Mike & Co. —
Far from the media carnival at center stage most of the electoral season, a number of fiscal and financial policy developments have slipped under the radar this recess. Before Congress adjourned for the election, political coverage focused on whether Congress would pass a CR. The developments since include a major bank’s restructuring, a court ruling that the CFPB is unconstitutional, the Wells Fargo scandal, and missed Living Will deadlines by two of America’s largest banks.
The media, distracted from this and instead reporting on issues of only apparent significance — like Trump’s personal income loss of $916 million in one year — has also missed opportunities to shed light on much more serious allegations of financial improprieties by Trump, which are summarized here.
Below we outline some of the most important developments in fiscal and financial from the last few weeks that might have been muted due in large part to media difficulty distinguishing serious from frivolous allegations.
This week, Metlife announced details of its plan to sell of a major portion of its retail finance business — a direct reaction to its FSOC designation as a Systematically Important Financial Institution (SIFI). With this designation comes additional capital requirements and federal oversight that large financial institutions often find burdensome. In June, Metlife solidified its plans by releasing its plans to create a subsidiary entity, Brighthouse financial — responsible for the majority of the organization’s variable rate and universal life insurance businesses — and begin reporting this new firm separately from MetLife’s main assets. This is a clear bid by the firm to eliminate its designation.
In March, a federal judge overturned the SIFI designation; however, the FSOC announced soon after that it intends to appeal the decision. MetLife’s spin off and other planned asset sales may moot the case.
The move reflects a trend among SIFIs of intentional downsizing. Metlife is the second SIFI to begin selling off assets to lose its designation, following GE’s example last spring. Now that two such firms have already done so, it puts more pressure on other SIFIs, such as AIG, to begin breaking off pieces to remain competitive with their leaner competitors.
- Electoral Implications— For 2017, this is a tangible sign that the Dodd-Frank is working important structural changes among financial firms whose collapse would threaten the economy at the expense of taxpayers.
Constitutionality of CFPB
This week the DC circuit court ruled the current structure of the Consumer Financial Protection Bureau unconstitutional. In a Tuesday decision the Court deemed that the agency had an unprecedented level of independence and an unacceptable lack of oversight by the branches of government. The Court also ordered the agency to review a ruling it gave issuing a mortgage company a $109 million fine.
While rejecting the plaintiff’s call to totally dismember the agency, the court instead deemed that the article of Dodd-Frank laying out the agency needed to be amended giving the president increased over sight over the agency, and give the president the ability to dismiss the Director of the agency at any time, a power previously missing.
This decision is a major blow to the agency, and with it the Obama administration’s post-crisis financial regulatory regime. The most important of these changes is the increased accountability the agency has to the White House. The CFPB was originally set up along the model of the Federal Reserve, with a high degree of independence to remove it from political motivations and to protect the rights of consumers against predatory actions.
The ruling also gives an opening to Republican legislators who have attempted to attack the agency before, who could now be embolden by the decision to further weaken the CFPB or dismantle it entirely.
The CFPB announced following the ruling that it intends to repeal the decision, and that this is an attack by the banking industry in an attempt to hamstring an agency that has already forced them to turn over $11 billion dollars stolen from consumers. There are two routes the agency can take for appeal. They can either present their case before the entire DC Circuit Court, or they can take their appeal to the Supreme Court. As of now there is no information on which path the organization will choose.
- Electoral Implications— CFPB’s governance structure is in hand balance this election, as the incoming Congress and Administraion will face a choice: continuing to hold banks accountable for their actions or to return to the policies that lead to the 2007 crash.
- Wells Fargo Fallout
The fake account scandal seems to have finally caught up with Wells Fargo CEO John Stumpf who retired this week amid demands for him to step down. Following the scandal it originally appeared that the CEO and other top managers would remain in place, much as what happened following the Financial crisis. However, appearing to finally bow to building internal and external pressure, he and several other top executives at the besieged bank have stepped down. It appears that a plummeting stock price, combined with outspoken criticism from several leading Congresspeople, including Elizabeth Warren, was enough to dislodge the CEO.
This is a major development for top executives at major financial institutions, and could suggest a new precedent for their untouchability. Other SIFI executives will take notice that scandals now have the ability to shake them from their position. They will also take notice that Stumpf’s resignation did not come with the now famous “golden parachute” that have defined CEO resignations in the last few years. These changes will hopefully force CEOs of SIFIs to behave more strictly and not take as many risks or attempt to cook the books, and there is now precedent holding them accountable for the actions of the firms they over see, with real punishment for them. This also have the additional effect of setting a precedent for dividing the offices of Chairman of the board and CEO, which are now being filled by different people following Stumpf’s departure.
The resignation of Stumpf without a golden parachute is case in point that the new regulations are making the upper executives accountable, and is a sign that change really is happening.
Forced Arbitration — The Wells Fargo scandal has also brought to light the excesses of forced arbitration clauses used by the bank it their contracts. These contracts force customers to settle in private arbitration instead of open court, which makes the cost of legal action prohibitively expensive, as well as preventing class action lawsuits and precedent setting decisions. Many Democratic legislators including Senator Warren have called on Wells Fargo to allow customers to sue in court, which the former CEO said was very unlikely.
In response to the bank’s abuse of forced arbitration clauses, the HRC campaign released a plan to allow customers to sue companies in court instead of through private arbitration. The plan would allow regulators such as the Federal Trade Commission and the Department of Labor to restrict arbitration clauses in consumer, employer and antitrust agreements.
- Electoral Implications— populist ire reached a surprising degree of intensity in recent weeks and serves as a reminder that the regulatory protections of DFA continue to be popular and large financial institutions do not. Out spoken criticism of the injustice, and the release of a plan to force corporations to go to court will also align HRC with Warren and other Progressives and energize the far left base.
On October 1, some of the largest financial institutions in the country, including JPMorgan Chase, Bank of American and Wells Fargo submitted revised yearly living wills to the FDIC and the Federal Reserve for approval. These wills are coming after regulators rejected the versions they submitted in April, giving the banks a critique of the submitted plans and a deadline of October 1st to resubmit them. These late submissions have taken into account advice issued by regulators, and while the full plans have not been released, and the Fed and FDIC have not yet ruled on them, certain sections have been made public that show there have been several new, and possibly precedent setting, additions to the living wills.
The most important of these changes is the establishment holding companies between the parent company and its subsidiaries. These entities would hold resources that would support banking and brokerage in times of crisis, including the collapse of the parent company, acting as a sort of bank within the bank. These new entities will force the largest financial actors to hold more capital, and provide a better chance of subsidiaries to survive the collapse of a parent firm. These funds will be able to support the subsidiaries in a crisis, and provide a layer of insulation and protection from financial crises between parent and subsidiary. As these changes were directly based on comments made by regulators it seems likely that these new financial holding companies will be become standard for all Living Wills going forward.
- Electoral Implications–-Examples like this of agencies pushing banks to higher accountability and ever increasing safety can rouse progressive support, and prove as an example of successful regulation to undecided voters.