Finance Brief: Fed to Begin Shrinking Crisis-Era Balance Sheet Within Months

Washington Brief

  • The Federal Reserve plans to begin gradually shrinking its crisis-era balance sheet of bonds and other assets. The central bank aims to start unwinding its stimulus program in the coming months, according to minutes from June’s meeting of Fed officials. (The Wall Street Journal)
  • The European Union and Japan announced a broad agreement that would lower barriers on almost all goods traded between the two economies. The trade deal, which still requires further negotiations and final approval, became a priority for the EU and Japan after President Donald Trump withdrew the United States from the Trans-Pacific Partnership. (The New York Times)
  • Oregon became the first state to launch an automatic enrollment, payroll deduction IRA program for workers in the private sector. The initiative is in its pilot phase, with larger employers slated to join in 2018, followed by full implementation in 2020. (InvestmentNews)

Business Brief

  • Banking regulators published the “living wills” submitted by the nation’s eight biggest banks. The Fed and the Federal Deposit Insurance Corp. allowed American International Group Inc. and Prudential Financial another year to submit their plans for how they could be dissolved during a financial crisis. (Reuters)
  • HSBC Holdings Plc is said to be in talks with the U.S. Justice Department to resolve a probe into the London-based bank’s sale of toxic mortgage bonds from a decade ago. The discussions are expected to provide insight into how the Trump administration will deal with international banks. (Bloomberg News)
  • Bank of America warned that the increased popularity of exchange-traded funds may result in market liquidity problems. Industry groups say that more than $4 trillion is invested in ETFs. (CNBC)

Chart Review

Events Calendar (All Times Local)

CSIS event on export financing 9:30 a.m.
AEI event on housing finance reform with Fed’s Powell 10 a.m.
Fed’s Fischer gives speech in Vineyard Haven, Mass. 7:30 p.m.
No events scheduled



The E.U.-Japan Trade Deal: What You Need to Know
James Kanter, The New York Times

The European Union and Japan announced a broad agreement on Thursday that would lower barriers on virtually all the goods traded between them, a pointed challenge to President Trump on the eve of a summit of world leaders in Germany. The agreement still needs further negotiation and approval before it can take effect, but it is aimed at giving both economies some zip after years in the doldrums.

Global Trade Rebounds Despite Trump’s Protectionist Threats
Enda Curran, Bloomberg News

Donald Trump’s election as U.S president sparked warnings of damaging trade wars and an end to globalization as we know it. So far, those predictions haven’t played out.

Justice Department’s Corporate Crime Watchdog Resigns, Saying Trump Makes It Impossible To Do Job
David Sirota, International Business Times

One of the Justice Department’s top corporate crime watchdogs has resigned, declaring that she cannot enforce ethics laws against companies while, she asserts, her own bosses in the Trump administration have been engaging in conduct that she said she would never tolerate in corporations. Hui Chen — a former Pfizer and Microsoft lawyer who also was a federal prosecutor — had been the department’s compliance counsel.

Oil Bounces; European Bonds Decline as Gold Slips: Markets Wrap
Samuel Potter, Bloomberg News

Futures on the S&P 500 Index declined 0.3 percent after the underlying gauge rose 0.2 percent Wednesday and the Nasdaq 100 index jumped 0.9 percent.


Fed posts banks’ ‘living wills,’ gives AIG, Prudential more time
Pete Schroeder, Reuters

U.S. bank regulators on Wednesday posted plans submitted by eight of the nation’s largest banks for how they could be dissolved in a crisis and gave American International Group, Inc and Prudential Financial an extra year to submit their plans. Banks, including Bank of America, JPMorgan Chase and Goldman Sachs are required to regularly provide regulators with “living wills” for how they could be taken apart should they face collapse.

Deutsche Bank CEO says has no plans to step down: Die Zeit
Maria Sheahan, Reuters

Deutsche Bank (DBKGn.DE) Chief Executive John Cryan has no plans to step down from running Germany’s biggest lender, he told German weekly Die Zeit in an interview. Cryan made the comments when asked whether the appointment of Christian Sewing and Markus Schenck as co-deputy CEOs earlier this year was meant to lay the groundwork for succession plans

Financial Products and Investments

Fed Officials Ready to Start Shrinking Portfolio in Months
Nick Timiraos, The Wall Street Journal

Federal Reserve officials in June readied plans to start slowly shrinking the central bank’s large portfolio of bonds and other assets in the next few months. Officials debated exactly when they should launch those plans, with several arguing the Fed had sufficiently prepared markets to move soon, while others suggested waiting for more proof that inflation would pick up, according to minutes of the central bank’s June meeting released Wednesday.

Now Fed Officials Are Starting to Wonder If the VIX Is Too Low
Oliver Renick, Bloomberg News

Wondering why three Federal Reserve officials were moved last week to make public pronouncements about rising asset prices? Evidently, it’s the potential for “buildup of risk to financial stability.” At least, that’s one way to read minutes to the June 13-14 meeting, where a few participants expressed concern about “subdued market volatility” and higher valuations.

Explosion in money flowing into ETFs may lead to a market liquidity problem, Bank of America says
Jason Gewirtz, CNBC

Bank of America rang a warning bell Wednesday regarding all the money that has piled into passive exchange-traded funds. The bank says the massive popularity of ETFs may be leading us on a road to a liquidity problem.

Oregon becomes first state to launch auto-IRA program
Greg Iacurci, InvestmentNews

Oregon has become the first state to launch an automatic-enrollment, payroll-deduction IRA program, known as an “auto-IRA,” for private-sector workers. It brings to fruition a concept that’s been discussed among policymakers for more than a decade, and represents a shot of sorts at the Trump administration.

CEO-Worker Pay Ratio Generates Outrage–And Some Insight
Stephen Wilmot, The Wall Street Journal

A controversial new metric on executive pay is on Congress’s chopping block. Shareholders should want it to survive, even if it only provides a sliver of insight into the companies they own.

Housing and GSEs

HSBC Is in Talks With U.S. to End Crisis-Era Mortgage Probe
Tom Schoenberg, Bloomberg News

HSBC Holdings Plc is in talks to resolve a U.S. probe into its sale of toxic mortgage bonds a decade ago, according to people familiar with matter, a negotiation that could offer an early look at how the Trump Justice Department will deal with global banks. The London-based bank has had at least one meeting with the Justice Department and is scheduled to meet again, said three people who asked not to be named because the negotiations are confidential.

Prospect Mortgage fined $4.16 million for crisis-era FHA lending violations
Ben Lane, HousingWire

While most of the country spent the early part of this week consumed by fireworks and consuming copious amounts of hot dogs and hamburgers, one mortgage lender found itself joining a list that includes Wells Fargo, Walter Investment, Freedom Mortgage, and many more. On Monday, the Department of Justice announced that Prospect Mortgage will pay more than $4 million to settle allegations the company committed civil mortgage fraud by underwriting mortgages that did not comply with Federal Housing Administration standards.

Will housing finance reform hurt small banks?
Kate Berry, American Banker

The battle over the future of housing finance may turn on whether whatever reforms or replaces Fannie Mae and Freddie Mac will bypass small banks, delivering more market share and power to the biggest banks. Small banks are clearly concerned, and are pushing back against the idea — conventional wisdom to many lawmakers of both parties on Capitol Hill — that significant changes are needed.


Health Care? Taxes? Budget? G.O.P. Has Big To-Do List, but Little Time
Alan Rappeport, The New York Times

An iffy health care vote. An unresolved budget resolution. A heavy debt ceiling lift. And, of course, there is that tax overhaul plan.

EU Backs New Transparency Rules for Multinationals
Julia-Ambra Verlaine, The Wall Street Journal

European Union lawmakers backed new rules that would force large multinational companies operating within the bloc to give detailed information on where profits are made to prevent them from reducing tax bills. As such, companies ranging from Google Inc. to Amazon Inc. will be forced to publish profits and tax bills from each of the EU countries in which they operate—and to provide some information for subsidiaries operating outside of the bloc.

What Constitutes Obstruction? A Tax Case May Narrow the Definition
Peter J. Henning, The New York Times

Over the past few years, the Supreme Court has shown a conspicuous concern when the Justice Department seemed to push the envelope of what constitutes a crime in a way that could reach ostensibly innocent acts, or at least conduct that does not deserve the severe punishment meted out under federal law. Last week, the justices agreed to review the conviction of Carlo J. Marinello II for obstructing the administration of the tax laws, presenting another opportunity to cut back on the scope of white-collar prosecutions under a catchall section.

Financial Technology

JPMorgan Tips Hand on Payments Hopes Despite Bailing on Worldpay
Hugh Son and Jennifer Surane, Bloomberg News

JPMorgan Chase & Co. signaled its aspirations in the payments-processing industry with its willingness to consider a bid for Worldpay Group Plc, the London-based company being acquired by Vantiv Inc. for $9.9 billion. JPMorgan’s merchant-acquiring unit, which handles card transactions for businesses, has vaulted to the world’s biggest by volume, fueled by the growth of e-commerce.

Bitcoin to $50,000 Is Latest Call From Prolific Stock Picker
Camila Russo, Bloomberg News

Ronnie Moas, who for the past 13 years has made more than 900 stock recommendations via his one-man show at Standpoint Research, is now venturing into cryptocurrencies. Bitcoin will double to $5,000 next year, and reach $25,000 to $50,000 in the next decade, the Miami Beach, Florida-based Moas said in a note to clients Wednesday, where he also disclosed he bought “a little bit” of litecoin, bitcoin and ethereum in a account.

A Message from the Electronic Payments Coalition:

Taking a road trip to escape the heat this summer? Watch out for skimmers at gas stations, which can steal your card data-including PINs-and cause you a headache during your vacation. Learn more from EPC.

Opinions, Editorials and Perspectives

Wanted: Bipartisan Tax Reform
David Williams, Morning Consult

It’s not too late to reverse course through permanent, comprehensive tax reform. Streamlining and simplifying the tax code will allow taxpayers to keep more money in their pockets.

America Once Led the World on Tax Reform
Sarah H. Ketterer, The Wall Street Journal

Three decades ago, Ronald Reagan worked with Congress to give the U.S. a modern, competitive and pro-investment tax system that set the stage for more than a decade of economic growth. Tax shelters disappeared at the stroke of the president’s pen.

Administration Official: ‘We’re Beyond’ Bannon’s Tax Rate Hike Idea
Michael Warren, The Weekly Standard

I’m told that Bannon may have offered this suggestion back when the administration was working on its proposal. But right now, as Trump’s tax reform team works with Congress on the details, there are no plans for the White House to modify its proposal or get behind the idea of raising the top marginal rate from where it is currently.

Vantiv sets punchy price on Worldpay
Swaha Pattanaik, Reuters

Worldpay discovered on Wednesday that a couple of birds in the bush are sometimes worth a bit more than one in the hand. A day after Britain’s biggest payment processor said it had received approaches from both Vantiv and JPMorgan, the company plumped for the former’s offer of nearly $10 billion in a mix of cash and shares.

Message to branch staff: Don’t fear automation
Dave Martin, American Banker

I recently taught a graduate school banking class where, at its conclusion, a student said, “I just want to thank you for not being an alarmist.” But that comment puzzled me since most of my subject matter was about the rapid change in the industry.

This Senate Effort Could Lead to Another Housing Bubble
John Ligon and Norbert Michel, The Daily Signal

The Senate Committee on Banking, Housing, and Urban Affairs held a hearing last week to lay out guiding principles for housing finance reform legislation. While it is a positive development that the Senate is getting to work on housing finance, conservatives should be wary of the way things are starting out.

A Message from the Electronic Payments Coalition:

$2 BILLION! That’s how much theft from gas station skimmers cost consumers in 2014. The Electronic Payments Coalition (EPC) has tips to help you protect yourself when you’re filling up at home or traveling far and wide this summer.

Research Reports

Equilibrium in a Competitive Insurance Market Under Adverse Selection with Endogenous Information
Joseph Stiglitz et al., The National Bureau of Economic Research

This paper investigates the existence and nature of equilibrium in a competitive insurance market under adverse selection with endogenously determined information structures. Rothschild-Stiglitz (RS) characterized the self-selection equilibrium under the assumption of exclusivity, enforcement of which required full information about contracts purchased.

Consumer Delinquencies Rise in First Quarter
American Bankers Association

Delinquencies in closed-end loans rose in the first quarter, driven by an uptick in late payments on auto loans, according to results from the American Bankers Association’s Consumer Credit Delinquency Bulletin. Overall, delinquencies rose in 7 of the 11 individual consumer loan categories tracked by ABA.