Geithner Meets with Eurozone Finance Ministers
On Friday, Treasury Secretary Timothy Geithner met with seventeen European finance ministers in Poland to discuss the eurozone’s debt crisis. Jean-Claude Juncker, president of the Eurogroup, announced the group decided to delay till October a decision on whether to pay out the next tranche of a multi-billion euro loan to Greece. The two-day meeting of Europe’s Economic and Financial Affairs (ECOFIN) Council — hosted by Polish Finance Minister Jacek Rostowski and the president of the National Bank of Poland — comes ahead of G20 and IMF meetings later this month. The European Central Bank, along with the Fed, the Bank of England, the Bank of Japan and the Swiss National Bank, also announced that three U.S. dollar auctions would be held between October and December.
Senate Committee Passes Increased Funding for SEC and CFTC
On Thursday, the Senate Appropriations Financial Services Subcommittee passed its FY 2012 funding bill giving banking and commodities regulators large budget increases to help them implement sweeping new financial regulations. The bill, which will now go to the full U.S. Senate for a vote, gives the Securities and Exchange Commission a fiscal 2012 budget of $1.407 billion, an increase of roughly 19 percent from its current fiscal 2011 budget of $1.185 billion and the Commodity Futures Trading Commission an estimated 19 percent increase in its funding, jumping from $202 million to $240 million for fiscal 2012. That bill would also split oversight of the nearly $600 trillion over-the-counter derivatives market between the two regulators and give the SEC greater authority to regulate hedge funds, credit-rating agencies and municipal advisers. However, the fate of the bill remains uncertain because House Republicans oppose many of the Dodd-Frank provisions which increase the need for expanded SEC and CFTC budgets. Earlier this year, the House Appropriations Financial Services Subcommittee passed a bill that would reduce the CFTC’s budget to $171.9 million but maintain the SEC’s funding at its FY 2011 level. With the end of the year approaching, House and Senate leaders are bracing themselves for another omnibus bill that combines all the unpassed appropriations bills into one major bill. The House and Senate will most likely fail to pass similar Financial Services Appropriations bills which will cause the bill to be wrapped into the omnibus thereby reducing the chance of large increases for the SEC or CFTC.
Fitzpayne Nominated for Treasury Legislative Affairs Chief
On Wednesday, the White House announced that President Obama intends to nominate Alastair Fitzpayne as the next assistant secretary of Treasury for legislative affairs. Fitzpayne has been Treasury’s deputy chief of staff since January 2009. He was a legislative assistant to former Sen. Evan Bayh (D-Ind.) from 2001 to 2006. From 2007 to 2009, he served as a senior policy adviser to Rep. Rahm Emanuel (D-Ill.).
House Republicans Introduce Disaster Funding Bill
On Wednesday, House Republican leaders introduced a stopgap spending bill to keep the government operating though mid-November and provide $3.65 billion in short-term federal assistance to replenish strained disaster reserves. The funding resolution would impose a 1.4 percent cut on most agencies and Cabinet departments, including Defense, to stay within 2012 spending caps set in August. FEMA and the Corps of Engineers would immediately benefit from a first installment of $1 billion in emergency funds to avoid any disruption in aid for these last weeks of the 2011 fiscal year ending September 30. The second $2.65 billion represents a down payment toward FEMA’s 2012 budget. With two weeks left in fiscal 2011, FEMA’s disaster reserve fund has dwindled to $377 million and the agency has been operating since late August on an “immediate needs” basis, forcing delays in longer-term recovery projects around the nation. Senate Democrats, who have been pursuing their own much larger $6.9 billion disaster aid package, said they did not support the current House approach, but left open the possibility of agreement if House Republicans consider more disaster aid. The House is schedule to vote on its bill next week.
FDIC Approves New Systematic Risk Rules
On Tuesday, the FDIC approved new sets of rules that the largest banks will have to follow in drafting plans in the event of their own collapse. The panel also approved contingency planning guidelines for insured banks. The new rules, which were authorized in the Dodd-Frank Act, are designed to eliminate the need for bailouts by giving the FDIC power to liquidate large firms whose failure could threaten the financial system. Banks with at least $50 billion in assets will have to file such plans, as will any firm designated as systemically important by the Financial Stability Oversight Council. The final rule changes the filing timeline from an April draft proposal released by the FDIC and Fed, moving toward a tiered phase-in based on the total of non-bank assets held by firms. Companies with more than $250 billion in non-bank assets are required to file the plans by July 1, 2012. Firms with non-bank assets between $100 billion and $250 billion would be required to file by July 1, 2013, and all other firms would be required to submit plans by December 2013. The agency also approved unanimously a separate rule dictating resolution plans for FDIC-insured banks with more than $50 billion in assets. The rule, which the agency began drafting before the completion of the Dodd-Frank Act, would apply to 37 banks and thrifts. Thirty four of those firms would be required to file resolution plans with the Fed because of the size of their parent company. The rule takes effect January 1, 2012, and would be subject to a 60-day public comment 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
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.
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Trade Deals Stalled in Senate
On Tuesday, the White House struck a deal with Senate Democratic leaders on the Trade Adjustment Assistance program which has stalled the three pending trade agreements with Colombia, Panama and South Korea for the past five years. However, on Thursday, Republican members of the Senate Finance Committee blocked the trade measures during a markup session because of their opposition to the agreement between the White House and Senate Democrats. The trade assistance program was expanded in 2009 to boost payouts and include service-sector employees as well as factory workers, but those added benefits expired in February. The deal between Senate Democrats and the White House, which Republicans opposed, would extend the additional benefits until 2014.
Fed Announces Final Rule on Debit Card Swipe Fees
On Wednesday, the Federal Reserve Board announced final rules that will limit debit card swipe fees, as mandated by the “Durbin Amendment” under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Fed’s original proposed rule capped the fees at 12 cents per transaction, but the Board passed a final rule that increased the cap to 21 cents per transaction, plus 5 basis points on the amount of the transaction for fraud costs, plus 1 cent for fraud prevention costs. Financial institutions with $10 billion or less in assets, governmental benefit cards, and certain prepaid cards are exempted under the Fed’s rule.
Greece Passes Austerity Program, Awaits Second Bailout
This week, the Greek parliament passed unpopular austerity and privatization programs thereby fulfilling the preconditions for receiving a second bailout. However, on Friday, European finance ministers cancelled a planned meeting for Sunday and indicated they may take as long as two more months to finalize the details of Greece’s long-term bailout. Nevertheless, the ministers are expected to approve a short-term loan installment that will keep Greece from bankruptcy over the summer.
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.
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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.
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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.
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Government Shutdown Looms
With the current temporary funding resolution set to expire April 8, House and Senate Appropriations committees worked toward crafting a six-month compromise bill, setting annual spending at $1.055 trillion, $28 billion more than the House-passed level but still a $33 billion cut from the original spending measure. However, House Republicans remain splintered over whether a shutdown would be good politically, or whether they should compromise with Democrats in order to move on to larger future battles such as next year’s budget and the debt ceiling increase. Meanwhile, Democrats also remain divided over whether to allow a shutdown to happen or acquiesce to Republican cuts. Whether a compromise can be reached to avoid a shutdown will be known next week.
Unemployment Rate Drops to 8.8%
On Friday, the Department of Labor announced that the unemployment rate dipped to 8.8% in March from 8.9% in February. Nonfarm payrolls gained 216,000, with private-sector employment rising by 230,000. Payroll employment stood at 130.7 million in March. There were gains of 199,000 jobs in services and 17,000 jobs in manufacturing in March. Government employment fell by 14,000 and 9,000 jobs were lost in education. Nearly half of the unemployed have been out of work for 27 weeks or more. Private-sector wages fell 2 cents an hour to $19.30.
Ally Financial Files for IPO
On Thursday, Ally Financial, the former finance arm of General Motors, filed for an initial public offering that would allow the federal government to begin selling off its 73.8 percent stake. Ally said in its registration statement with the Securities and Exchange Commission (SEC) that it was seeking to raise $100 million. Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley are the lead underwriters. The company did not give an estimated date or share price for the offering. The Treasury Department, which invested more than $17 billion in Ally, did not say how much of its stake it intended to sell. In addition to common shares, the Treasury Department owns $5.9 billion in convertible preferred stock. Earlier this month, the Treasury Department began unwinding its holdings in Ally, selling $2.7 billion in trust preferred securities.
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Bernanke to Hold Regular Press Briefings
On Thursday, the Federal Reserve announced that Chairman Ben Bernanke will begin holding press briefings four times per year to present the Federal Open Market Committee’s current economic projections. In 2011, the Chairman’s briefings will be held on April 27, June 22 and November 2.
Fed Rejects Bank of America Dividend Increase
On Wednesday, Bank of America announced that the Federal Reserve had vetoed its plans for a dividend increase in the second half of 2011. Bank of America did not disclose the central bank’s reason for rejecting the dividend proposal, and the Fed declined to comment on how individual institutions fared in its latest round of examinations. The Bank said it had originally submitted its dividend proposal to the Fed in January, and it now intends to submit a revamped dividend proposal at a later date.
Treasury Department Opposes Tax Repatriation Holiday
On Wednesday, Michael Mundaca, the Assistant Treasury Secretary for Tax Policy, announced that he opposed proposals to give corporations a tax holiday on their overseas profits. Mundaca pointed to an earlier assessment from the Joint Committee on Taxation that estimated the tax holiday would cost billions, rather than raise revenue as proponents have argued. He added that a second holiday might even weigh even more heavily on revenue, by encouraging multinationals to shift even more profits overseas. The federal government currently taxes businesses up to 35 percent on overseas earnings. Win America, a coalition of multinational corporations including Apple, Google, Microsoft and Pfizer, argues that a temporary tax holiday would allow businesses to invest an estimated $1 trillion in America, creating jobs in the process.
Treasury Announces Mortgage-Backed Securities Sale
On Monday, the Treasury Department announced that it will begin to sell its portfolio of $142 billion in agency-guaranteed mortgage-backed securities (MBSs) amassed during the financial crisis. Starting this month, the department plans to sell up to $10 billion in MBSs per month subject to market conditions. The sales are expected to generate a profit for taxpayers of $15 billion to $20 billion. The Fed currently holds just under $945 billion of MBSs on its balance sheet.
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
Administration Unveils Housing Reform Plan
On Friday, Treasury Secretary Tim Geithner announced the Obama Administration’s recommendations to phase out Fannie Mae and Freddie Mac and to set minimum down-payments for buyers. The proposal includes a mandatory 10 percent down payment for home buyers and three options for Fannie and Freddie to be wound down but stopped short of recommending outright privatization or closure. However, critics were quick to point out that there are no specific timelines for action in the proposal, and regardless of Geithner’s recommendations, ultimately it will be up to Congress to enact legislation on the issue.
Kevin Warsh to Leave Fed
On Thursday, Federal Reserve Board Governor Kevin Warsh announced that he is stepping down from his position at the end of March. President Obama will now have the opportunity to replace Warsh, a Bush appointee, with his own nominee. President Obama currently has another nominee, Peter Diamond, pending before the Senate for confirmation. Once President Obama has filled these two vacant slots, he will have named six of the seven currently sitting Fed Governors.
Senate Banking Committee Sets First Dodd-Frank Hearing
On Friday, the Senate Banking Committee announced it will hold its first hearing of the 112th Congress on the Dodd Frank Wall Street Reform Act on February 17. The hearing will focus on the Administration’s progress report six-months after the bill’s passage. Witnesses will include Fed Chair Ben Bernanke, FDIC Chair Sheila Bair, SEC Chair Mary Schapiro, CFTC Chair Gary Gensler and Acting Comptroller John Walsh.
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Fourth Quarter GDP Released
On Friday, the Department of Commerce announced that the U.S. economy grew at a 3.2% rate in the fourth quarter, an improvement from the 2.6% pace in the prior period. For all of 2010, GDP grew by 2.9% after contracting by 2.6% in 2009. The report showed that fourth quarter numbers were boosted by strong personal spending, reflected in the best holiday retail sales since 2006. The report also showed U.S. exports accelerated while the rate of import growth slowed. Company investments also helped the economy, although business spending for equipment and software slowed.
IMF Report Criticizes US Debt
On Thursday, the International Monetary Fund issued a report criticizing the U.S. response to its rising public debt. The IMF report focused on criticism that the United States is falling behind on a promise it made to other top economic countries to halve its budget deficit by 2013. At a gathering of the world’s top economic leaders in Canada last summer, U.S. officials promised to reduce the deficit to roughly 6 percent of gross domestic product. However, according to data released this week by the Congressional Budget Office (CBO), recent tax cuts and expected spending will keep the annual deficit this year at about 10 percent of GDP.
Financial Crisis Inquiry Commission Releases Final Report
On Tuesday, the Financial Crisis Inquiry Commission (FCIC) releases its final majority and dissent reports. The majority report concluded that the 2008 financial crisis was caused by the Fed’s ” pivotal failure to stem the flow of toxic mortgages,” the SEC ” [not] requiring more capital and halted risky practices,” and banks ” recklessly taking on too much risk, with too little capital, and with too much dependence on short-term funding.” The dissent report signed by FCIC Vice Chair Bill Thomas and Commissioners Douglas Holtz-Eakin and Keith Hennessey criticized the majority’s report for being ” more an account of bad events than a focused explanation of what happened and why.” The dissent also focused it blame for the crisis on policymakers who “poorly designed government housing policies that distorted market outcomes and contributed to the creation of unsound mortgages.”