Finance Brief: Puerto Rico Warns of Government Shutdown If It Doesn’t Get More Aid


Government Brief

  • New York Rep. Chris Collins said that it was “ironclad” that there will be no full repeal of the state and local tax deduction in final tax legislation, based on his conversations with GOP leaders. Earlier on Wednesday, House Ways and Means Chairman Kevin Brady told CNBC he couldn’t confirm that congressional leaders may back off the call for a full repeal. (Bloomberg)
  • The Senate voted 62-33 to limit debate on Randal Quarles’ nomination to join the Federal Reserve’s Board of Governors, ensuring opponents could not delay his confirmation. Trump nominated the former Treasury Department official in July, and Quarles is expected to take the role of vice chair for supervision at the Fed. (Reuters)
  • A Treasury Inspector General for Tax Administration report set to be released today found that between 2004 and 2013 the Internal Revenue Service selected dozens of liberal-leaning groups for intensive review alongside conservative organizations. A 2013 report found that 96 groups with names referencing “Tea Party,” “Patriot” or “9/12” were selected for scrutiny between May 2010 and May 2012, prompting GOP lawmakers to accuse the Obama administration of targeting conservatives. (The Washington Post)

Business Brief

  • Puerto Rico’s Treasury Secretary Raul Maldonado said the island will face a government shutdown on Oct. 31 if it does not receive billions of dollars in emergency aid in the aftermath of Hurricane Maria. Already struggling with $74 billion in debt, the commonwealth’s government now needs more money for necessities such as fuel and food aid. (Bloomberg)
  • Senators questioning Equifax Inc.’s former CEO Richard Smith over the company’s massive breach attacked the business model of the credit-reporting industry and questioned why consumers don’t have more power over the data the companies collect on them. Members of the Senate Banking Committee also asked whether sweeping changes are needed for both private sector and government activities. (The Wall Street Journal)
  • Wells Fargo said it will refund fees imposed on customers whose delays in completing their mortgage loan applications were primarily the bank’s fault. The San Francisco-based bank said it would reach out to about 110,000 customers who paid the fees from Sept. 16, 2013, through Feb. 28, 2017, for mortgage rate lock extensions, which are charged when borrowers don’t finish their paperwork on time and want to retain the initially quoted interest rate on their home loan. (The Los Angeles Times)

Chart Review

Events Calendar (All Times Local)

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.
NTU event with Sen. Ted Cruz 3 p.m.
Friday
Heritage event with FINRA’s Cook 12 p.m.
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General

Puerto Rico Is Running Out of Money
Ezra Fieser, Bloomberg

Puerto Rico faces a government shutdown on Oct. 31, including halting its hurricane recovery, if Congress doesn’t provide billions in emergency funds, said Treasury Secretary Raul Maldonado. The U.S. commonwealth’s bankrupt government is burning through the $1.6 billion it had on hand before Hurricane Maria ravaged the island, destroying decayed infrastructure and killing 34 people.

Trump nominee clears Senate hurdle to join Federal Reserve
Pete Schroeder, Reuters

The head of a private investment firm came one step closer to leading the Federal Reserve’s regulatory efforts Wednesday, a key post as President Donald Trump endeavors to trim regulations to boost economic growth. The U.S. Senate voted 62-33 to limit debate on Randal Quarles’ nomination to join the Fed’s Board of Governors, guaranteeing opponents could not delay his confirmation.

Treasury moves to undo Obama tax rules, including anti-inversions regulation
Joseph Lawler, Washington Examiner

President Trump’s Treasury Department announced Wednesday that it plans to undo many of former President Barack Obama’s tax regulations, including a measure issued over the protests of business meant to penalize companies that move their headquarters out of the U.S. to reap tax breaks. “This is only the beginning of our efforts to reduce the burden of tax regulations,” Secretary Steven Mnuchin said Wednesday on issuing an 11-page report outlining the planned actions.

Euro Steady as Spanish Stocks Climb; Pound Weakens: Markets Wrap
Eddie Van Der Walt, Bloomberg

The euro traded little changed and investors snapped up Spanish bonds while the nation’s stocks recovered as Economy Minister Luis de Guindos poured cold water on Catalonia’s bid for independence. The pound fell against most major peers as political noise swirls around U.K. Prime Minister May’s leadership.

Banking

Dem bill would shut down banks over Wells-caliber abuses
Lalita Clozel, American Banker

Rep. Maxine Waters, D-Calif., introduced a bill Wednesday outlining a process to break apart systemically important big banks that engage in widespread consumer abuse. The bill, sparked by Wells Fargo’s ongoing fake-accounts scandal, was backed seven by other Democrats.

Yellen Says Fed Is Working on Tailoring Regulations to Bank Size
Jeanna Smialek, Bloomberg

Federal Reserve Chair Janet Yellen said the U.S. central bank has been working to ensure that regulations are tailored to the size, complexity and roles of the lenders it oversees.“For community banks, which by and large avoided the risky business practices that contributed to the financial crisis, we have been focused on making sure that much-needed improvements to regulation and supervision since the crisis are appropriate and not unduly burdensome,” Yellen said Wednesday.

Wall Street Regulator Is Also an Investor—With Meager Returns 
Dave Michaels, The Wall Street Journal

The Financial Industry Regulatory Authority is more than just a Wall Street regulator. Rare among regulators and little known to many industry participants, Finra is also an investor—and one whose subpar returns are compounding its members’ financial challenges, say some of the brokerages that pay its fees.

Financial Products and Investments

Senators Rip Credit-Reporting Model in Wake of Equifax Breach
AnnaMaria Andriotis et al., The Wall Street Journal

Senators questioning Equifax Inc.’s former chief Wednesday attacked the business model of the credit-reporting industry, asking why consumers shouldn’t have power over the data that these companies collect on them. The hearing before the Senate Banking Committee was as much about the control consumers have over their personal data as it was about the Equifax hack, which has affected potentially 145.5 million Americans.

SEC chief Jay Clayton tells lawmakers agency is drafting its own fiduciary duty rule
Mark Schoeff Jr., Investment News

Securities and Exchange Commission Chairman Jay Clayton told lawmakers on Wednesday that the agency is drafting a proposal for a fiduciary rule. The agency is trying to catch up with the Department of Labor, which partially implemented its own fiduciary rule in June and is currently conducting a review of the regulation’s enforcement mechanisms as ordered by President Donald J. Trump that could lead to revisions.

Housing and GSEs

Wells Fargo to refund fees charged for mortgage delays that were primarily its own fault
Lauren Raab, The Los Angeles Times

Wells Fargo & Co. said Wednesday that it will refund a swath of fees it assessed to mortgage borrowers whose delays in completing their loan applications were primarily the bank’s fault. As it looks to win back trust after a scandal over its sales practices, the San Francisco bank said it will reach out to customers who paid so-called “rate-lock extension” fees from Sept. 16, 2013, through Feb. 28, 2017, and give refunds to customers who don’t think they should have paid.

CFPB gives more time to reach troubled borrowers in servicer rule revision
Kate Berry, American Banker

The Consumer Financial Protection Bureau said Wednesday that it would give mortgage servicers more time to send early intervention notices to distressed borrowers who have asked not to be contacted about the collection of their debts. The CFPB issued an interim final rule to give servicers a longer, 10-day window to provide modified early intervention notices to borrowers facing foreclosure.

Taxes

New York Lawmaker Says It’s ‘Ironclad’ That State Tax Break Won’t Get Axed
Sahil Kapur, Bloomberg

Representative Chris Collins of New York said Wednesday he’s spoken to key Republicans who have signaled to him the state and local tax deduction will be preserved in some form. “It’s ironclad that you will not see a full repeal, which was initially within the framework. That there will be an accommodation. And it could be any one of six different flavors or combinations of flavors,” Collins said in an interview.

Liberal groups got IRS scrutiny, too, inspector general suggests
Mike DeBonis, The Washington Post

A federal watchdog has identified scores of cases in which the Internal Revenue Service may have targeted liberal-leaning groups for extra scrutiny based on their names or political leanings, a finding that could undermine claims that conservatives were unfairly targeted under President Barack Obama.The Treasury Inspector General for Tax Administration (TIGTA) reviewed cases between 2004 and 2013, which includes the period TIGTA previously examined in a 2013 report that faulted the IRS for using inappropriate political criteria to select groups for heightened scrutiny.

Koch Group Pressures Democratic Senators to Back Tax Overhaul
Rebecca Ballhaus, The Wall Street Journal

A group backed by billionaire industrialists Charles and David Koch on Thursday launched a $4.5 million advertising campaign urging three vulnerable Democratic senators to support the Republican effort to overhaul the U.S. tax code. Americans for Prosperity, one of the Koch network’s largest political advocacy groups, will air ads in Missouri, Wisconsin and Indiana encouraging those states’ Democratic senators— Claire McCaskill, Tammy Baldwin and Joe Donnelly, respectively—to back the tax proposal unveiled by President Donald Trump and GOP leaders last week.

GOP Budget Kicks Off Effort on Tax Cuts. Now Comes the Hard Part
Eric Wasson, Bloomberg

House and Senate Republicans will take their first concrete steps Thursday toward enacting a major U.S. tax cut by advancing budget resolutions for fiscal 2018 — and it only gets harder from here.”It’s uphill, there’s no doubt about that,” Senator Orrin Hatch of Utah, chairman of the tax-writing Finance Committee, told reporters Wednesday about the road forward.

U.S. budget deficit could obstruct Trump’s tax cut plan
David Morgan and Susan Cornwell, Reuters

The U.S. budget deficit is proving to be a major obstacle to the tax reform plan being offered by President Donald Trump and top congressional Republicans, with one leading Senate hawk saying a week after the plan was introduced that any enlarging of the fiscal gap could kill his support.From proposed infrastructure enhancements to a military build-up, the deficit long ago put the brakes on major new federal spending programs; now Trump’s tax-cut proposal is threatened.

Financial Technology

Navient to Buy Fintech Firm Earnest for $155 Million
Peter Rudegeair, The Wall Street Journal

Navient Corp. , one of the largest U.S. companies that collects payments on student debt, jumped into the lending business on Wednesday by agreeing to acquire financial-technology startup Earnest Inc. The Wilmington, Del.-based company, which spun off from student lender SLM Corp., or Sallie Mae, in 2014, will pay $155 million in cash for Earnest.

SoFi’s Plan to Become the Bank of the Future Isn’t Going So Well
Julie Verhage and Selina Wang, Bloomberg

Just a few years after Mike Cagney co-founded Social Finance Inc., he was already talking about how his new venture was going to “kill banks.” Having built a decent business refinancing student loans taken out by graduates from top universities, SoFi’s brash and quirky founder dreamed of creating a “Wells Fargo of the future.”

Opinions, Editorials and Perspectives

Closing the Insurance Tax Haven Loophole Key to Comprehensive Tax Reform
William F. Berkley, Morning Consult

As lawmakers launch the first serious effort to achieve comprehensive tax reform in three decades, one consistent challenge persists: how to pay for the heart of the effort, which is lower tax rates. In comprehensive reform, every dollar counts.

Tax Reform Isn’t a Popularity Contest
Karl Rove, The Wall Street Journal

There’s no tax-reform bill yet, only a framework, but the left is already trumpeting the old argument that Republicans want to help their rich buddies while blowing up the deficit. It’s déjà vu all over again: We’ve heard this from Democrats since the fights over the Reagan tax cuts in the 1980s.

Fear of Federal Debt Has Faded, but Risks Remain
Binyamin Appelbaum, The New York Times

The federal government learned over the last half-century that it could run up a much larger debt than experts had previously considered prudent or even possible. Now, as Republicans push a tax plan that would propel the federal debt to new heights, experts are debating the lessons of that history. Some see evidence that the downside of deficits is greatly overstated; others say the country just hasn’t reached the precipice.

How We Think About the Deficit Is Mostly Wrong
Stephanie Kelton, The New York Times

With their nine-page “framework,” President Trump and congressional Republicans have turned to tax cuts in a bid to get a victory on their policy agenda. Mr. Trump has promised to deliver “the biggest tax cut in the history of our country.” It achieved a rare feat of bipartisan agreement in Washington — worry from the left and the right about the plan’s potential to increase the deficit.

This GOP tax proposal isn’t fair. Here’s what would be.
The Editorial Board, The Washington Post

Gary Cohn, a Trump administration cheerleader for tax reform, said recently that the administration is “trying to get rid of all of the loopholes and all of the deductions that mostly wealthy people use.” Unfortunately, that is not the case.

Research Reports

Real Exchange Rate Policies for Economic Development
Martin Guzman, The National Bureau of Economic Research

This paper analyzes the role of real exchange rate (RER) policies in promoting economic development. Markets provide a suboptimal amount of investment in sectors characterized by learning spillovers.