News : Wall Street foes turn free-market heroes

Tuesday, July 25, 2023

Wall Street foes turn free-market heroes

Jul 25, 2023

Presented by Structured Finance Association

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Progressives and finance industry skeptics are embracing a new role as Republicans bash big business: defenders of free-market capitalism.

The emerging shift, which has been playing out in the House in recent weeks, is a 2024 dynamic worth watching as Republican presidential candidates like Florida Gov. Ron DeSantis attack Disney and other companies over social issues.

As Jasper reports in a new piece, Democrats including California Rep. Maxine Waters and Minnesota Attorney General Keith Ellison are among the progressives who have started testing out the new line of attack. Waters this month blasted GOP lawmakers as “anti-capitalist, anti-investor, anti-business and anti-American.”

A trigger for Democrats’ sudden defense of Wall Street has been a series of House Financial Services hearings designed to discourage investing tied to environmental, social and governance metrics. It’s an approach to finance that BlackRock CEO Larry Fink and other industry leaders say is critical to addressing climate change's long-term risks for investors.

Republicans counter that their anti-ESG push is about protecting the returns of those same investors and shielding public companies from political pressure coming from activists, blue-state pension funds and regulators. Rep. Andy Barr (R-Ky.), one of the lead Republicans on the issue, said ESG defenders have responded “with hysterics … to conflate non-owner stakeholders, woke institutional investors and proxy advisory firms for bona fide shareholders.”

To be sure, Democrats including President Joe Biden are fully leaning in and may be reveling in flipping the script.

“Your plan manager should be able to protect your hard-earned savings — whether Rep. Marjorie Taylor Greene likes it or not,” Biden tweeted when he vetoed an anti-ESG bill in March.

Rep. Brad Sherman (D-Calif.) this month said former President Ronald Reagan “would be ashamed” of the GOP’s new approach. Rep. Jim Himes (D-Conn.), a Goldman Sachs alumnus who’s not exactly a bomb thrower, has started to use even harsher terms.

“The party formerly of free markets has decided that they will use the power of government to pound on Disney, to pound on banks that … won’t invest in the carbon industry,” he told MM. “We’re standing up for free markets against a Taliban-like attack on the private sector.”

It’s Tuesday — It’s all banking drama from here in today’s MM. Let me know what you think: zwarmbrodt@politico.com.

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Driving the day

The Fed begins a two-day FOMC meeting … Former Treasury Secretary Larry Summers talks industrial and foreign policy at a Peterson Institute event at 9:30 a.m. … Treasury assistant secretary for financial institutions Graham Steele talks banking stress at an Americans for Financial Reform Education Fund event at 3 p.m.

First in MM: Senate GOP warns Powell on bank capital — Senate Banking Republicans are demanding receipts from Fed Chair Jerome Powell before he and his colleagues begin to hike bank capital requirements.

In a letter to Powell signed by every GOP member of the Banking Committee, Republicans said they have “significant questions” regarding the level of internal transparency among Fed officials regarding the upcoming proposal. They also said Fed Vice Chair for Supervision Michael Barr’s recent assertions on strengthening bank capital “remain unsubstantiated by any publicly released analysis.” Sen. Thom Tillis led the letter.

They’re urging Powell to provide materials related to Barr’s holistic capital review and the full text of proposed changes before any vote. They also want Powell to ensure that all Fed board members have time to review the changes, in particular any new members that are added to the board.

This is just the beginning of intense congressional scrutiny of the capital proposals, which the Fed will issue Thursday.

Brown, Vance call for regional bank relief — This isn’t something you see everyday: Senate Banking Chair Sherrod Brown is urging regulators to go a little easier on large banks.

Brown and fellow Ohioan Sen. J.D. Vance in a new letter call on the FDIC to take special care with Ohio regional banks when the agency implements an industry fee designed to recoup losses after the failures of Silicon Valley Bank and Signature Bank. The fee is tied to the levels of uninsured deposits that banks hold.

While the FDIC is shielding the smallest lenders from the fee, Brown and Vance told FDIC Chair Martin Gruenberg it would still impact “some Main Street-focused regional banks."

They said the agency should exclude collateralized and affiliate deposits when calculating an institution's level of uninsured deposits — an ask that touches on a new controversy that we’ll get into below.

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Regional banks in Ohio include Fifth Third, KeyBank and Huntington. Brown is up for reelection in 2024.

FDIC scolds banks for deposit data — The WSJ reports that the FDIC is putting banks on notice for how they report their deposit levels, after 47 lenders restated their year-end uninsured-deposit figures downward by $198 billion. The reporting issues are arising as the FDIC prepares to charge the aforementioned post-SVB fee based on banks’ uninsured deposits.

Bank of America and Ohio regional Huntington have had some of the largest revisions, according to the WSJ’s analysis. Many of the banks that changed their numbers tried to count deposits that were backed by collateral as insured, which they weren’t.

The FT reports that midsize bank Zions told the FDIC in a letter last week that several big banks had refiled their year-end financial statements to report a lower level of uninsured deposits.

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Regulatory Corner

Banks signal Fed legal threat — Victoria Guida reports that the Bank Policy Institute and the American Bankers Association are petitioning the Fed to seek public feedback on the scenarios and models used in annual stress tests, arguing that it’s unlawful for the central bank to set capital requirements using an opaque mechanism.

Audit watchdog sees growing problem — Erica Williams, chair of the Public Company Accounting Oversight Board, said in a WSJ op-ed that audit quality is trending down for the second year in a row. PCAOB inspectors expect that about 40 percent of the audits they reviewed in 2022 will have had one or more deficiencies, up by 6 percentage points from 2021, which was 5 points higher than 2020.

Lawmakers press SEC to drop rule — Declan Harty reports that the Democrats and Republicans who lead the Senate and House Agriculture Committees are urging SEC Chair Gary Gensler to withdraw a plan designed to safeguard investment advisers' client assets.

In a letter, Sens. John Boozman (R-Ark.) and Debbie Stabenow (D-Mich.), along with Reps. G.T. Thompson (R-Pa.) and David Scott (D-Ga.), warned that the SEC's so-called custody rule proposal risks upending markets overseen by the CFTC.

UBS hit with nearly $400M in fines over Credit Suisse – Victoria reports that U.S. and British regulators on Monday hit UBS with $387 million in penalties for losses linked to the collapse of Archegos Capital Management, which the Swiss bank inherited when it bought Credit Suisse earlier this year.

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Crypto

House crypto wrangling continues — Eleanor Mueller reports that House Republicans have tweaked their stablecoin bill in a bid to draw Democrats before a Financial Services Committee vote Wednesday.

The latest version of the bill, which would set up a federal stablecoin regime while maintaining a role for the states, includes a provision that would require state regulators and stablecoin issuers to share more information with the Federal Reserve. It's an attempt to address concerns raised by Himes and other Democrats.

Democrats still appear to be mostly against Republicans' separate crypto market regulation bill, which would divvy up jurisdiction between the SEC and CFTC. House Democrats on Monday got a two-hour virtual briefing organized by Rep. Stephen Lynch that included a handful of lawmakers and about 60 staffers, according to a House aide. Academics and others outlined their concerns with the legislation.

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