean” raise of the debt ceiling before lawmakers leave for their traditional monthlong recess in August.
 
Federal Reserve
May Meeting Minutes Suggest June Rate Rise
The release of the Federal Reserve’s minutes from the May meeting of the Federal Open Markets Committee added fuel to speculation that the body will raise the federal funds rate again in June. Officials said it would “soon be appropriate” to raise rates again, and traditional wisdom has long suggested that June would be the month where the Fed moves again. The Fed is also making progress on shrinking its $4.5 trillion balance sheet, with a consensus emerging on allowing increasing amounts of the securities to mature without reinvesting them. The sluggish GDP growth in the first quarter of 2017 was considered transitory by the Fed.  
 
Federal Deposit Insurance Corporation (FDIC)
FDIC Reports Bank Loan Growth Only 4 Percent in Past Year
The FDIC reported last week that bank loans grew at a rate of only 4 percent from March 2016 through March of this year. That rate is considerably lower than the 5.3 percent in the year prior, and applied across all major loan categories. In response to the report, FDIC Chairman Martin Gruenberg said that “As the U.S. economy approaches the end of the eighth year of expansion, a slowdown in loan growth is not unusual at this stage of the credit cycle.”