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Finance Brief: GOP Lawmakers Considering Alternatives to State and Local Tax Deduction Repeal


Government Brief

  • The Republican proposal to repeal state and local tax deductions might not survive opposition from GOP lawmakers from high-tax states who are concerned about a backlash from constituents who could see their tax bills rise. Representative Chris Collins (R-N.Y.) said party leaders had assured him “there’s not going to be full repeal” and that tax writers are considering alternative options. (The New York Times)
  • The White House plans to request a $29 billion disaster aid package from Congress today, including nearly $13 billion in relief for victims of Hurricanes Harvey, Irma, and Maria and $16 billion for the National Flood Insurance Program, which has maxed out its $30 billion borrowing ability. The proposal would allow the NFIP to pay claims from hurricane victims. (Associated Press)
  • Nearly half — 47 percent — of the respondents in a Morning Consult/POLITICO poll said they don’t believe that they will benefit from a cut in the corporate tax rate from 35 percent to 20 percent, which President Donald Trump and members of Congress say is key to job creation and economic growth. (Morning Consult)

Business Brief

  • The Internal Revenue Service is receiving criticism for awarding a $7.25 million no-bid contract to Equifax Inc., which is now under fire for a massive security breach that exposed personal information for up to 145.5 million Americans. According to a Sept. 30 posting on the Federal Business Opportunities database, the credit agency will “verify taxpayer identity” and “assist in ongoing identity verification and validations” at the IRS. (Politico)
  • According to testimony prepared for a House Financial Services Committee hearing today, Securities and Exchange Commission Chairman Jay Clayton is expected to address anxieties about how to protect personal information in the new Consolidated Audit Trail database, which is scheduled to begin receiving data in November. The CAT, which would keep track of every trade and order in U.S. stock and option markets, has fallen under new scrutiny from lawmakers after the SEC revealed a 2016 hack of its corporate filing system last month. (The Wall Street Journal)
  • The head of the U.S. Securities and Exchange Commission forensics unit complained of “serious deficiencies” with equipment and cyber defense training in August 2016, two months before it was discovered that the system had been hacked, according to a memo to the SEC’s internal watchdog, Carl Hoecker. The concerns in the memo were never addressed, according to sources familiar with the matter. (Reuters)

Chart Review

Events Calendar (All Times Local)

Wednesday
CRFB event on paying for tax reform 9 a.m.
House Ways and Means hearing on IRS information technology 9 a.m.
House Financial Services hearing with SEC’s Clayton 10 a.m.
Senate Banking Committee hearing with Equifax’s Smith 10 a.m.
CFTC’s Quintenz speech to Symphony Innovate 2017 conference 10:25 a.m.
Washington Post event with OMB’s Mulvaney 10:30 a.m.
House Small Business Committee hearing on tax reform 11 a.m.
Brookings discussion with former Fed Gov. Tarullo 2 p.m.
Senate Judiciary subcommittee hearing on Equifax breach 2:30 p.m.
Senate Budget Markup of FY 2018 Budget Resolution 2:30 p.m.
Thursday
WITA event on NAFTA dispute settlement 9 a.m.
House Financial Services hearing with former Equifax CEO 9:15 a.m.
Senate Finance markup of USTR, ITC nominees 10 a.m.
Senate Budget Markup of FY 2018 Budget Resolution 10:30 a.m.
Peterson Institute event on global economic prospects 12:15 p.m.
Friday
Heritage event with FINRA’s Cook 12 p.m.
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General

White House to seek $29B disaster aid package
Andrew Taylor, Associated Press

The Trump administration is finalizing a $29 billion disaster aid package that combines $16 billion to shore up the government-backed flood insurance program with almost $13 billion in new relief for hurricane victims, according to a senior administration official and top congressional aides. The huge request is expected to be officially sent to Congress on Wednesday, but its outlines were characterized by officials who demanded anonymity because the $29 billion measure is not yet public.

IRS awards multimillion-dollar fraud-prevention contract to Equifax
Steven Overly and Nancy Scola, Politico

The IRS will pay Equifax $7.25 million to verify taxpayer identities and help prevent fraud under a no-bid contract issued last week, even as lawmakers lash the embattled company about a massive security breach that exposed personal information of as many as 145.5 million Americans. A contract award for Equifax’s data services was posted to the Federal Business Opportunities database Sept. 30 — the final day of the fiscal year.

Senate Considers Broadening Budget Resolution
Joe Williams, Roll Call

The Senate is considering beefing up the fiscal 2018 budget resolution to address a broader swath of issues beyond a tax overhaul, including the rollback of regulations on the financial industry, lawmakers said.The additions might not be included in the Senate’s version before a floor vote, lawmakers said, but could be added during an expected conference with the House.

Trump on Puerto Rico’s debt: ‘We’re going to have to wipe that out’
Staff, Fox News

President Trump told Fox News Tuesday that “you can say goodbye” to Puerto Rico’s debt as the island struggles to recover from the devastation left by Hurricane Maria. Trump spoke to Fox News’ Geraldo Rivera in an interview that aired exclusively on “Hannity” Tuesday evening.

The Hand-to-Hand Combat to Save Payday Lending
Yuka Hayashi, The Wall Street Journal

Florida payday lender Amscot Financial Inc. in the summer of 2016 rounded up about 600,000 letters from customers protesting a regulator’s plan to clamp down on high-interest loans. The letters, many handwritten, were scanned, packed in 131 cartons and shipped to Washington.

Dollar Weakens; Spanish Stocks and Bonds Slump: Markets Wrap
Cormac Mullen, Bloomberg

The dollar fell and global stocks were mixed in a day packed with catalysts for markets. Futures on the S&P 500 Index decreased less than 0.05 percent.

Banking

Trump Aides Deliver Shortlist of Fed Candidates
Jennifer Jacobs and Saleha Mohsin, Bloomberg

President Donald Trump’s advisers have given him a final list of people they’re recommending as candidates to lead the Federal Reserve and have ended the search, according to seven people familiar with the matter.Two of the people said Fed Chair Janet Yellen remains under consideration — even though few, if any, of Trump’s inner circle are advocating for her re-appointment.

Here’s Who Really Holds Power at the Fed
Jeanna Smialek, Bloomberg

To the casual observer, the Federal Open Market Committee September meeting in Washington might have looked like any other. But when San Francisco’s John Williams, Minneapolis’s Neel Kashkari, and the other regional Fed presidents took their seats at the big oval table, an historical anomaly glared back from the other side.

Fed Chair Hopeful Warsh Draws Opposition From Left and Right
Christopher Condon and Craig Torres, Bloomberg

On a Wednesday in mid-September, a group of progressive activists concerned about the stewardship of the American economy packed a meeting room on Capitol Hill with staff of Senate Democrats. Part strategy session and part pep talk, the gathering had a very specific aim.

Financial Products and Investments

Exclusive: SEC forensics unit sought resources, cyber training ahead of 2016 hack
Sarah N. Lynch, Reuters

In August 2016, just two months before the U.S. Securities and Exchange Commission discovered its corporate filing system had been hacked, the SEC’s internal watchdog, Carl Hoecker, received a plea for help from his new forensics investigative unit. In a three-page memo that was shared with U.S. Congressional staff and seen by Reuters, the head of the forensics unit complained of “serious deficiencies” in equipment, inadequate cyber defense training, and a lack of communication with the SEC’s Office of Information Technology (OIT).

SEC Weighs How to Protect Vast Trading Database From Hackers
Dave Michaels, The Wall Street Journal

U.S. regulators, already grappling with defending their systems against hackers, are taking a fresh look at how to protect a vast database of stock-market trades that promises to be an even bigger target of cyberthieves. The Consolidated Audit Trail, which is scheduled to begin receiving data in November, would keep track of every trade and order in U.S. stock and option markets. Securities and Exchange Commission Chairman Jay Clayton is assessing the type of information reported to the CAT, according to testimony prepared for a House hearing on Wednesday.

Regulators Fret About Cyber Risk after SEC Hack
Ryan Tracy and Gabriel T. Rubin, The Wall Street Journal

A pair of top U.S. regulators called for increased attention to cyber risks to the financial system Tuesday in the wake of the hack of the Securities and Exchange Commission’s corporate filing system. Federal Reserve Governor Jerome Powell and Commodity Futures Trading Commission Chairman J. Christopher Giancarlo both cited cybersecurity as a fundamental risk point for the financial sector during a discussion at George Washington University Law School.

Ahead of proxy vote, P&G pushes hard to keep Peltz off board
Siddharth Cavale, Reuters

Procter & Gamble Co’s (PG.N) Chief Executive David Taylor urged investors to back its turnaround plan and vote against activist investor Nelson Peltz’s addition to the board, just days ahead of the largest proxy vote in corporate history. “We strongly recommend you give us this opportunity to finish this transformation,” Taylor said during a question and answer session with investors.

Housing and GSEs

Watt suggests GSEs need to hold some capital, urges Congress to act on housing reform
Brena Swanson, Housing Wire

Federal Housing Finance Agency Director Mel Watt once again pressed Congress on the urgent need for housing finance reform due to the looming deadline of the government-sponsored enterprises’ capital buffer timeline. In less than three months, both Fannie Mae’s and Freddie Mac’s capital buffer will fall to zero, meaning, as structured now, any loss the GSEs experience in any quarter will require additional taxpayer support, i.e. another bailout.

Fannie-Freddie Regulator Used Government Resources for Personal Travel
Elizabeth Dexheimer and Joe Light, Bloomberg

Fannie Mae and Freddie Mac’s regulator may have a travel kerfuffle of his own. Mel Watt, the director of the Federal Housing Finance Agency, sometimes tasked FHFA employees with driving him and his wife to the airport for personal trips, and directed staff members to book flights unrelated to government business, the agency’s inspector general said in a December 2016 report.

Taxes

Republicans Are Reconsidering Full Repeal of State and Local Tax Deduction
Alan Rappeport and Jim Tankersley, The New York Times

Republican leaders are backing away from a proposal to fully repeal an expensive tax break used by more than 40 million tax filers to deduct state and local taxes amid pushback from fellow lawmakers whose residents rely on the popular provision. The state and local tax deduction is estimated to cost $1.3 trillion over the next decade and its repeal is central to paying for a sweeping tax rewrite unveiled last week by Republican lawmakers and administration officials.

Voters Aren’t Sold on Trump’s Corporate Tax Cut Pitch, Poll Shows
Anna Gronewold, Morning Consult

President Donald Trump is touting a cut in corporate tax rates as a direct benefit for the average American, but voters in a Morning Consult poll aren’t so sure that they will get anything out of it. Trump last week proposed a corporate tax cut from the current 35 percent level to 20 percent as part of a framework for sweeping tax code changes.

U.S. Tax Reforms Would Leave Renewable Energy Out in the Cold
Brian Eckhouse, Bloomberg

The prospects for a broad tax reform with lower corporate rates has excited business leaders and boosted the stock market — except for renewable energy. Tax reform “will make renewables more expensive,” Keith Martin, a partner at law firm Norton Rose Fulbright, said in an interview Tuesday at Infocast’s Solar Connect conference in San Diego.

Conservative Democrats Endorse Parts of GOP Tax Plan
Arit John, Bloomberg

A group of conservative House Democrats is embracing some elements of a GOP plan to cut taxes, potentially creating an opening for Republicans to win bipartisan support. The Blue Dog coalition, which has 18 members in the House, said it’s open to lowering business taxes, the first significant sign of a crack in Democratic opposition to the GOP approach.

Warren Buffett, the world’s second richest man, says eliminating the estate tax would be a ‘terrible mistake’
Matthew J. Belvedere, CNBC

Billionaire Warren Buffett told CNBC on Tuesday that it’s a “terrible mistake” to eliminate the estate tax as part of the Republican approach to tax reform. “It’s not a death tax,” the chairman and CEO of Berkshire Hathawaysaid on “Squawk Box.”

Financial Technology

Can the OCC really grant fintech charter to a Google?
Lalita Clozel, American Banker

Not so fast. That was the message industry observers were sending to acting Comptroller of the Currency Keith Noreika after he suggested last week that commercial firms, including Google and Amazon, could legally obtain a fintech charter if they applied.

Goldman CEO keeps open mind on digital currency bitcoin
Aparajita Saxena and Olivia Oran, Reuters

Goldman Sachs Group Inc (GS.N) Chief Executive Lloyd Blankfein said he is keeping an open mind on bitcoin after a media report that the investment bank was exploring a new trading operation dedicated to cryptocurrencies. “Still thinking about #Bitcoin. No conclusion – not endorsing/rejecting. Know that folks also were skeptical when paper money displaced gold,” Blankfein tweeted on Tuesday.

MoneyGram Deal Is Said to Spur Schumer Warning Over Security
David McLaughlin, Bloomberg

Foreign takeovers of U.S. companies that control Americans’ personal information should be scrutinized for risks to national security and possibly blocked, Senate Minority Leader Chuck Schumer is planning to tell the Trump administration as it reviews a batch of Chinese deals. Schumer, a Democrat from New York, plans to send a letter to Treasury Secretary Steven Mnuchin on Wednesday urging the administration to closely scrutinize acquisitions that give overseas investors access to personally identifiable and sensitive financial information about Americans, including those in the military.

Opinions, Editorials and Perspectives

The Herculean Task of Solving America’s $750 Billion Long-Term Care Problem
Tom McInerney, Morning Consult

With every passing day, 10,000 more Americans turn 65, and many of these Americans and their families find themselves unprepared for the financial challenge that awaits them. Although the retirement savings crisis makes headlines, a long-term care crisis is also wreaking havoc on aging Americans, their families, and state Medicaid coffers.

Republicans Sink to Deceit in Defense of Tax Plan
Albert R. Hunt, Bloomberg

Faced with a near disastrous launch of their prized tax reform proposal, Republicans are resorting to Plan B: kill the messenger of bad news and twist their message to the point of deception. Most analysts have found that, contrary to the claims of the White House and congressional leaders, the Republican “framework” for changing the tax system focuses its benefits more on the wealthy than the middle class, would increase taxes for some working-class families and probably would balloon the federal budget deficit.

Tax Cuts, Sold as Fuel for Growth, Widen Gap Between Rich and Poor
Eduardo Porter, The New York Times

It is a little unsettling that the intellectual underpinning of tax policy in the United States today was jotted down on a napkin at the Two Continents Restaurant in Washington in December 1974. That was when, legend has it, Arthur Laffer, a young economist at the University of Chicago, deployed the sketch over dinner to convince Dick Cheney and Donald H. Rumsfeld, aides to President Gerald R. Ford, that raising tax rates would reduce tax revenue by hampering growth.

The Trump Tax Idea That’s a Boon for Shareholders
David J. Herzig, The New York Times

One of the proposals in the Republican tax plan set out last week — a bid to get American corporations to “repatriate” their untaxed corporate overseas profits — has support both in Congress and in the Trump administration. As much as $2.6 trillion in such profits sits in offshore subsidiaries of United States corporations.

Trump and the Fed
The Editorial Board, The Wall Street Journal

Donald Trump has thrown more than one curve ball since becoming President, but his looming choice to run the Federal Reserve Board could be his biggest bender to date. He may choose a Fed Chairman who represents the monetary policies that have favored the affluent and done little or nothing for the real economy.

Research Reports

A Tough Act to Follow: Contrast Effects In Financial Markets
Samuel M. Hartzmark and Kelly Shue

A contrast effect occurs when the value of a previously-observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets.