News : A new regulatory rift

Thursday, August 3, 2023

A new regulatory rift

Aug 03, 2023

By Declan Harty, Zachary Warmbrodt and Sam Sutton

Presented by Structured Finance Association

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QUICK FIX

A clash between two of Wall Street’s top regulators is beginning to spill out into public view.

The friction over how to police financial markets involves two Biden appointees aligned with Democrats: CFTC Chair Rostin Behnam and fellow Commissioner Christy Goldsmith Romero.

For months, the two have shown signs of being at odds over a range of policy issues, from crypto to cybersecurity rules. But the divide, which in part reflects concerns by progressives that the agency is acting too conservatively, came to a head last week.

In a rare move, Behnam had to rely on support from Republican CFTC commissioners last Wednesday to issue a proposal that would loosen post-financial crisis collateral requirements for certain derivatives. Behnam called it a “thoughtful and deliberate proposal,” while framing it as fine-tuning around the edges.

But Goldsmith Romero, who previously served as the government watchdog for the Troubled Assets Relief Program, rebuked the move. She told MM “we don’t know what the consequences are going to be” of easing requirements from the 2010 Dodd-Frank law.

Tyson Slocum, energy program director at Public Citizen, said there has been a natural push and pull between Behnam’s “more moderate chairman style” and Goldsmith Romero’s “more aggressive” approach.

“Often in D.C., people think that Democrats and Republicans are monolithic,” Slocum said. “That’s not the way it always works.”

Former CFTC Republican Commissioner Dawn Stump said the agency has historically pursued a “consensus-driven” agenda and that Behnam “is very much true to the spirit of the traditional CFTC.”

To be sure, Behnam has sought to tackle top financial policy priorities for Democrats, including climate risk concerns and crypto oversight. The former long-time aide to Senate Agriculture Chair Debbie Stabenow (D-Mich.) led work on a landmark 2020 government report detailing climate risks in the financial system, and is gearing up to issue guidance on carbon trading standards. He is also urging Congress to give his agency more authority to regulate crypto markets.

But as one veteran of the CFTC world framed the approach: “It’s not a big sweeping policy agenda. He’s looking to make incremental change in the industry from the regulatory perspective.”

“I’m worried that the agency is doing a lot of information gathering and is running out of time to enact concrete policy,” said Todd Phillips, a long-time investor advocate and professor at Georgia State University.

Goldsmith Romero has regularly pushed the agency to more aggressively rethink whether its rules are tough enough and is now confronting Behnam openly. A Behnam spokesperson declined to comment.

“I’d like to see the CFTC doing more to address risk in our markets,” Goldsmith Romero told MM.

IT’S THURSDAY — Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com

A message from Structured Finance Association:

Did you know? Your mortgage, credit card, or small-business or car loan probably has a lower interest rate because of securitization, the bundling of your loan with other loans for added safety by members of the Structured Finance Association. Learn more at www.structuredfinance.org.

Driving the day

The Labor Department will release preliminary second quarter productivity data at 8:30 a.m. … The Securities and Exchange Commission has a closed meeting at 2 p.m.

More Fitch fallout — Wall Street shrugged Fitch’s momentous downgrade of U.S. debt as the news barely made a dent in financial markets. But the reputational blow to the federal government’s creditworthiness unleashed an aggressive round of political finger pointing that invoked everything from Jan. 6 to looming fiscal challenges. From Sam and Victoria Guida: “It’s a new dynamic to the political blame game over Wall Street’s unease with Washington dysfunction, which has been heightened by repeated stalemates over maintaining the government’s borrowing authority and fraught debates about the validity of national elections themselves. Fitch’s downgrade reflects growing concern about U.S. governance, from its ability to responsibly manage its budget to its tendency toward high-stakes political conflict.”

— JPMorgan Chase CEO Jamie Dimon on Wednesday called the downgrade “ridiculous,” telling CNBC’s Leslie Picker that the U.S. is “still the most prosperous nation on the planet, it’s the most secure nation [on] the planet.”

— Meanwhile, Bloomberg’s Ye Xie reported that US Treasury yields hit 2023 highs as bond investors were “spooked by plans for a flood of government-debt issuance and signs of the labor market’s enduring strength.”

— Still, as The WSJ’s Spencer Jakab notes, there’s certainly a chance that investors are “drawing false comfort from the past and from the perception that fiscal scolds have cried wolf so often.” And both the S&P 500 and Nasdaq fell for the second straight day as traders weighed the Fitch news along with some troubling signs in corporate earnings.

— To wit, as Apollo Chief Economist Torsten Slok noted on Wednesday, a growing number of small and mid-cap companies reported negative earnings in the second quarter.

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In the markets

Going the other way — Bloomberg’s Reade Pickert, and Swati Pandey: “Economists at Bank of America Corp. scrapped their forecast for a recession in the US, becoming the first large Wall Street bank to officially reverse its call amid growing optimism about the economic outlook.”

Had to see this coming — BlackRock’s decision to bring Amin Nasser, the head of Aramco, to its board has triggered a backlash with policymakers and hedge funds, writes the NYT’s Maureen Farrell.

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Regulatory Corner

Republicans urge bank regulators to rein in Gensler — Zach reports that GOP lawmakers this week asked the leaders of the Federal Reserve, FDIC and OCC to intervene in an SEC rulemaking targeting conflicts of interest in the asset-backed securities market.

The proposed rule at issue, mandated by the 2010 Dodd-Frank law, is intended to address concerns going back to the 2008 financial crisis about Wall Street banks that sell securities in which their traders also take positions.

Reps. Andy Barr of Kentucky and Ann Wagner of Missouri said in letters to the banking regulators that the SEC's latest iteration of the rule could have the effect of "potentially disallowing bona fide capital markets capital raising, risk management, hedging, and investment opportunities." They tied their concerns to the recent failures of Silicon Valley Bank and other lenders, warning that hedging strategies "are absolutely necessary for financial institutions to handle normal market risk."

House GOP urges Chopra to nix talks with the European Commission — Meanwhile, Rep. Young Kim (R-Calif.) led a letter with 18 other House Financial Services Republicans calling on CFPB Commissioner Rohit Chopra to brief lawmakers on a recently announced “informal dialogue” with regulators at the European Commission by Sept. 30. “Any agreement reached on policies between the CFPB, and the EU will not enjoy the enforcement of U.S. law.,” the lawmakers wrote, adding that the CFPB should “terminate” its discussions unless authorized by Congress.

Private funds rule, finally incoming? — The WSJ’s Paul Kiernan: “Since the agency first proposed new rules for the industry last year, representatives of private equity, hedge funds and venture capital have met frequently with SEC officials to try to dissuade them, SEC meeting logs show. They have lobbied lawmakers to push back against the SEC’s plans and formed a group to fight the final rules, which could differ from the proposal.”

It’s been awhile — Our Brian Faler: “Four senators are adding to calls for the Treasury Department to release long-delayed regulations filling in the details of a congressionally-ordered tax crackdown on cryptocurrencies.”

ICYMI — Jordan Williams and Eleanor Mueller have a break down of the House GOP’s crypto market structure bill.

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Jobs Report

The region’s take on ribs are also slow cooked — Our Victoria Guida: “Kansas City Federal Reserve on Wednesday announced former midsize bank CEO Jeffrey Schmid as its new president, after a search process that took more than a year.”

They swiped right — With more fights over swipe fees on the horizon, the Electronic Payments Coalition has hired former Consumer Bankers Association president and CEO Richard Hunt as its executive chair.

A message from Structured Finance Association:

When loans are bundled together – a process called securitization – the result is less risk and lower interest rates for American families and small businesses. Securitization provides $15.6 trillion in financing and last year funded over half of U.S. household debt. Members of the Structured Finance Association give individuals and businesses access to essential credit at a lower price through securitization. Learn more at www.structuredfinance.org.