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Finance Brief: Senate GOP Leaders Plan to Attach Debt Limit Hike to Harvey Package


Government Brief

  • Top Senate Republicans said they were likely to link a debt ceiling hike to the $7.9 billion Hurricane Harvey aid package in attempt to provide emergency relief to Texas and Louisiana without the danger of exceeding the current debt limit. The House is expected to vote on an initial version of the disaster relief package today, and if it passes, the Senate could attach the debt-limit increase and vote on the measure by end of this week. (The Washington Post)
  • U.S. Trade Representative Robert Lighthizer said he was optimistic about negotiating changes to the South Korea-U.S. free trade pact, but he did not mention any potential termination of the 5-year-old agreement.  His remarks are the first public ones about the bilateral trade deal after White House officials said last weekend that President Donald Trump was considering withdrawing from the pact. (The Wall Street Journal)
  • National Economic Council Director Gary Cohn’s argument that corporate tax cuts can help the middle class by pushing up returns at public pension funds received a mixed verdict from economic experts. They were split on whether corporate tax cuts would translate to immediate payoffs to public-sector workers, whose pension benefits are often set as monthly payments determined by a formula. (Morning Consult)

Business Brief

  • A pair of former Wells Fargo managers, who managed about 3,500 staff in Southern California combined, have sued the bank, saying they had been unfairly fired in March. Reza Razzaghipour and Marla Razzaghipour accused the bank of terminating their jobs after they questioned senior management about suspicious sales practices. (The Wall Street Journal)
  • U.S. Securities and Exchange Commission Chairman Jay Clayton told a panel at New York University that one of his top priorities will be educating smaller investors about cybersecurity issues. The SEC has also increased regulatory activity on initial coin offerings and companies offering them, said Stephanie Avakian, co-director of the SEC’s enforcement division. (Reuters)
  • The leaders of two major banks joined widespread corporate criticism of Trump’s decision to end the program that shelters undocumented immigrants brought to the United States as children from deportation. Jamie Dimon, the chairman and CEO of JPMorgan Chase, said people in the Deferred Action for Childhood Arrivals program should be allowed to stay in the country, and Goldman Sachs Chairman and CEO Lloyd Blankfein said in a Twitter post that Congress must act quickly to address the issue. (The Hill)

Chart Review

Events Calendar (All Times Local)

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
House Speaker Paul Ryan TimesTalks conversation on congressional agenda 8:40 a.m.
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

Senate leaders to vote on measure combining debt ceiling increase, hurricane relief
Kelsey Snell and Mike DeBonis, The Washington Post

Senate leaders are prepared to vote this week on legislation that would pair an increase in the federal government’s borrowing limit with $7.9 billion in disaster relief for victims of Hurricane Harvey despite opposition from conservatives. The decision to combine the two unrelated measures is a potentially risky strategy that could further alienate conservatives who have insisted that any debt-limit increase be paired with corresponding spending cuts.

U.S. Trade Representative Looks for ‘Successful’ Discussions With South Korea
Jacob M. Schlesinger and William Mauldin, The Wall Street Journal

The Trump administration’s chief trade negotiator said Tuesday that he is looking to negotiate some changes to the Korea-U.S. free-trade agreement and that he is hoping for a “successful discussion” with the South Koreans—avoiding any mention of a possible termination of the five-year-old pact. The remarks by Robert Lighthizer, the U.S. trade representative, were the first public comments by a top policy maker about the trade agreement, known as Korus, since administration officials said over the weekend that President Donald Trump was seriously considering terminating the pact, and would discuss the matter with advisers this week.

Round of NAFTA talks ends amid resistance over Mexico wages
Christopher Sherman and Mark Stevenson, Associated Press

The second round of talks on renegotiating the North American Free Trade Agreement ended Tuesday amid resistance to discussing Mexico’s low wages and large differences over dispute resolution mechanisms. The head negotiators for all three countries at the talks in Mexico City said progress had been made, but U.S. Trade Representative Robert E. Lighthizer said some areas were going to be challenging.

Hurricane Relief Bill Set to Pass House as Aid Funds Nearly Gone
Erik Wasson and Steven T. Dennis, Bloomberg

The House is set Wednesday to pass $7.4 billion for a federal disaster-relief fund two days before it’s set to run out as Hurricane Irma bears down on Florida and bills mount for a storm that flooded tens of thousands of houses in Texas. Senate Republican leaders want to use the Federal Emergency Management Agency funding measure to suspend the nation’s debt ceiling past the November 2018 elections, and possibly add a stopgap spending bill to keep the government open after Oct. 1. The House would then have to give final approval — a move that would roil that chamber’s most conservative members.

Stocks Slide as Headwinds Build; Treasuries Steady: Markets Wrap
Samuel Potter, Bloomberg

There was little optimism on display in Wednesday trading, with North Korean tensions simmering, another hurricane bearing down on the U.S. and the American debt ceiling looming. Futures on the S&P 500 Index increased 0.1 percent.

Banking

Fired Wells Fargo Managers Sue Over Sales Scandal
Emily Glazer, The Wall Street Journal

Two former managers have sued Wells Fargo claiming they were unfairly fired over the bank’s sales-practices issues. Reza Razzaghipour and Marla Razzaghipour claimed their dismissals were retaliation for them raising issues with senior managers about the questionable sales practices, such as falsification of bank records, according to a lawsuit filed Aug. 31 in Los Angeles Superior Court.

Bank CEOs say DACA recipients should be allowed to remain in US
Max Greenwood, The Hill

The top executives at two of the country’s largest banks said Tuesday that young undocumented immigrants brought to the U.S. as children should be allowed to stay in the country.  Jamie Dimon, the chairman and CEO of JPMorgan Chase, said in a statement that “when people come here to learn, work hard and give back to their communities, we should allow them to stay in the United States

How banks are coping with New York’s cybersecurity rules
Penny Crosman, American Banker

Theodore Tomita has plenty to say about the New York State Department of Financial Services’ new cybersecurity rule, which began to take effect last week, and little of it is complimentary. “It was a complete and utter waste of time,” said Tomita, a senior vice president and the chief technology officer at Catskill Hudson Bank in Monticello.

Financial Products and Investments

SEC chief says cyber crime risks are substantial, systemic
John McCrank, Reuters

Regulators must do more to help mom-and-pop investors better understand the potential risks posed by cyber crime and new technologies used to commit fraud, U.S. Securities and Exchange Commission Chairman Jay Clayton said on Tuesday. Clayton, who was appointed to the commission earlier this year, said cyber security would be one of the top enforcement issues during his tenure at the head of Wall Street’s main regulator.

Fed’s Brainard urges caution on rates in face of subdued inflation
Sam Fleming, Financial Times

The Federal Reserve should be cautious about lifting short-term interest rates further until it is confident inflation is on track to reach the central bank’s target, a senior policymaker has said as she expressed concern about the “troubling” weakness of price growth in recent years. Lael Brainard, a Federal Reserve governor, said policymakers should be making it clear they are comfortable with allowing inflation to move modestly above their target given the five-year spell of below-target readings.

Sen. Elizabeth Warren urges DOL to implement fiduciary rule without delay
Staff, Investment News

Sen. Elizabeth Warren (D-Mass.) has sent a letter to Labor Secretary Alexander Acosta asking him to implement the fiduciary rule in full, and not press forward with a delay of its partial applicability from January 2018 to July 2019. A delay, she wrote “would endanger billions of dollars in Americans’ hard-earned retirement savings and ignore the preparation and positive outlook on the rule that many financial services and insurance companies have repeatedly expressed.”

Ex-Morgan Stanley Broker Pleads Not Guilty to Insider Trades
Erik Larson, Bloomberg

A longtime Morgan Stanley broker and financial adviser pleaded not guilty to trading on secret tips about pending mergers and acquisitions leaked by a Bank of America Corp. consultant. Michael Siva, 55, got the information from a close friend, James Moodhe, whose daughter was dating the consultant at the center of the case, Daniel Rivas, prosecutors said in an August indictment.

Housing and GSEs

MBA requests mortgage industry input on unified MISMO closing instructions
Kelsey Ramírez, HousingWire

The Mortgage Bankers Association announced MISMO, the mortgage industry standards maintenance organization, is requesting feedback from the mortgage industry on its new closing instruction industry standards. The MBA explained the new closing standards will be designed to improve communication and avoid delays during the closing process.

Almost half of top US housing markets are ‘overvalued’
Diana Olick, CNBC

It will come as no surprise to anyone out house hunting today — buying a home is becoming ever more difficult to afford. Prices just keep soaring while incomes fail to keep pace.

Taxes

Cohn’s Pitch Tying Corporate Tax Cut to Pension Fund Benefits Divides Experts
Ryan Rainey, Morning Consult

As the White House promotes a corporate tax cut as helping the middle class, National Economic Council Director Gary Cohn touted the benefits as a boon to a group that represents millions of public-sector workers: pension funds. His argument, laid out during a CNBC interview on Friday, is that a business tax would boost companies’ profits, which would end up benefiting public-sector workers such as firefighters or teachers because of the large number of corporate stocks that public pension funds hold.

Trump Offers Democrat Air Force One Ride as Tax Pitch Hits Road
Justin Sink and Sahil Kapur, Bloomberg

President Donald Trump will bring his pitch to overhaul the tax code to North Dakota on Wednesday with an unlikely guest in tow: the state’s Democratic senator, Heidi Heitkamp. Heitkamp, who is facing re-election next year, will join the rest of the state’s congressional delegation aboard Air Force One as they travel to the capital of Bismark, where Trump is planning to argue that his proposed cuts are worthy of bipartisan support.

Financial Technology

Deutsche Boerse invests in U.S. ‘regtech’ startup: source
Anna Irrera, Reuters

German exchange operator Deutsche Boerse Group has participated in a $5 million equity investment in RegTek.Solutions Inc, a U.S. startup providing software to help financial firms comply with trading regulations, according to a source familiar with the situation. Deutsche Boerse co-led the investment alongside London-based financial technology venture capital firm Illuminate Financial Management LLP, the source said.

Regulation of digital coin offerings needed for healthy market: China central bank adviser
Staff, Reuters

It is the interest of the long-term development of blockchain technologies for the rapidly growing market for fundraising through the issue of digital currencies to be regulated, an adviser to China’s central bank said on Tuesday. Sheng Songcheng, adviser to the People’s Bank of China (PBOC), said regulation was needed for a healthy market.

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

A welcome change of course from the Trump administration
The Editorial Board, The Washington Post

There are many good reasons for the federal government to intervene in the economy, but diverting resources from less affluent first-time home buyers to seniors who already own homes would not be at the top of our list. Nevertheless, that is what the Federal Housing Administration’s Home Equity Conversion Mortgage program — commonly known as the “reverse mortgage” — essentially does.

Trump’s Looming Trade Crack-Up
Robert B. Zoellick, The Wall Street Journal

Donald Trump’s trade policy is speeding toward a shipwreck. Under the Constitution, Congress has principal authority over trade, although it has delegated considerable powers to the executive. Congress needs to reassert control to block Mr. Trump’s crack-up.

Tax Scofflaws Shouldn’t Rest Easy Despite IRS Budget Cuts
Caroline D. Ciraolo, Morning Consult

Many people thought a Republican administration would usher in an era of scaled-back tax enforcement. But despite the hostility toward the Internal Revenue Service – and taxes in general – on the 2016 campaign trail, nothing could be further from the truth.

To Raise Wages, Make Employers Compete for U.S. Workers
Samuel Estreicher, Bloomberg

One of the more confounding aspects of the U.S. labor market is why, even with unemployment hovering at around 4 percent a year, wages and salaries remain flat. Economists offer a range of explanations for wage stagnation, from the decline of organized labor to the automation of jobs once held by unskilled workers.

How Local Housing Regulations Smother the U.S. Economy
Chang-Tai Hsieh and Enrico Moretti, The New York Times

If you live in a coastal city like New York, Boston or San Francisco, you know that the cost of housing has skyrocketed. This housing crisis did not happen by chance: Increasingly restrictive land-use regulations in the last half-century contributed to it.

Gary Cohn’s tangle over tax
Lawrence Summers, Financial Times

Given recent controversies, I was interested to read national economic council chairman Gary Cohn’s answer to a “why are you staying?” question put by Stuart Varney of Fox Business Network last week. To his credit, Mr Cohn did not back away from his reservations about the president’s response to Charlottesville.

Why the Supreme Court May Review the S.E.C.’s In-House Judges
Peter J. Henning, The New York Times

The claim that the Securities and Exchange Commission gets a big boost from bringing enforcement actions before its own administrative law judges has become a matter of lore, at least among the members of the securities defense bar. A decision issued last week by an in-house judge in the case of Barbara Duka, a former Standard & Poor’s ratings service executive, shows that even if there is a benefit, it does not always work to the regulator’s advantage.

Wells Fargo Should Focus on Its Actual Misbehavior, Not on Perceptions
William D. Cohan, The New York Times

It’s been a rough year for Wells Fargo. And most of the bank’s problems have come from self-inflicted wounds driven by an incentive system that rewarded appalling behavior.

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

Trade and Investment in the Global Economy
James E. Anderson et al., The National Bureau of Economic Research

We develop a dynamic multi-country trade model with foreign direct investment (FDI) in the form of non-rival technology capital. The model nests structural gravity sub-systems for FDI and trade, with accumulation/decumulation of physical and technology capital in transition to the steady state.