Bernanke Signals No New Fed Stimulus
On Friday, Federal Reserve Chairman Ben Bernanke offered an upbeat assessment of the domestic economy that offered little indication of any immediate monetary stimulus by the Fed. However, Bernanke did acknowledge that the nation faces significant challenges, including high unemployment and an unsustainable federal debt. Bernanke also offered an unusual critique of the government’s fiscal policy, criticizing the political battle over raising the debt-ceiling. While Bernanke failed to signal any future Fed action, he did say the issue of potential action would be discussed at the next meeting in late September.
Treasury Department Announces OFAC Settlement with JPMorgan Chase
On Thursday, the Treasury Department announced that JPMorgan Chase has agreed to pay $88.3 million as part of a settlement over a series of transactions involving Cuba, Iran and Sudan. The Treasury Department’s Office of Foreign Assets Control (OFAC) said in a news release that JPMorgan processed wire transfers totaling around $178.5 million for Cuban nationals in late 2005 and early 2006, violating United States embargo laws. The bank was also fined for a 2009 incident in which it made a $2.9 million loan to a bank that had ties to Iran’s government-owned shipping line, a violation of United States sanctions against Iran. The third violation occurred in 2010 and 2011, when the bank failed to give up documents about a wire transfer that referred to Khartoum, the capital of Sudan. According to the release, the agency gave JPMorgan a list of documents believed to be possessed by JPMorgan. In response, JPMorgan, which previously said it had no such documents, produced more than 20 of the items in question.
S&P President Resigns
On Tuesday, McGraw-Hill, parent company of Standard & Poor’s (S&P), announced that S&P President Deven Sharma will step down from his position by the end of the year and be replaced by Douglas Peterson, the chief operating officer at Citigroup. McGraw-Hill said Sharma’s decision was not influenced by the United States’ credit rating downgrade or an investigation by the Justice Department over S&P’s rating of its subprime securities. The company said the decision to replace Sharma took place over six months ago when the Board of Directors decided to split the company into four divisions due to increasing pressure from investors.
(more…)
Debt Limit Negotiations Continue
On Tuesday, the House passed its “Cut, Cap and Balance” legislation which would cut government spending now, cap it in the future and approve a constitutional amendment to balance the federal budget. On Friday, the Senate voted to table a motion to consider the measure. However, after another tense week of negotiations between the Senate Republicans, Senate Democrats, House Republicans, House Democrats, and the President Obama, the outline of a purported deal seemed to emerge late Thursday. Congressional Democrats reported that President Obama discussed with them a deal he had reached with Speaker John Boehner to raise the debt ceiling by $2.4 trillion, enough to get through the 2012 elections, with at least as much in immediate spending cuts and a promise of “tax reform” in 2012. On Friday, in response to the news of a “deal,” Speaker Boehner told the House Republican Conference there was “no deal,” but that he will continue to negotiate with the White House over the weekend. The most important questions remaining are how many House Republicans will vote for a deal that does not include immediate tax increases but does include the promise of broader “tax reform” next year and how many House Democrats will vote for a deal with no tax increases.
Greece Gets Another Bailout
On Thursday, European finance ministers agreed to a new $157 billion financial aid package for Greece in exchange for forcing Greece’s bond holders to accept a bond exchange that gives them less than originally promised. The new plan for Greece will provide for the euro zone’s bailout fund and the International Monetary Fund to lend Greece $157 billion over the next three years at 3.5% interest. Private creditors who hold Greek debt that matures in the coming years will “voluntarily” turn in their bonds and accept new ones that mature far in the future.
The EU also agreed Thursday to an expansion of its bailout fund. That vehicle, once restricted to lending to countries near the brink of collapse, will now be able to buy euro-zone bonds on secondary markets to move prices and lend directly to countries even before they lose access to private funding and could even include lending to finance bank recapitalizations. The leaders also agreed to cut the once-lofty interest rates that the bailout fund charges and extend to as much as 30 years the maturities of the loans it provides. Ireland and Portugal, both currently receiving European aid, will get breaks on their interest rates to 3.5%. Ireland was paying around 6% on the EU portion of its euro 67.5 billion bailout.
Treasury Sells Off Remaining Stake of Chrysler
On Thursday, the Treasury Department sold its remaining stake in Chrysler losing a total of $1.3 billion. Italian automaker Fiat purchased the U.S. government’s remaining 6% stake in Chrysler for $560 million, formally concluding the $12.5-billion bailout.
Suit Against Goldman Dismissed
On Thursday, former Australian hedge fund Basis Yield Alpha’s legal challenge to Goldman Sachs’ infamous Timberwolf 2007-1 collateralized debt obligation was dismissed by Judge Barbara Jones of the U.S. District Court for the Southern District of New York. Jones cited a Supreme Court decision that held that U.S. securities-fraud laws apply only to domestic transactions.
Senate Banking Hearing on One Year Anniversary of Dodd-Frank
On Thursday, in a hearing before the Senate Banking Committee, federal banking regulators testified on the implementation of the Dodd-Frank Wall Street Reform Act. Regulators said they are moving fast enough to give markets certainty, but slow enough to get hundreds of new rules right. A handful of regulatory agencies are writing hundreds of new rules to police the swaps market, reduce risk at the biggest financial firms, and bring the so-called shadow banking system — which includes hedge funds and non-traditional lenders — into the traditional regulatory framework. The SEC and CFTC have struggled to keep pace with the swift rule-writing timeline laid out in Dodd-Frank, and are months behind schedule on many key rules. However, in a surprising move, Federal Reserve Chairman Ben Bernanke said federal bank regulators may rethink their crackdown on derivatives if a global agreement cannot be reached on margin requirements thereby acknowledging that U.S. banks would be at a significant competitive disadvantage if their foreign rivals do not have to demand margin, or collateral, for derivatives trades.
More Information:
If you have any questions regarding any of these issues, please contact:
Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463
Debt Limit Negotiations Continue
After a week of tense negotiations between President Obama and Congressional leaders over the debt-limit increase, lawmakers now have less than three weeks to reach a deal before August 2, when the Obama administration says the U.S. could risk defaulting on its loans without an increase in the $14.3 trillion debt ceiling. All parties involved say that a significant deficit reduction plan should be part of the plan to raise the debt ceiling, but Democrats want to balance the budget by raising tax revenues in addition to making spending cuts — and the GOP remains firmly opposed to any tax increases. However, Senate Republican Leader Mitch McConnell (R-KY) and Senate Majority Leader Harry Reid (D-NV) have proposed a contingency plan that would give President Obama authority to raise the debt ceiling by $2.5 trillion through the end of 2012 but require the President to submit spending cuts totaling $2.5 trillion to Congress in three tranches every four months. The McConnell-Reid plan would not come with tax increases or Medicare savings but does include an extension of unemployment insurance that would be offset by spending cuts.
Next week, the House will vote on the Republican “cut, cap and balance” proposal which would make raising the debt ceiling contingent on Congress sending a balanced budget amendment to the states. It would also limit government spending to under 20 percent of Gross Domestic Product over the next 10 years. While the legislation is expected to overwhelmingly pass the House, it is unlikely to become law because Senate Democratic leaders have said they will not vote on the legislation.
White House Likely To Submit South Korea Trade Bill Soon
On Friday, White House Chief of Staff William Daley said the Obama administration may send Congress a bill for a South Korea free-trade agreement that includes Trade Adjustment Assistance ”very soon.” The Senate Finance Committee passed a symbolic draft of the South Korea trade legislation that includes Trade Adjustment Assistance last week. However, the House Ways and Means Committee passed a South Korea bill without the aid attached. The hearings were “mock markups” that let lawmakers give the President their views on the free-trade deals before he submits them formally under fast-track rules that prohibit amendments and provide for a yes-or-no vote.
IRS Issues Delay on Offshore Bank Reporting Rules
On Thursday, the Internal Revenue Service issued a notice of delay in rulemaking for regulations stemming from the Foreign Account Tax Compliance Act which Congress adopted last year. The notice did not address many of the Act’s central policy questions, including the requirement to withhold 30 percent from payments that might have indirectly originated in the U.S. The new timeline gives offshore banks until June 30, 2013, to enter into an agreement with the IRS that would shield them from some withholding requirements. Institutions will not have to report on their efforts to track down their U.S. clients until 2014. Banks will not be required to make 30 percent withholdings on non-compliant U.S. customers until Jan. 1, 2014. Other withholdings on gross proceeds and income that might be indirectly sourced to the U.S. will not start until Jan. 1, 2015. All of the requirements were initially slated to take effect at the beginning of 2013. In April, the IRS responded to initial concerns with guidance that said the agency will focus on citizens with more than $500,000 in offshore bank accounts and those with private banking relationships at overseas institutions.
Bernanke Delivers Monetary Policy Report to Congress
On Wednesday and Thursday, Federal Reserve Chairman Ben Bernanke delivered the Fed’s semiannual Monetary Policy Report to the House Financial Services Committee and the Senate Banking Committee, respectively. Bernanke said the nation faces at least two crises, the fiscal budgetary crisis that Congress is trying to tackle and the unemployment crisis. He said the Federal Reserve’s planned purchase of $600 billion in longer-term Treasury securities that ended in June had the “intended effects of reducing the risk of deflation and shoring up economic activity” by decreasing longer-term Treasury yields and interest rates. Bernanke also addressed questions from Members regarding the troubled housing market and the “continuing weakness” of the labor market. According to Bernanke, almost half of those unemployed have been out of work for more than six months, the highest ratio in the post-World War II period.
More Information
If you have any questions regarding any of these issues, please contact:
Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463
Goldman Settles Massachusetts Trading Investigation
On Thursday, the Massachusetts Securities Division announced that Goldman Sachs agreed to a consent order to pay $10 million and to ban so-called “trading huddles.” The Massachusetts Securities Division had been investigating Goldman for the past two years to determine whether the trading ideas that analysts had shared with traders during these huddles “favored the interests of certain priority clients.” Goldman settled the matter without admitting or denying the state regulator’s allegations and agreed to disclose to future research clients that they would not all be treated equally. In its consent order, the Massachusetts regulator said it found no instances of fraud.
Senate Defeats Bill to Delay Interchange Fee Caps
On Wednesday, after a long and divisive lobbying fight, retailers defeated the banking industry in the Senate on a vote to delay new caps on debit-card swipe fees. The legislation was offered by Sens. Jon Tester (D-Mont.) and Bob Corker (R-Tenn.) and failed on a 54-45 vote, falling just six votes shy of the 60 needed for passage and clearing the way for a provision in last year’s Dodd-Frank Wall Street reform law to take effect July 21. The provision, often referred to as the “Durbin Interchange Amendment,” required the Federal Reserve to establish fair and reasonable interchange fees for many debit and prepaid card transactions. Last fall, the Federal Reserve proposed new rules which (among other things) would limit to 12 cents per transaction the fee that large banks (with more than $10 billion in assets) can charge merchants every time a consumer uses a debit card or a prepaid gift card. These proposed rules garnered significant criticism and final rules, which are now overdue from the Federal Reserve, are expected shortly. Senators Tester and Corker initially proposed legislation to delay the Durbin amendment from taking effect for 24 months. The final version of the Tester-Corker bill cut the delay in half to 12 months and called for a six-month study of the costs associated with debit transactions and their impact on consumers and community banks.
Bernanke Signals End to Fed’s Monetary Stimulus
On Tuesday, in a speech at the International Monetary Conference in Atlanta, Fed Chairman Ben Bernanke signaled that the central bank plans to end its “quantitative easing” program on schedule this month. Bernanke’s announcement comes seven months after the central bank began a historic round of monetary stimulus. In his speech, Bernanke acknowledged the recovery has fallen short of the central bank’s expectations because of the high unemployment rate and falling home prices.
Goolsbee Leaving Council of Economic Advisors
On Monday, Austan Goolsbee, chairman of the White House Council of Economic Advisers, announced that he plans to leave the White House and return to teaching economics at the University of Chicago this fall. Goolsbee has been on leave for four years from the University’s Booth School of Business where he was a professor for 14 years before joining the Administration.
Diamond Withdraws Fed Nomination
On Sunday, MIT professor Peter A. Diamond announced he was withdrawing his nomination to the Federal Reserve Board from consideration before the Senate. Diamond’s nomination had been blocked by Senate Republicans for over a year because of Senate Banking Committee Ranking Member Richard Shelby’s (R-AL) contention that Diamond lacked the proper qualifications. President Obama first nominated Diamond in April 2010.
After a long and divisive lobbying fight, retailers defeated the banking industry Wednesday as the Senate narrowly defeated legislation to delay new caps on debit-card swipe fees.
The legislation was offered by Sens. Jon Tester (D-Mont.) and Bob Corker (R-Tenn.) and failed on a 54-45 vote, falling just six votes shy of the 60 needed for passage and clearing the way for a provision in last year’s Dodd-Frank Wall Street reform law to take effect July 21.
The provision, often referred to as the “Durbin Interchange Amendment” required the Federal Reserve to establish fair and reasonable interchange fees for many debt and prepaid card transactions. Last Fall, the Federal Reserve proposed new rules which (among other things) would limit to 12 cents per transaction the fee that large banks (with more than $10 billion in assets) can charge merchants every time a consumer uses a debit card or a prepaid gift card. These proposed rules garnered significant critcism and final rules, which are now overdue from the Federal Reserve, are expected shortly.
Senators Tester and Corker initially proposed delaying the Durbin amendment from taking effect for 24 months. The final version of the Tester-Corker plan was to cut the delay in half to 12 months and called for a six-month study of the costs associated with debit transactions and their impact on consumers and small, community banks.
On May 19, 2011, the Government Accountability Office published its report on the federal banking regulators’ 2006 interagency guidance on commercial real estate concentrations. The GAO report concludes that federal banking regulators should enhance or supplement the 2006 CRE concentration guidance and take steps to better ensure that such guidance is consistently applied.
The GAO report indicates that the OCC and Federal Reserve agree with its recommendations, while the FDIC insists that it has already implemented strategies to supplement the 2006 guidance. A closer review of the OCC and Federal Reserve positions, however, would seem to suggest that the OCC and Federal Reserve agree the 2006 guidance should be enhanced, but don’t seem to have any issue with the inconsistent application of the current guidance, and may even suggest that over-reaching application of the 2006 guidance is necessary since it, in their opinions, doesn’t go far enough. Both the OCC and Federal Reserve indicated that they were reviewing whether higher capital requirements should be set for banks that have higher CRE concentrations.
The GAO report is a good read for any banker looking for the current collective position of the federal regulators with regard to commercial real estate concentrations (and especially with respect to how the 2006 guidance should be interpreted), but ultimately only highlights the discretion vested in each agency (as well as each examiner).
IMF Leader Resigns
On Wednesday, International Monetary Fund (IMF) President Dominique Strauss-Kahn resigned following his arrest in New York. European officials quickly moved to assert their claim over the leadership of the IMF, however emerging economic powers Brazil, China and India are seeking a process that prevents the top position from being granted to a European, as has been the convention since the fund was founded 65 years ago. European leaders appeared to unite behind Christine Lagarde, France’s finance minister, as their preferred candidate to succeed Mr. Strauss-Kahn. Other possible candidates include Kemal Dervis, a former finance minister of Turkey; Arminio Fraga Neto, former governor of the central bank of Brazil; Tharman Shanmugaratnam, finance minister of Singapore; Agustín Carstens, governor of the central bank of Mexico; and Montek Singh Ahluwalia, deputy chairman of India’s planning commission. The IMF’s 24-member executive board has begun discussions about the selection process for the new managing director. The board is scheduled to hold its regular weekly meeting on Friday when the timetable for succession, like deadlines for nominations, may be discussed. Countries will nominate their candidates, and then the board will vote, with large financial contributors like the United States and Japan getting a bigger share of voting rights. The entire process could take months, as it has in the past.
Fed to Propose New Stress Tests
On Monday, press reports indicated that a draft of the Federal Reserve’s new rules regarding stress tests is set to be approved by the Federal Reserve Board and put out for public comment within weeks. The Fed is seeking to subject banks to annual capital tests and to reserve the right to veto dividend pay-outs. In between the Fed’s annual reviews, banks would be able to resubmit capital plans should they wish to increase dividend payments or stock buybacks. However, industry executives say the restrictions on capital distribution are excessive and will inhibit their ability to compete globally.
DOJ Forces Nasdaq/ICE to Withdraw NYSE Proposal
On Wednesday, Nasdaq OMX Group and IntercontinentalExchange said they were withdrawing their April joint proposal of $11 billion to acquire NYSE Euronext, citing discussions with the Justice Department’s Antitrust Division that “surprised and disappointed” Nasdaq and ICE. Speculation has been that the Justice Department’s Antitrust Division blocked the merger for two reasons. First, because the combined company would have too much market power — 50% of the market for U.S. stock trading NYSE with 28%, Nasdaq 22%. Second, because the merger’s $740 million in proposed cost savings would cause massive layoffs. Experts now believe that Deutsche Boerse’s (DB1) $10 billion bid for NYSE Euronext will prevail. The Futures Industry Association estimates that the NYSE/DB1 merger would create the top-ranked global futures trader, controlling 11 derivatives markets in the U.S. and Europe with 4.8 billion in contracts.
HUD to Release Report Accusing Five Biggest Mortgage Firms of Fraud
On Tuesday, press reports indicated that the Department of Housing and Urban Development will soon release audits that accuse the nation’s five largest mortgage companies (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial) of defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans. The reports indicate the audits accuse the five major lenders of violating the False Claims Act, a Civil War-era law crafted as a weapon against firms that swindle the government. The audits were completed between February and March. According to the reports, HUD’s auditor has referred its findings to the Department of Justice, which must now decide whether to file charges.
More Information
If you have any questions regarding any of these issues, please contact:
Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463
Bank Regulators Testify on Wall Street Reform Act
On Thursday, Deputy Treasury Secretary Neal Wolin, Federal Reserve Chairman Ben Bernanke, and Federal Deposit Insurance Corp. Chair Sheila Bair testified before the Senate Banking Committee on implementation of the Dodd Frank Wall Street Reform Act. The most salient piece of testimony came from Fed Chairman Bernanke who said the central bank is set to finally publish this summer tighter rules for big financial firms that pose a risk to the economy. The new rules will likely include more stringent requirements for large banks and financial companies, including stricter standards on capital and leverage ratios.
Treasury Auctions Will Exceed Debt Limit Monday
This week, the Treasury Department auctioned $72 billion in three and ten-year notes. When the notes are formally settled Monday, this will cause the U.S. Government to officially exceed its federal borrowing ceiling. As of Tuesday, total debt subject to the limit was $14.274 trillion. The Obama administration has asked Congress to raise the limit, warning that failure to act could lead the government to default by August 2nd. The federal budget deficit widened in April, with the government spending $ 40.49 billion more than it collected.
Bipartisan Housing Reform Bill Introduced
On Thursday, two members of the House Financial Services Committee — Rep. John Campbell (R., Calif.) and Rep. Gary Peters (D., Mich) — introduced legislation to replace troubled government-seized housing giants Fannie Mae and Freddie Mac and set up as many as fifteen or twenty private firms that would buy loans, then package and sell them with explicit government guarantees. The bill does not specify whether the new mortgage companies should hold a portfolio of mortgages the way Fannie and Freddie currently have on their books. It also seeks to limit taxpayer liability by creating a private sector financed reserve fund to cover any losses. The fund would be capitalized by assessing a special guarantee fee to buyers of the packaged mortgage securities. It also would seek to recoup any taxpayer funds spent to bail out the firms through a special assessment levied on the firms.
(more…)
April Unemployment Rises to 9%
On Friday, the Department of Labor announced that the United States economy added 244,000 jobs in April, but the unemployment rate rose to 9 percent from 8.8 percent in March. The jobs numbers beat forecasts estimates of an expected gain of 185,000 jobs.
Bank Regulators to Testify on Dodd-Frank in Senate
The Senate Banking Committee announced that next Thursday, May 12, Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corp Chairman Sheila Bair, Commodity Futures Trading Commission Chairman Gary Gensler, Securities and Exchange Commission Chairman Mary Schapiro, Acting Comptroller of the Currency John Walsh and Deputy Treasury Secretary Neal Wolin will testify on the implementation of the Dodd-Frank financial oversight law. The hearing is slated to focus on monitoring systemic risk and promoting financial stability and will likely include questions over a recent settlement bank regulators entered into last month with large banks over mortgage servicing abuses.
Roemer Is Newest Rumor to be Next Commerce Secretary
As current Commerce Secretary Gary Locke prepares to depart for his new assignment as Ambassador to China, former Representative and current Ambassador to India Timothy Roemer’s name has surfaced as Locke’s possible successor. Roemer was an early backer of President Obama’s 2008 presidential campaign. Obama is also rumored to be considering current U.S. Trade Representative Ron Kirk and General Electric CEO Jeffrey Immelt for the position.
(more…)
Q1 GDP Slows to 1.8%
On Thursday, the Bureau of Economic Analysis announced that the U.S. GDP growth rate in the first quarter of 2011 slowed to an annual rate of 1.8 percent, compared to a rate of 3.1 percent in fourth quarter 2010 and 3.7 percent in first quarter 2010. The Bureau cited a combination of lower-than-expected economic data, global energy uncertainty, and concerns about the budget deficit as causes of the growth rate decelerating.
Bernanke Announces Rates to Stay at Near Zero, Ends Bond Buying Program
On Wednesday, Federal Reserve Chairman Ben Bernanke held his first quarterly press conference in which he said that the economy and job market are improving moderately, but the housing market and other factors such as gas prices continue to be a drag on growth. He announced that the Fed plans to end the $600 billion treasury bond-buying program in June and will leave interest rates at their current levels. The event followed a two-day meeting of the Fed’s policymaking committee at which the central bank indicated continuity in its strategy. The Fed’s bond buying program known as the second round of quantitative easing, or “QE2,” will expire as scheduled at the end of June. The Fed also maintained its near-zero target for short-term interest rates, where it has been since December 2008, and indicated that it expects to keep rates “exceptionally low” for “an extended period.”
Debt Ceiling Vote
The vote to increase the U.S. government’s borrowing ceiling beyond the current limit of $14 trillion has become the hot topic in Congress. While the Treasury Department’s original estimate was that the ceiling would need to be raised by mid-May, the Department is now saying it could hold out till July but would need to take extraordinary measures. While the measure is expected to easily pass the Senate, the question remains whether the House can pass such a bill. House Speaker John Boehner (R-OH) said this week that he will not guarantee a vote on bill to raise the debt limit, much less passage of such a bill, without cuts in discretionary spending and alterations of entitlements such as Medicare and Medicaid. Congress returns next week from its two week recess, and House Republicans plan to hold a series of meetings to gather feedback from their Members about the debt ceiling.