News : Dimon warns DC against regulatory ‘whack-a-mole’

Tuesday, April 4, 2023

Dimon warns DC against regulatory ‘whack-a-mole’

Apr 04, 2023

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If you ask Jamie Dimon, no one walked out of the Silicon Valley Bank fiasco looking good.

“This wasn’t the finest hour for many players,” the longtime JPMorgan Chase CEO wrote in his annual letter to shareholders this morning.

Silicon Valley Bank’s exposure to rising interest rates and heavy reliance on flighty deposits from venture capitalists created tremendous risks, many of which were “hiding in plain sight,” Dimon wrote. Even if the bank had been subjected to a Federal Reserve stress test prior to its collapse, regulators wouldn’t have flagged how its massive portfolio of long-dated U.S. debt would fare against higher rates as cause for concern.

In other words, there’s plenty of blame to go around.

This is not 2008. The problems plaguing SVB aren’t as pervasive as the financial system’s pre-crisis exposure to toxic mortgages. But “there will be repercussions from it for years to come,” he wrote.

For Dimon — the only crisis-era CEO of a major bank still standing — that’s where the danger lies.

“It is extremely important that we avoid knee-jerk, whack-a-mole or politically motivated responses,” he wrote, later adding that many post-crisis “disruptions in the market were, in my opinion, largely caused by certain regulations that did not improve the safety of the market maker but, instead, damaged the safety of the whole system.”

That means taking a holistic look at how existing rules are applied across the breadth of the financial system – including at so-called “shadow banks” — to assure that institutions of all sizes can continue to serve the market. While that shouldn’t preclude a bank from failing, it should limit “the chance of failure and the odds of contagion,” he wrote.

What else did Dimon have to say?

On the state of the economy: It’s a mixed bag.

The regional banking crisis “provoked lots of jitters in the market and will clearly cause some tightening of financial conditions as banks and other lenders become more conservative,” he wrote. Nevertheless, “it is unclear whether this disruption is likely to slow consumer spending.”

On energy policy: “Permitting reforms are desperately needed to allow investment to be done in any kind of timely way. We may even need to evoke eminent domain – we simply are not getting the adequate investments fast enough for grid, solar, wind and pipeline initiatives.”

On private equity’s growing sway over markets: The onerous requirements facing public companies, which has been compounded environmental, social and governance-related from demands from investors and new shareholder proxy rules, is putting pressure on businesses to remain private.

“This migration [to private markets] is serious and worthy of critical study, and it may very well increase with more regulation and litigation coming. We really need to consider: Is this the outcome we want?”

IT’S TUESDAY — Sorry that this arrived a bit later than usual. We wanted to make sure that Dimon’s letter was at the top of your inbox. Send tips, suggestions and gossip to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

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Driving the Day

Outgoing World Bank President David Malpass speaks at the Atlantic Council at 10 a.m. … The Bureau of Labor Statistics will release job openings data at 10 a.m. … Cleveland Fed President Loretta Mester speaks at 6 p.m.

Trump’s in New York and Wall Street has agita — The GOP base still loves former President Donald Trump. Republicans on Wall Street are getting scared that his arraignment this afternoon on criminal charges will only make them love him more.

“If I have one huge fear at all it’s that the Democrats — in their lust to put Donald Trump in an orange jumpsuit — are going to reelect him,” said one Republican on the Street, who was granted anonymity to speak with MM because their employer prohibits them from publicly commenting on politics. “I think that that will make him a martyr, and I think he’ll win.”

Trump’s hold over the Republican electorate already posed significant challenges for anyone looking to spoil his 2024 campaign. Much like in 2016, there’s a growing concern that his hand will only get stronger as more candidates enter the arena. And while some longshot candidates, like former Arkansas Gov. Asa Hutchinson, could try to batter Trump over his alleged criminal misdeeds, the former president’s popularity poses unique challenges to likely challengers like Florida Gov. Ron DeSantis, who blasted the looming indictment even as he became the subject of attack ads from pro-Trump forces.

DeSantis and other possible contenders have started making their pitch to deep-pocketed donors in New York and the financial services sector.

But among GOP supporters on Wall Street, “there’s a lot of concern about whether Trump will consolidate support in the polls,” Ken Spain, a partner at Narrative Strategies who advises investment firms, told MM. “Then the concern becomes: Does that freeze money in the investor class? Do people sit on the sidelines if they think the chance of defeating Trump in a primary is diminishing?”

Is that what’s happening? You know the drill, email me at ssutton@politico.com if you have thoughts or insights on how Wall Street investors are weighing the GOP field.

A potential JOLTS jolt — Federal Reserve Chair Jerome Powell will be watching this week’s data closely for signs that higher interest rates have finally made a dent in the jobs market. The Institute for Supply Management Survey might offer some hints of what’s to come from this morning’s job openings report – out at 10 a.m. — and Friday’s readout on the unemployment rate.

A growing number of manufacturers are weighing workforce reductions as demand peters, according to March survey results released on Monday. The manufacturing sector has been a bulwark of labor market strength amid soaring inflation. And while there are obvious signs that the labor market is still piping hot — the median estimate is that today’s will show 10.5 million openings in February – contractions of the ISM index could be a “canary in the coal mine” for cuts in what had been a “one pillar of a strong labor market,” said Andrew Flowers, a former Atlanta Fed economist who now works for the recruitment advertising tech firm Appcast.

MOUSE POLITICS — Reuters’s Dawn Chmielewski and Lisa Richwine: “Walt Disney Co. Chief Executive Bob Iger fired back at … DeSantis on Monday, saying his apparent retaliation against Disney for taking a position on legislation was ‘anti-business."”

ICYMI — Our Caitlin Oprysko: “The Independent Community Bankers of America, which represents the nation’s smallest banks in Washington, is rolling out a new campaign aimed at shoring up small lenders in the wake of last month’s collapses of Silicon Valley Bank and Signature Bank.”

In the markets

ANOTHER HEADACHE FOR THE FED? A SURPRISE SURGE IN OIL PRICES — OPEC’s decision to cut oil production early Monday could make the central bank’s job “a little bit more difficult,” St. Louis Fed President James Bullard told Bloomberg.

— "I think it's a regrettable action that OPEC decided to take," Treasury Secretary Janet Yellen said, per Reuters. "I think it's a very unconstructive act at this time when it's important to try to hold energy prices down."

BIG REVERSAL — The WSJ’s Heather Gillers: “After years of shifting money into private market investments, public pension and investment funds are taking a fresh look at publicly traded debt, thanks to the highest yields in more than a decade.”

WAIT, WHAT? — CNBC’s Diana Olick: “Unexpectedly strong home sales at the start of this year reversed a sharp, several-month decline in home prices. Mortgage rates are behind the swing.”

HOCHUL’S HOUSING PLAN — Bloomberg’s Laura Nahmias and Skylar Woodhouse: “To some policy experts and supporters, it’s the most politically ambitious program of its type in years, a rare act of courage in Albany, where incrementalism is king. Others see it as the policy equivalent of an extinction-level event and a bizarrely self-defeating move from a governor who risks permanently alienating the suburban voters she’ll need to win reelection in three years.”

SVB HITS A REELING SF — Bloomberg’s Biz Carson, Karen Breslau and John Gittelsohn: “San Francisco, where the next new thing was always around the corner, is struggling to figure out its future. With the spigot of easy money that propelled its tech and finance industries turned off, the city is facing a constellation of economic challenges unlike any in its boom-and-bust history.”

Regulatory Corner

LINKING ARMS ON MARKET STRUCTURE — FT’s Jennifer Hughes and Nicholas Megaw: “Several big investors have joined opposition to an ambitious stock market overhaul proposed by US regulators to improve transparency and pricing for smaller retail traders.”

FTC REJECTS GRAIL — The WSJ’s By Peter Loftus and Jonathan D. Rockoff: “The Federal Trade Commission rejected Illumina Inc.’s $7 billion deal for cancer-test developer Grail Inc., a fresh sign the commission wants to take a more aggressive stance toward deal-making.”

CFPB DEFINES ABUSE — Our Katy O’Donnell: “New policy guidance outlines an expansive approach to abusive conduct, which includes obscuring information relevant to the consumer’s understanding of a product or service and taking ‘unreasonable advantage’ of a consumer’s gaps in understanding.”

Unlikely — Credit unions blasted the Consumer Financial Protection Bureau’s final rule requiring small business lenders to collect and submit racial and demographic data on their applicants. While top Republicans have been sympathetic to their arguments, the odds of undoing the rule through legislation or a court challenge “are pretty low,” National Association of Federally-Insured Credit Unions Vice President of Regulatory Affairs, Ann Petros told reporters on Monday. “The legal challenges are limited but we are exploring our options.”

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