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Finance Brief: Mnuchin Says Higher Debt Ceiling Should Be Linked to Harvey Aid


Government Brief

  • Treasury Secretary Steven Mnuchin said a $7.9 billion Hurricane Harvey relief package should be linked with the spending limit increase Congress needs to pass so that the United States will not default on its debt. Without a higher debt ceiling, Mnuchin said he was “not comfortable” that lawmakers could get the necessary funds to rebuild parts of Texas. (Associated Press)
  • U.S. Ambassador to the United Nations Nikki Haley asked the U.N. Security Council to adopt the strongest sanctions possible against North Korea, which conducted a nuclear test over the weekend, and said the United States would scrutinize North Korea’s trading partners as countries that are possibly aiding North Korea’s “reckless and dangerous intentions.” (CNN)
  • Canada is holding firm to positions that Washington might find difficult to accept in the renegotiations of the North American Free Trade Agreement. Ottawa is pushing ambitious goals for labor and environmental regulations and holding back from fully supporting some language it had agreed to in the Trans-Pacific Partnership. (The Wall Street Journal)

Business Brief

  • A White House review use of the term “systemically important financial institutions” as a descriptor for nonbank financial organizations is expected in a forthcoming U.S. Treasury report. It is uncertain whether the review will call for the elimination of the “too big to fail” label, but analysts say that it’s likely that regulators would limit its use. (The New York Times)
  • Consumer Financial Protection Bureau Director Richard Cordray sidestepped questions about a run for Ohio governor at the annual AFL-CIO Labor Day picnic in his home state. He said that his appearance at the event didn’t hold any special significance, adding that he has commuted to Ohio every weekend for six years. (The Washington Post)
  • The prices of bitcoin and ether sank after Chinese regulators declared initial coin offerings illegal. The country’s announcement on Monday calling for bitcoin fundraising to “cease immediately” follows recent endorsements for the digital currency from prominent U.S. celebrities, such as Paris Hilton and Floyd Mayweather. (The Wall Street Journal)

Chart Review

Events Calendar (All Times Local)

Tuesday
SEC’s Clayton speech at NYU 5:30 p.m.
Wednesday
House Financial Services subcommittee hearing on financing for lone-wolf terrorist attacks 2 p.m.
Mercatus Center discussion with former Treasury Secretary Lawrence Summers 3:30 p.m.
Thursday
Urban Institute event on tax policy and immigrant experience 9 a.m.
FDIC fall research conference 9 a.m.
Senate Banking Committee markup of FSOC insurance bill, Quarles & Otting nominations 9:30 a.m.
Senate Banking Committee hearing on North Korea sanctions 9:30 a.m.
House Financial Services subcommittee hearing on financial regulation legislation 10 a.m.
National Economists Club luncheon on economic academia 12 p.m.
House Financial Services subcommittee hearing on FINRA oversight 2 p.m.
Friday
FDIC fall research conference 8 a.m.

General

Mnuchin: Congress should tie Harvey aid to debt limit bill
Hope Yen, The Associated Press

Congress needs to combine a $7.9 billion disaster relief package for Harvey with a contentious increase in the nation’s borrowing limit, Treasury Secretary Steven Mnuchin says, arguing it is needed to ensure storm victims in Texas get the help they need. “The president and I believe that it should be tied to the Harvey funding,” Mnuchin said.

Haley: Kim Jong Un ‘begging for war’
Jeremy Herb, CNN

US Ambassador to the United Nations Nikki Haley said Monday that North Korean leader Kim Jong Un was “begging for war” as she urged the UN Security Council to adopt the strongest sanctions measures possible to stop Pyongyang’s nuclear program. Speaking at a Security Council emergency meeting, Haley said North Korea’s sixth nuclear test was a clear sign that “the time for half measures” from the UN had to end.

Canada Emerges as a Tough Negotiator in Nafta Talks
William Mauldin et al., The Wall Street Journal

The latest challenge to renegotiating the North American Free Trade Agreement is coming from an unexpected direction: Canada. For months, President Donald Trump has pointed the finger at Mexico as the source of U.S. trade deficits in North America, and U.S. officials are pushing for new provisions in the 23-year-old trade pact that would make it harder for Mexican manufacturers to send goods to the U.S. duty free.

NAFTA talks progress on energy, telecoms, customs: lobby group
Reuters Staff

Trade negotiators from Canada, the United States and Mexico have made headway on issues including energy, small businesses and telecommunications in talks to revamp the North American Free Trade Agreement (NAFTA), the head of a top business lobby said on Monday. “I think we’ve made a lot of progress,” said Juan Pablo Castañon, head of the Consejo Coordinador Empresarial (CCE), which represented Mexico’s private sector during the trade talks.

U.S. autos content demands loom as obstacle in NAFTA talks
David Lawder and Dave Graham, Reuters

NAFTA negotiators discussed rules of origin on Monday as the Trump administration’s expected demand for U.S.-specific automotive content requirements was emerging as a major obstacle to a deal, auto industry lobbyists said. U.S. Trade Representative Robert Lighthizer and Canadian Foreign Minister Chrystia Freeland arrived in Mexico City to close out the second round of talks to modernize the North American Free trade agreement on Tuesday along with Mexican Economy Minister Ildefonso Guajardo.

Stocks Bounce as Traders Refocus on Central Banks: Markets Wrap
Robert Brand, Bloomberg

European stocks bounced after Monday’s losses as traders shifted focus from North Korea to a week packed with central-bank decisions, Federal Reserve speakers and economic data that will help illuminate the path of the global economy. Futures on the S&P 500 Index decreased 0.3 percent.

Banking

Australia’s Commonwealth Bank slapped with class-action suit
Paulina Duran, Reuters

Commonwealth Bank of Australia was hit on Tuesday with potentially Australia’s biggest class-action lawsuit over a money-laundering scandal that has already smashed its share price and exposed it to billions of dollars in fines. Litigation financier IMF Bentham Ltd said it would fund the lawsuit against Australia’s biggest bank, accusing it of making false and misleading statements and failing to disclose breaches of anti-money laundering rules for years.

Chinese Firm With Big Stake in Lenovo to Buy Control of Luxembourg Bank
Chad Bray, The New York Times

Legend Holdings, the Chinese company that is the computer manufacturer Lenovo Group’s largest shareholder, said on Friday that it had agreed to buy a 90 percent stake in Banque Internationale à Luxembourg for 1.48 billion euros, or about $1.75 billion. The deal was reached despite authorities in China cracking down on some overseas investments because of concerns about increasing levels of debt at some of the country’s biggest conglomerates.

Banks Step Up Employee Surveillance After Latest Wells Scandal
Hugh Son, Bloomberg

Banks already using algorithms to monitor traders are looking to expand surveillance to cover more employees in the wake of the Wells Fargo & Co. scandal. Lenders asked International Business Machines Corp. if it were possible to use the technology to also watch retail-banking salespeople, loan officers and other workers, according to Marc Andrews, a manager on the company’s Watson financial services team.

Financial Products and Investments

‘Too Big to Fail’ Label May Shrink for Some Firms Under Trump
Victoria Finkle, The New York Times

The Trump administration is examining the labeling of large non-bank financial institutions as “too big to fail,” with a closely anticipated Treasury Department report on the initiative expected next month. It is unclear whether the White House will move to entirely eliminate the label, a product of the Dodd-Frank financial regulations, but analysts and industry officials predict that its use will most likely be curtailed significantly.

Richard Cordray dodges questions — again — about his political ambitions
Kevin Williams and Renae Merle, The Washington Post

The annual AFL-CIO Labor Day picnic is a staple for up-and-coming Democrats in Ohio. Surrounded by welders, electricians and their families eating hot dogs, Richard Cordray, the state’s former attorney general, joined their ranks Monday.

Trump nominates Columbia law professor, former Treasury aide to SEC
Sylvan Lane, The Hill

President Trump plans to nominate Robert Jackson Jr., a Columbia Law School professor and former Treasury Department adviser to serve on the Securities and Exchange Commission (SEC), the White House announced Friday. Jackson served as a special assistant to the Treasury Department during the 2008 financial crisis, focusing on executive compensation caps mandated by the Troubled Asset Relief Program (TARP).

Housing and GSEs

Before Harvey, Houston Had a Glut of Rentals. Not Any More
Laura Kusisto and Valerie Bauerlein, The Wall Street Journal

Not even two weeks ago, this city had one of the weakest apartment markets in the country with tens of thousands of vacant units. Now landlords say prospective renters are lining up outside their doors and some have almost no units left.

Harvey Makes Trump Rethink Draining Swamp at Key Housing Agency
Benjamin Bain, Bloomberg

The long-term recovery for thousands of Texans whose homes were decimated by Hurricane Harvey rests with a Trump administration government outsider who wants his agency’s budget cut by billions of dollars. After the flood waters around Houston recede and the Federal Emergency Management Agency disaster officials leave, Ben Carson’s Department of Housing and Urban Development will take on the complicated task of getting victims back into permanent residences.

Taxes

Pessimism abounds on Trump tax reform effort
Alexander Bolton, The Hill

Tax lobbyists and Wall Street rate the prospects of tax reform as very low. One veteran tax lobbyist, a former member of the Senate Finance Committee staff, said the chances of a broad tax reform package similar to the 1986 rewrite of the code are “zero.”

Tax reform advocates hope GOP can avoid September catastrophes
Naomi Jagoda, The Hill

Stakeholders hoping that the Republican Congress and President Trump can make meaningful progress this fall on tax reform say those efforts could be upset by difficult legislative hurdles in September. Looming deadlines to avert a government shutdown and raise the debt limit have created a busy month for Congress, and one that could create new obstacles for tax reform if they are not handled carefully.

Tax reform near the top of Congress’ lengthy to-do list
Ashley Killough and Lauren Fox, CNN

When lawmakers return this week from the August recess, they’ll face a bevy of must-do tasks, but chief among them is a long-held Republican agenda item: comprehensive tax reform. Enthusiasm levels are high for the mountainous challenge, as tax reform is a widely popular idea, and Republicans are desperate for a major legislative accomplishment they can tout in next year’s midterm elections.

Financial Technology

China Bans Digital Coin Offers as Celebrities Like Paris Hilton Tout Them
Paul Vigna, The Wall Street Journal

Chinese regulators on Monday declared initial coin offerings illegal, dealing a blow to the latest financial-markets mania and sending the prices of the two leading cryptocurrencies, bitcoin and ether, tumbling. The move by China, which included a call for fundraising activities through the digital tokens to “cease immediately,” follows on the heels of a recent warning by the U.S. Securities and Exchange Commission that it may treat the coins as securities.

Lattice to Seek Trump’s Approval for Chinese-Backed Buyout
Michael J. de la Merced, The New York Times

The Trump administration will soon face a test of its China economic policy, as a chipmaker plans to appeal to the White House for approval of its proposed sale to a Chinese-backed buyer. The chipmaker, Lattice Semiconductor, disclosed in a regulatory filing on Friday that a government committee tasked with reviewing mergers for national security concerns planned to recommend blocking its proposed $1.3 billion sale to Canyon Bridge, a private equity firm backed in part by Chinese investors.

Bitcoin sell-off resumes, crypto currency down almost 20% from weekend high
Adam Samson, Financial Times

Definitely not a safe haven. Bitcoin dropped again on Tuesday, with the cyber currency facing its worst two days in more than a month amid mounting anxiety over a regulatory decision by China.

A Message from the Electronic Payments Coalition:

A majority of voters are concerned with data breaches, yet there are no national data security standards to protect consumers at checkout. It’s time retailers share responsibility for data security. Learn more from the Electronic Payments Coalition.

Opinions, Editorials and Perspectives

Trump: We must fix our self-destructive tax code
Donald Trump, Milwaukee Journal Sentinel

As we celebrate Labor Day, we are reminded of the inherent dignity of work and the American worker. In America, we honor grit.

The last big piece of unfinished business from the Great Recession
The Washington Post Editorial Board

On Wednesday, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. will mark their ninth anniversary under what was supposed to have been temporary federal control, but Congress still seems far from legislating a permanent fix for the housing finance giants. The two entities continue to back roughly half of all residential mortgages in the United States; and they continue to do so under the conservatorship of their regulator, the Federal Housing Finance Agency (FHFA).

Making Growth Great Again
Kimberley A. Strassel, The Wall Street Journal

In May 2014, a broad collection of thinkers and politicians gathered in Washington to celebrate a new conservative “manifesto.” The document called for replacing stodgy old Reaganite economics with warmer, fuzzier handouts to the middle class.

The False Promises in President Trump’s Tax Plan
New York Times Editorial Board

As they return to Washington this week from their August recess, House Republicans on the Ways and Means Committee have their work cut out for them. Their job is to draft a major tax-cut bill for Congress to pass, ideally by year-end, to avoid closing out 2017 without a single big legislative win.

When the Rich Said No to Getting Richer
David Leonhardt, The New York Times

A half-century ago, a top automobile executive named George Romney — yes, Mitt’s father — turned down several big annual bonuses. He did so, he told his company’s board, because he believed that no executive should make more than $225,000 a year (which translates into almost $2 million today).

America needs its unions more than ever
Lawrence Summers, Financial Times

The central issue in American politics is the economic security of the middle class and their sense of opportunity for their children. A pervasive sense of vulnerability and missing opportunity leads to dissatisfaction, reduces faith in government and institutions, diminishes willingness to support the least fortunate, increases resentment towards members of other ethnic groups and fuels truculence towards other nations.

A Message from the Electronic Payments Coalition:

Four times as many voters trust financial institutions over retailers to create new, more secure ways to pay, which is just one reason why the payments industry is focused on innovation. Banks and credit unions are continuously working to provide consumers with the latest security features when they pay. Get the latest from EPC.

Research Reports

The U.S. Treasury Premium
Wenxin Du et al., The National Bureau of Economic Research

We quantify the difference in the convenience yield of U.S. Treasuries and the bonds of near default-free sovereigns by measuring the gap between the FX swap-implied dollar yield paid by foreign governments and the U.S. Treasury dollar yield. We call this wedge the “U.S. Treasury Premium.”