| | | | | |  | | By Sam Sutton | Presented by Structured Finance Association | Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro.
| | The answer is definitely maybe. Moody’s announcement that it had lowered the ratings of 10 small and midsized lenders was a sign that the “mini-bank crisis” that roiled Washington and Wall Street earlier this spring might not be over. The ratings service also cautioned key institutions (BNY Mellon, State Street and Northern Trust) and super-regionals (Truist, U.S. Bank) that debt downgrades could be imminent. That’s the last thing White House allies want as they hop aboard the “Bidenomics” bus. If Wall Street sours on the banking sector, it could create new challenges for lenders after they’ve already said they expect to toughen loan standards in the months ahead. “Credit conditions have tightened materially this year and are more consistent with hard landing than soft landing economic scenarios,” Darrell Cronk, chief investment officer of Wells Fargo's wealth and investment management division, told MM. The challenges facing certain financial institutions aren’t as immediate or acute as what hit Silicon Valley Bank in March. Even if the cascading failures that regulators feared when they backstopped uninsured deposits at SVB and Signature Bank never materialized, Moody’s still sees trouble. With interest rates expected to stay higher for longer, the cost of maintaining deposits will climb, loan assets will deteriorate and unrealized losses from older investments will smolder. On top of that, banks have made it clear that lending activity will likely cool. That was a factor in the rating service’s cloudy outlook for banks as well. Moody’s analysts Jill Cetina and Ana Arsov wrote in a research note that the slumps “associated with banking strains are both deeper and more protracted, and a sharper downturn is possible if bank lending standards continue to tighten.” Of course, there’s a raft of data that shows the economy is faring well. Last month’s growth reading was solid and unemployment remains close to historic lows. Inflation has started to recede (though we’ll learn more on that front when the consumer price index for July comes out on Thursday). While second-quarter earnings have been pretty bleh, there hasn’t been a market rout.
| | | | 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. | | | “The [Moody’s] downgrades are consistent with the more challenging operating environment facing banks. Together with banks’ expectations of a tighter regulatory context, they will lead to some further reduction in credit extension,” Mohamed El-Erian, president of Queens' College, Cambridge and chief economic adviser at Allianz, emailed your host. “Having said that, the economy as a whole is versatile and flexible enough to navigate a tightening of credit conditions provided the Fed does not overdo at its end,” El-Erian added. Will that happen? For now, it’s also a definite maybe. IT’S WEDNESDAY — And New Jersey tomatoes are absolutely perfect right now. Make salad, make sauce, slice ‘em up as a snack. It’s the most wonderful time of the year and you must take advantage. And while you’re at it, send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.
| | | | A NEW PODCAST FROM POLITICO: Our new POLITICO Tech podcast is your daily download on the disruption that technology is bringing to politics and policy around the world. From AI and the metaverse to disinformation and cybersecurity, POLITICO Tech explores how today’s technology is shaping our world — and driving the policy decisions, innovations and industries that will matter tomorrow. SUBSCRIBE AND START LISTENING TODAY. | | | | | | | | | The Peterson Institute for International Economics hosts an event on whether supervisory reforms can prevent repeat bank failures at 9 a.m. Speaking of the Fed — Philadelphia Fed President Patrick Harker on Tuesday said the central bank might not need to raise rates at its next meeting. “Absent any alarming new data between now and mid-September, I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work,” Harker, who holds a vote on the open market committee, said in prepared remarks at an event in Philadelphia. — To steal a phrase from Fed Chair Jerome Powell, September’s meeting could be a live one. A lot can happen in a month, but FOMC voting members have started to publicly diverge on what next steps could look like. New York Fed President John Williams was pretty dovish when he spoke to The NYT’s Jeanna Smialek on Aug. 2. But Fed Gov. Michelle Bowman on Monday said she expects “additional increases will likely be needed to lower inflation to the FOMC's goal.” It begins — The WSJ’s Theo Francis and Lauren Weber: “Conservative legal activists successfully challenged the use of affirmative action by universities. Now they are going after diversity initiatives widely deployed across American corporations. Some companies are already reconsidering their efforts.” Climate conundrum — Our James Bikales: U.S. insurance companies held $536 billion in fossil-fuel related assets in 2019, even as the pollution from those industries worsens climate change that is decimating insurers’ core business, a report published Tuesday by Ceres, ERM, and Persefoni found. The report, which relied on data compiled by the California Department of Insurance, found that fossil fuel holdings were heavily weighted toward the largest insurers, with the 16 largest insurance companies holding 50 percent of the fossil-fuel related assets. “Despite the clear signals that the insurance sector is suffering tremendous monetary losses related to physical risks of climate change, U.S. insurers have yet to persuasively demonstrate their commitment to a low carbon future,” the researchers wrote.
| | | | A message from Structured Finance Association:   | | | | | Fed flexes on stablecoins — From Victoria Guida and Zach: “The Federal Reserve on Tuesday outlined its expectations for banks interested in dealing in stablecoins, asserting itself as Congress debates the extent to which the central bank should share oversight of such tokens with the states. Gensler’s war on texts — Our Declan Harty: “More than a dozen Wall Street firms have agreed to pay a total of $549 million to settle charges from U.S. regulators over their employees' widespread use of unmonitored communications platforms.”
| | | | HITTING YOUR INBOX AUGUST 14—CALIFORNIA CLIMATE: Climate change isn’t just about the weather. It's also about how we do business and create new policies, especially in California. So we have something cool for you: A brand-new California Climate newsletter. It's not just climate or science chat, it's your daily cheat sheet to understanding how the legislative landscape around climate change is shaking up industries across the Golden State. Cut through the jargon and get the latest developments in California as lawmakers and industry leaders adapt to the changing climate. Subscribe now to California Climate to keep up with the changes. | | | | | | | | | Slow, slow, slow — Our Doug Palmer: “U.S. goods imports from China fell 25 percent during the first six months of 2023, the Commerce Department reported Tuesday, as companies looked to other countries to de-risk and diversify their supply chains amid rising friction between Washington and Beijing.” — The NYT’s J. Edward Moreno: “China’s trade numbers dropped in July, according to government data released Tuesday, a sign that the country’s economic rebound was lagging despite efforts by officials in Beijing to revive growth.” WeWorked — Bloomberg’s Ellen Huet: “WeWork Inc. shares plummeted more than 25% in extended trading after saying there’s ‘substantial doubt’ about its ability to continue operating. The company cited sustained losses and canceled memberships to its office spaces.” Bank challenges, to wit — Bloomberg’s Claire Ballentine: “Millions of Americans have a higher rate on their savings account than they’re paying for their mortgage.”
| | | | 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. | | | | | | | Follow us on Twitter | | | | Follow us | | | | |
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