Finance Brief: Puerto Rico Plan to Get Review, Wells Fargo Changes May Not Go Far Enough

By Ryan Rainey and Tara Jeffries

Today’s Washington Brief

  • Puerto Rico Gov. Alejandro García Padilla rolled out the commonwealth’s fiscal plan proposal designed to resolve its current debt crisis. A congressionally established federal oversight board will review the plan and question Padilla on how tax policy, government spending and financial reporting could be altered. (The New York Times)
  • Hillary Clinton’s paid, nonpublic speeches to Goldman Sachs Group were leaked as part of the latest disclosure of hacked emails obtained by the group WikiLeaks. Clinton’s remarks highlighted what she viewed as the “political” reasons for the 2010 Dodd-Frank Act, and they also indicated skepticism about the effectiveness of regulations. (Bloomberg News)
  • The Securities and Exchange Commission has beefed up enforcement of abuses in public finance, the agency’s enforcement director says. The SEC has already increased its enforcement in the sector by conducting over 100 enforcement actions since 2013, compared to 24 from 2002 through 2012. (The Hill)

Today’s Business Brief

  • Despite changes in the senior leadership at Wells Fargo & Co., the bank’s culture still hasn’t changed significantly in the fallout from a weeks-long cross-selling scandal, experts said. One professor said that naming current CEO Tim Sloan to his new position on an interim basis, rather than permanently, could help inject the bank with an impetus to change and bring in new faces. (Reuters)
  • Ohio became the latest state to suspend doing business with Wells Fargo  for one year. Gov. John Kasich (R) said all state agencies under his authority will not do business with the bank, including for debt issuing services. (Business Insider)
  • Wall Street firms are weighing how to deal with new regulations aimed at retaining risk that require financial engineers to hold onto at least 5 percent of the securities they create. The firms want to find outside companies that will buy the complex securities to help them reach the 5 percent minimum holding requirement laid out in the rules, which go into effect in December.  (The Wall Street Journal)

Today’s Chart Review

Quarterly Bank Earnings
Financial Times

Mark Your Calendars (All Times Eastern)

Monday
American Council of Life Insurers annual conference 7:15 a.m.
American Bankers Association annual conference in Nashville 8 a.m.
Council on Foreign Relations world economic update 8:30 a.m.
Penn-Wharton Budget Model webinar on presidential tax plans 9:30 a.m.
Tuesday
ACLI annual conference 7:15 a.m.
ABA annual conference in Nashville 8 a.m.
Information Technology and Innovation Foundation event on financial technology 9 a.m.
Enterprise Forum event on blockchain 5:30 p.m.
Wednesday
Coalition of Services Industries Global Services Summit 8:45 a.m.
Thursday
SIFMA/FINRA Senior Investor Protection Conference 8 a.m.
New York Fed conference on culture and behavior in banking 8:30 a.m.
CSI Global Services Summit 8:45 a.m.
Friday
SIFMA/FINRA Senior Investor Protection Conference 8 a.m.

 

General

Puerto Rico’s Governor Warns of Fiscal ‘Death Spiral’
Mary Williams Walsh, The New York Times

Reach for your wallets. It is going to be expensive to pull America’s largest territory out of its death spiral, Puerto Rico’s outgoing governor warned the island’s new federal oversight board on Friday.

Clinton Goldman Speech Transcripts Show Little to Match Fuss
Mark Niquette and Alan Levin, Bloomberg News

Transcripts purported by WikiLeaks to be of three speeches Democratic presidential nominee Hillary Clinton gave to Goldman Sachs Group Inc. in 2013 show less than might have been expected from all the attention the appearances have received in the presidential campaign.

Hillary Clinton Really, Really Wanted Bill To Give One Last Wall Street Speech
Zach Carter, The Huffington Post

Hillary Clinton’s campaign staffers knew that her paid speeches to Wall Street could be a political liability for her 2016 run, according to private emails disclosed by WikiLeaks. But even as she prepared to formally announce her presidential bid, she resisted entreaties from several staffers to have her husband, former President Bill Clinton, cancel one last speech to Morgan Stanley.

Scoring the next presidential debate for Social Security
Russ Wiles, The Arizona Republic

The first two presidential debates pitting Donald Trump against Hillary Clinton have meandered into a variety of topics, but Social Security hasn’t been among them. The presidential contenders managed to talk about carried interest — an arcane financial topic if there ever was one — while ignoring the nation’s largest retirement program.

EU Asks U.S. For Improved Financial Services Access In TISA, According To Leaked Docs
Inside U.S. Trade

The European Union is asking that the U.S. make a series of improvements to its Trade in Services Agreement market access offer, most notably in the financial services sector, according to a leaked copy of its bilateral request.

Despite economic recovery, many Americans still feeling anxious
Adam Allington, Marketplace

The latest Marketplace-Edison Research Poll shows that anxiety has increased despite the fact that 37 percent report that their personal situation has improved since last year. This is somewhat counterintuitive given that we’re several years into a wide-ranging economic recovery, albeit one characterized by slow growth.

Bonds Selloff Spreads on Inflation Concern; Stocks Fall With Oil
James Regan and Alan Soughley, Bloomberg News

Government bonds retreated around the world after comments by Federal Reserve Chair Janet Yellen fueled concern that policy makers will tolerate faster inflation. S&P 500 Index futures retreated 0.3 percent, after U.S. equities ended Friday little changed following a late-afternoon selloff.

Banking

Lack of new blood casts doubt over Wells Fargo’s change plan
Dan Freed, Reuters

Wells Fargo & Co’s decision not to introduce new names onto its board or into the ranks of its senior management in the wake of a sales scandal has raised questions about whether it can truly fix the culture which caused its problems. The United States’ third-largest bank by assets has been plunged into crisis by revelations that its branch staff created as many as 2 million accounts without customers’ knowledge in order to meet internal sales targets.

Ohio is dumping Wells Fargo after John Kasich called the bank a ‘disgrace’
Allan Smith and Bob Bryan, Business Insider

John Kasich is furious at Wells Fargo, and now his state is cutting off its business with the bank for at least one year. In an interview with Business Insider on Thursday, the Ohio governor and one-time 2016 Republican presidential contender said Wells Fargo executives should be held accountable for the bank’s recent fraudulent-accounts scandal.

Federal Reserve Chair Janet Yellen: Question everything
Ylan Q. Mui, The Washington Post

Federal Reserve Chair Janet L. Yellen on Friday questioned some of the most fundamental principles of economics, including the nature of inflation and the influence of financial markets, as the central bank navigates the nation’s slow-burning recovery. Speaking at a conference organized by the Federal Reserve Bank of Boston, Yellen made no mention of when the central bank might raise its benchmark interest rate.

Deutsche Bank considering changes to U.S. strategy: sources
Kathrin Jones and Alexander Huebner, Reuters

Deutsche Bank is studying a possible change of its strategy in the United States, where it is fighting a $14 billion fine the Department of Justice (DoJ) is requiring over the sale of toxic mortgage bonds before the financial crisis, two sources close to the company said on Saturday. They said that while abandoning the United States, its most important market, altogether was very likely out of the question for the bank, it could consider scaling down its activities, so as to focus more on the needs of German corporate clients overseas.

US investment banking makes a comeback
Ben McLannahan, Financial Times

The “last man standing” strategies could be paying off. Third-quarter results last week from the trading and advisory units of JPMorgan Chase and Citigroup, two of the top three banks by investment-banking revenues, suggest that more good news is likely from Goldman Sachs and Morgan Stanley, which report on Tuesday and Wednesday this week.

Financial Products and Investments

SEC stepping up enforcement of public finance market
Timothy Weatherhead, The Hill

Over the last three years, the Securities and Exchange Commission’s Enforcement Division has used sweeps to dramatically increase the number of enforcement measures brought against bad actors in the public finance market, Director Andrew Ceresney said. Ceresney’s division has brought enforcement actions against 76 state or local governments, 13 obligated individuals and 16 public officials since 2013. From 2002-2012, the division brought enforcement actions against six government entities, six obligated individuals and 12 public officials.

Financial Engineers Take On New Rule With More Engineering
Sam Goldfarb and Serena Ng, The Wall Street Journal

A major postcrisis rule taking effect in December will force Blackstone Group LP and other creators of complex securities to eat some of their own cooking. Many of them are already engineering ways to keep it to a nibble.

Miami to Pay $1M Civil Penalty to SEC
Shelly Sigo, The Bond Buyer

Miami officials will pay $1 million to settle securities fraud charges after the city was found guilty by a local jury of playing a shell game to hide its deteriorating financial condition from bondholders. City commissioners, without making any public comments late Thursday, voted 4-0 to end the federal case brought in 2013 by the Securities and Exchange Commission by paying the largest civil penalty ever imposed against a municipality.

How Wall St. Regulation Pushed Up Libor, and Borrowing Costs
William D. Cohan, The New York Times

Is there any significance to the fact that a short-term interest rate has nearly tripled in the last year, to 0.86 percent from 0.32 percent? The short answer, of course, is yes.

Housing & GSEs

Bond Investors Question Pilot Program for Mortgage Insurers
Matt Scully and Joe Light, Bloomberg News

Bond investors including AllianceBernstein Holding LP are criticizing proposals from Fannie Mae and Freddie Mac designed to transfer more of their risk to insurance companies. The money managers have raised concerns about pilot programs by the two U.S.-controlled mortgage companies to share more risk with the guarantors, and are pressing trade groups to lobby against components of the plans.

Taxes

Watchdog: IRS wasted $12M on software subscriptions
Naomi Jagoda, The Hill

The IRS wasted $12 million on subscriptions for software that it couldn’t utilize, the Treasury Inspector General for Tax Administration (TIGTA) said in a report made public this week. “The purchase was made without first determining project infrastructure needs, integration requirements, business requirements, security and portal bandwidth, and whether the subscriptions were technologically feasible on the IRS enterprise,” TIGTA said.

Financial Technology

How OCC Will Assess Fintech Firms for Charter
Lalita Clozel, American Banker

In a sit-down interview, Amy Friend, the OCC’s chief counsel, details how the agency would evaluate firms for a possible fintech charter, whether the charter would favor particular kinds of companies and what happens next in the process.

Opinions, Editorials & Perspectives

Officials must break silence over Wells scandal
Jonathan Ford, Financial Times

Have the revelations of the post-crisis years desensitised authorities to basic law breaking? It can sometimes feel that way.

The Cashless Society Is a Creepy Fantasy
Elaine Ou, Bloomberg View

It’s fun to imagine a world without cash. Liberated from the burden of physical currency, consumers could make purchases from the convenience of a mobile device.

A Judicial Slap to a Careless Congress
George Will, National Review

Another small step was taken last week on the steep and winding ascent back to constitutional norms. The U.S. Court of Appeals for the D.C. Circuit, the nation’s second-most important court, did its judicial duty by reprimanding Congress for abandoning constitutional propriety.

Stop Saying A Trump Win Would Cause A Recession
Ben Casselman, FiveThirtyEight

Billionaire investor Mark Cuban says a Donald Trump victory would cause the stock market to “tank.” The forecasting firm Macroeconomic Advisers says stocks would fall 8 percent if he wins.

Financial crisis 2.0?
Robert J. Samuelson, The Washington Post

While everyone fixates on the U.S. election, developments in the world economy threaten to create problems for the next president and, possibly, trigger a major financial crisis. A little-noticed study by the International Monetary Fund (IMF) delivers the bad news.

Queen Elizabeth Gives Orders to Hillary
Editorial Board, The Wall Street Journal

As Hillary Clinton expands her lead in the polls, Democrats are angling to influence her choices for policy-making jobs. Witness Elizabeth Warren’s extraordinary demand on Friday that President Obama demote Mary Jo White as chair of the Securities and Exchange Commission.

O’Connor: For Trump, ‘CFPB’ is the real dirty word
Brian J. O’Connor, The Detroit News

Leaving aside other things that might be snatched away if the Raging Pumpkin of Doom becomes president, let’s turn our attention to the Consumer Finance Protection Bureau. The CFPB is the cop on the personal finance beat and just busted Wells Fargo for bilking customers holding nearly 1 million accounts out of at least $2.5 million.

Community Banks Under Siege By Dodd-Frank
Johnathan Sargent, Americans for Tax Reform

Regulations imposed by Dodd-Frank have crippled America’s community banks. In the years following its passage, the financial services industry has witnessed a steady decline in the number of community banks operating in America. As these banks disappear, so does the valuable services that they provide communities and small businesses every day.

Research Reports, Issue Briefs & Case Studies

Minimum Payments and Debt Paydown in Consumer Credit Cards
Benjamin J. Keys and Jialan Wang, The National Bureau of Economic Research

Using a dataset covering one quarter of the U.S. general-purpose credit card market, we document that 29% of accounts regularly make payments at or near the minimum payment. We exploit changes in issuers’ minimum payment formulas to distinguish between liquidity constraints and anchoring as explanations for the prevalence of near-minimum payments.