News: A China hawk lands on Wall Street

Tuesday, September 12, 2023

A China hawk lands on Wall Street

Sep 12, 2023

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QUICK FIX

Rep. Mike Gallagher — who heads the House GOP’s select committee on China — sees a potential financial tsunami looming in the Pacific.

The Green Bay Republican, who wants Washington to impose tougher restrictions on investment flows between the U.S. and China, is swinging through Wall Street this week as he tries to warn that banks and asset managers are ill-prepared for the chaos that would ensue if President Xi Jinping decided to invade Taiwan. Gallagher’s New York trip includes a table top exercise with senior executives and retired military officers, including former Bridgewater Associates CEO and Senate candidate David McCormick.

MM spoke with Gallagher Monday as he kicked off his two-day trip. What follows are a few excerpts from the conversation.

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What is your mission? Are you looking to gather information or to try and convince some of these Wall Street executives to change their ways when it comes to China?

It's both.

Today is 22 years since 9/11. We're going to start the day by participating in the ceremony at Ground Zero. In my mind it’s a good way to frame it.

Nine-eleven was this exogenous shock to the system that had massive financial, economic and human repercussions. Similarly, an invasion of Taiwan could be an exogenous shock that Wall Street tends to discount.

We want to have a candid conversation with experts in the financial community about the systemic risk that comes with American capital flowing into China.

You’d have closure of global shipping lanes. You’d have astronomical shipping insurance premiums. You’d have supply chain disruptions. General geopolitical chaos.

Are our banks and asset managers going to protect American investors or are they just betting on another bailout?

Who are you meeting with?

We have representatives from big banks whose names you would recognize, as well as some of the biggest asset managers, as well as people from the venture capital and private equity community.

Do you see much resistance on Wall Street when it comes to your message?

Yes, a lot of resistance. It’s fair to say the bankers and the asset managers find my view of the world to be too hawkish.

A lot of people here still cling to the theory that financial interdependence is a stabilizing mechanism and that ultimately China will be a more responsible stakeholder the more enmeshed they are in the U.S. capital markets and the more enmeshed we are in Chinese manufacturing.

[Dove-ish Wall Street types] would be fine with a more aggressive set of guard rails on things like outbound capital flows but … they want predictability.

So to what extent are you working with House Financial Services Chair Patrick McHenry, who has jurisdiction to write new laws but is less willing to intervene in the markets?

Even though he might have a different view of how best to legislate the question of outbound capital flows, we’ve had a productive working relationship.

We’re hoping to influence the product that eventually comes out of Financial Services.

What we’re talking about now is, what mechanism do you use?

I’d prefer a sector-based approach as opposed to sanctioning individual Chinese companies. That’s the core of the discussion right now. So we’ll see where we land.

Happy Tuesday — Please send tips: Zach Warmbrodt, Sam Sutton.

A message from BPI:

The Fed’s extreme Basel proposal will have real consequences for everyday Americans. These costly new capital rules will create a drag on our economy for years to come and will hurt working families and small businesses. Congress must take action to stop the Basel endgame before it’s too late.

Driving the day

The House is back … The House China select committee holds a New York field hearing on financial stability threats at 8:30 a.m. … SEC Chair Gary Gensler testifies at Senate Banking at 10 a.m. (more below)

Gensler hearing prep — The SEC chair is expected to face a barrage of tough questions from senators this morning over his sweeping plans for financial markets.

Wall Street and Senate Republicans would like to know whether all the changes — from climate risk disclosures to hedge fund rules — can play nice together, Sam and Declan Harty report.

The Managed Funds Association, which represents hedge funds, is among the groups urging policymakers to look at the planned regulations holistically. “There's been no effort to look at the overall cost of all these rules — to look at how interconnected these rules are,” the group’s president and CEO Bryan Corbett told Sam.

Senate Banking Republicans will take up a similar line of questioning about the scale and impact of the SEC’s plans, according to a spokesperson for Sen. Tim Scott.

Gensler is set to strike back. In prepared testimony, He says the agency is “focused on getting things right.”

Democrats are likely to press him to do more. Sen. Mark Warner and Senate Banking Chair Sherrod Brown on Monday reintroduced a bill that would force public companies to disclose more about their workforces.

"As our economy and markets move forward, the SEC must keep moving forward and put American savers first," Brown plans to tell Gensler, according to a preview from his office.

Close on cannabis — Brown told reporters Monday that senators are near a bipartisan deal on a bill that would help banks serve the cannabis industry, our Jasper Goodman reports.

“We hope to be able to announce something in the next few days,” he said.

Sen. Steve Daines, a Republican co-sponsor of the legislation, said in an interview he is “cautiously optimistic” that the banking committee will vote on it this month.

Economy

How bankers are sizing up a recession — Industry economists on an American Bankers Association advisory committee believe the U.S. is likely to dodge a recession, though growth will slow over the next few quarters. They warn that recession risks still loom — primarily around monetary tightening, deteriorating credit availability and high credit costs.

Goldman Sachs is out with a similar warning based on a new survey of small businesses. It found that 70 percent of small business owners who applied for a new business loan over the past year reported it was difficult to access capital. Seventy-six percent said the difficulty negatively impacted their business.

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Regulatory Corner

BofA might drop card holders — The FT reports that Bank of America is threatening to cut off some credit card customers thanks to a proposed hike in capital requirements. It's the latest in a series of warnings the industry is making about the planned regulations.

Jamie Dimon has thoughts — “Do you think the [notices of proposed rulemaking] are going to make a shit of difference?” the JPMorgan Chase CEO said about regulators’ requests for feedback on the capital proposal, according to the FT. “It’s my academics arguing with their academics. They’re going to do what they want anyway. That’s all that’s going to happen.”

Federal reserve

First in MM: Fed looks to elevate female economists — Victoria Guida reports that the Richmond Fed is taking steps to boost opportunities for women in economics. The field has been plagued by underrepresentation and harassment.

The Richmond Fed’s new Center for Advancing Women in Economics will organize networking events, feature work by female economists and share resources about women’s experiences in economics. It will also offer fellowships to post-PhD women.

“These are all things that we do in the profession for anyone,” said Arantxa Jarque, associate director of the center. “What we’re trying to do is adapt all of these activities that are very important for people to thrive and for the profession to grow and be inclusive, and making sure that it works for women.”

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Housing

FHFA takes more time on credit scoring revamp — The Federal Housing Finance Agency is potentially delaying a credit scoring overhaul that would require Fannie Mae and Freddie Mac to seek just two credit reports from borrowers, rather than three. It had proposed the first quarter of next year to make the change effective but is planning to take more feedback on how mortgage lenders will implement the plan. The new timeline is TBD.

A message from BPI:

Instead of playing politics, the banking agencies should engage in a robust and thorough economic analysis of the proposal's effect. Federal agencies need to go back to the drawing board and ensure that future policy allows working families and small businesses to thrive.

To learn more, visit StopBaselEndgame.com.