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Finance Brief: U.S. Stocks Tumble in Reaction to Trump-Comey Developments

Washington Brief

  • The Trump administration is considering adding rules banning currency manipulation in a renegotiated version of the North American Free Trade Agreement. While Canada and Mexico haven’t been criticized by the United States for their currency, adding such rules could set a precedent for future trade pacts with Asian countries. (The Wall Street Journal)
  • Five business leaders, including S&P Global President Douglas Peterson and Willett Advisors Chairman Steven Rattner, will testify at the House Ways and Means Committee’s first major hearing on tax reform today. (The Hill)
  • Commodity Futures Trading Commission Acting Chairman Christopher Giancarlo announced a new fintech “lab” initiative to guide its regulation of the financial technology sector. President Donald Trump last week nominated Giancarlo to lead the agency on a permanent basis. (American Banker)

Business Brief

  • The Standard & Poor’s 500 Index on Wednesday fell the most since March as political conflict roiled Washington. The latest White House controversy surrounding the firing of now-former Federal Bureau of Investigation Director James Comey triggered risk-averse behavior in financial markets. (Bloomberg News)
  • Public pension funds and other institutional investors urged lawmakers to oppose the Financial CHOICE Act, the House GOP’s Dodd-Frank replacement bill. They say the legislation, sponsored by House Financial Services Committee Chairman Jeb Hensarling (R-Texas), would undercut shareholder rights. (The Wall Street Journal)
  • A federal judge indicated he may reject parts of a proposed settlement from Wells Fargo & Co. over unauthorized consumer accounts. He specified, among other facets of the proposed settlement, a ban on consumers pursuing other claims against the lender. (Reuters)

Chart Review

Events Calendar (All Times Local)

Thursday
American Council for Capital Formation conference with Rep. Roskam 8 a.m.
Senate Banking Committee hearing with Treasury’s Mnuchin 10 a.m.
House Ways and Means Committee hearing on tax reform 10 a.m.
House Financial Services subcommittee hearing on Greek bailout 10 a.m.
Friday
U.S. Chamber of Commerce investment summit 8:30 a.m.
House Ways and Means Committee hearing with National Taxpayer Advocate 9 a.m.
House Judiciary Committee hearing on antitrust enforcement 9 a.m.

 

General

Trump Administration Weighs Adding Currency Rules to Nafta
William Mauldin, The Wall Street Journal 

The Trump administration has told senators it is considering adding rules barring currency manipulation to the North American Free Trade Agreement, according to congressional aides, a departure from past U.S. policy that could set a precedent for other trade deals. U.S. Trade Representative Robert Lighthizer said in a Senate meeting Wednesday that he is looking at currency rules as a part of planned renegotiation of Nafta, the 23-year-old trade agreement that connects the U.S. economy with Canada’s and Mexico’s, the aides said.

U.S. Set to Start Three-Month Countdown to Nafta Renegotiation
Andrew Mayeda, Bloomberg News

The U.S. is poised to kick off a three-month countdown to renegotiating the North American Free Trade Agreement, the first major test of President Donald Trump’s vow to clinch better deals for the world’s biggest economy. Before officially starting talks with Nafta partners Canada and Mexico, the Trump administration must notify Congress to begin 90 days of domestic consultations.

Sherrod Brown looks to defy Trump trend in Ohio
Sylvan Lane, The Hill 

Sen. Sherrod Brown (D-Ohio) is a rarity among Democrats — a liberal considered to have a good shot at reelection in a state President Trump won by an overwhelming margin. As Democrats try to pick up the pieces from a surprise electoral defeat in 2016, Brown’s swing-state politics offer one possible path for the party to win back the Midwestern voters in the white working class who ditched Democrats for Trump.

Finance Elite on President: Long Live Trump! Or Pence. Whichever
Max Abelson et al., Bloomberg News

As Donald Trump’s ballooning scandals sent stocks tumbling Wednesday, hedge fund managers gathered at the Bellagio in Las Vegas for one of the industry’s most popular conferences. First on the day’s agenda: pedaling exercise bikes, visiting a spa and trying a beauty service called GlamSquad.

Global Stocks Fall After U.S. Rout as Bonds Gain: Markes Wrap
Samuel Potter et al., Bloomberg News

Futures on the S&P 500 fell 0.3 percent after the benchmark gauge fell 1.8 percent on Wednesday, its worst day since Sept. 9.

Banking

Judge may reject parts of Wells Fargo account abuse settlement
Jonathan Stempel, Reuters

A federal judge signaled that he may reject parts of Wells Fargo & Co’s proposed $142 million settlement with customers for whom it opened millions of unauthorized accounts. In an order on Tuesday evening, U.S. District Judge Vince Chhabria in San Francisco ordered lawyers for customers and the bank to address his concerns, including whether the entire settlement should be rejected, before a scheduled Thursday hearing to consider preliminary approval.

Mnuchin’s Senate Testimony Eclipsed by Trump’s Comey Saga
Saleha Mohsin and Elizabeth Dexheimer, Bloomberg News

Steven Mnuchin will be overshadowed during his first congressional testimony as Treasury secretary on Thursday by a deepening political crisis at the White House that threatens his aspirations for tax and regulatory overhauls.

Bipartisan bill would raise stress testing thresholds for community banks
Ian McKendry, American Banker 

Sen. Jon Tester, D-Mont., and Sen. Jerry Moran, R-Kan., introduced legislation Wednesday that would raise the stress testing threshold for small and community banks to $50 billion of assets. Currently, banks with assets of $10 billion or more must run their own stress test and may also face an additional test from regulators.

Why Volcker Rule Review is Music to Bankers’ Ears
Jesse Hamilton, Bloomberg News

U.S. banks have been barred from speculating with their own money, a practice known as proprietary trading, since the Volcker Rule took effect in 2015. Named after Paul Volcker, the former Federal Reserve chairman, the rule is meant to stop banks with taxpayer-protected deposits from taking on big risks that can lead to large losses and possibly further bailouts.

Big Banks Can Relax, Trump’s Modern Glass-Steagall Probably Doesn’t Mean Breaking Them Up
Ryan Tracy, The Wall Street Journal 

The Trump administration’s administration’s often-stated goal to review the line between commercial and investment banking activities may be very different—and less onerous for big banks—than the industry fears. President Donald Trump’s economic team has referred to the effort as creating a modern version of the 1933 Glass-Steagall Act—a partially repealed law that would force the largest U.S. banks to break themselves apart if it were still in effect.

Deutsche Bank to have former executives pay for past misconduct: chairman
Tom Sims and Arno Schuetze, Reuters 

Deutsche Bank expects former board members to pay substantial sums for their role in misconduct that threw Germany’s flagship lender into turmoil, supervisory board Chairman Paul Achleitner said on Thursday. At the lender’s annual general meeting he told shareholders that the supervisory board and two committees had been discussing the need for personal and collective responsibility for past deeds.

Financial Products and Investments

Here’s How Markets Are Reacting to the Trump-Comey Turmoil
Isobel Finkel and Julie Verhage, Bloomberg News

The latest political turmoil in Washington has triggered a bout of risk aversion in financial markets after the extended lull of the past few weeks. The S&P 500 Index fell the most since March, volatility surged and haven assets from gold to the yen advanced as the unrelenting pace of developments threatened to derail Trump administration policy prescriptions cheered by Wall Street.

Investor Group, Pension Funds Oppose Financial Choice Act
Tatyana Shumsky, The Wall Street Journal 

A group of institutional investors is calling on the House of Representatives to oppose the Financial Choice Act saying it will undercut shareholder rights. The Council of Institutional Investors, an advocacy group, sent a letter to every House member Wednesday urging them to oppose the bill.

US moves to settle ‘Wolf of Wall Street’ corruption claim
Jeevan Vasagar, Financial Times 

The Hollywood studio behind The Wolf of Wall Street is in talks with the US Department of Justice to settle a lawsuit alleging the film was funded with money diverted from 1MDB, the Malaysian state investment fund mired in a multibillion-dollar embezzlement scandal. The civil case against the movie, which starred Leonardo DiCaprio as crooked trader Jordan Belfort, is a component of the largest asset seizure the US has brought under an anti-kleptocracy initiative established in 2010.

Banks Tighten Auto Lending as More Borrowers Fall Into Default
Gabrielle Coppola, Bloomberg News

Lenders are tightening the spigot on new auto loans, making it harder for U.S. consumers with weak credit to buy a car, data from the Federal Reserve Bank of New York show.

Wall Street regulator detects fewer signs of illegal ‘layering’
Sarah N. Lynch, Reuters 

A surveillance program by Wall Street’s self-funded regulator has seen a huge decline in alerts that may indicate potential market manipulation, after it launched a new initiative last year to help brokerages spot problematic clients. Robert Cook, the chief executive at the Financial Industry Regulatory Authority, announced at the group’s annual conference on Wednesday that FINRA has seen a 68 percent drop in “layering exceptions,” or possible indications of a type of manipulative trade.

Housing and GSEs

Mnuchin’s OneWest subsidiary agrees to $89M settlement for reverse mortgage violations
Ben Lane, HousingWire

During the confirmation process for Department of the Treasury Secretary Steven Mnuchin, Congressional Democrats attempted to use the mortgage practices that took place at OneWest Bank during Mnuchin’s time as chairman against him, claiming that Mnuchin oversaw a “foreclosure machine” during his time at OneWest. One of the Democrats’ weapons of choice was the alleged practices of Financial Freedom, a reverse mortgage servicer owned by OneWest, which Mnuchin sold in 2015.

Bond Pricing Chats Remain at Heart of U.S. Case Against Traders
Chris Dolmetsch, Bloomberg News

U.S. prosecutors working to convict three former Nomura Holdings Inc. mortgage-bond traders are trying to convince jurors that lying about prices amounts to fraud. For a second day Tuesday, attorneys quizzed Zachary Harrison, a former Putnam Investments LLC portfolio manager, about his dealings with the Nomura traders.

Taxes

Business leaders to testify at House panel’s tax reform hearing
Naomi Jagoda, The Hill 

Several business leaders are slated to testify at the House Ways and Means Committee’s tax-reform hearing on Thursday, the committee announced Wednesday. The hearing, the first in a series that the panel plans to hold, will focus on how tax reform can affect the economy and jobs.

Koch Brothers’ Network Readies Major Push for Tax Reform
Philip Elliott, Time 

Coming soon to your television, smart phone, front door, mailbox and landline: a multi-million-dollar push for tax reform, courtesy of the political and policy network backed by the billionaire Koch brothers. Americans for Prosperity and the Freedom Partners Chamber of Commerce on Thursday are set to announce an all-out campaign for a tax overhaul that closely resembles the broad ideas proposed at the White House earlier this year.

Trump Tax Plan, If It Emerges Intact, Would Dull Munis’ Allure
Daisy Maxey, The Wall Street Journal 

President Donald Trump’s plan to cut taxes—if it’s approved along the lines of its current form—stands to weigh on prices in the $3.8 trillion municipal-bond market. Cutting personal and corporate income-tax rates, as Mr. Trump has proposed, will make the tax protections muni bonds offer less valuable relative to taxable fixed-income investments.

Lawmakers: Leave advertising tax break alone
Naomi Jagoda, The Hill 

Industry groups and more than 100 lawmakers want to prevent tax reform legislation from curbing the deduction for businesses’ advertising expenses. Since the federal tax code was created in 1913, businesses have been able to immediately deduct their full advertising costs.

Financial Technology

CFTC creates new arm dedicated to fintech
Lalita Clozel, American Banker 

The Commodity Futures Trading Commission has launched a new arm dedicated to exploring fintech issues, the agency’s head announced Wednesday. “The world is changing. Our parents’ financial markets are gone,” J. Christopher Giancarlo, the commision’s acting chairman, said in prepared remarks for a speech at the Fintech Innovation Lab in New York.

GOP lawmakers question IRS summons to Coinbase users
Michael Cohn, Accounting Today 

Three Republican lawmakers who chair key congressional committees and subcommittees related to tax policy have sent a letter to Internal Revenue Service Commissioner John Koskinen asking about the IRS’s recent efforts to gain more information about users of Coinbase, the largest Bitcoin exchange in the U.S.

US National Security Advisor: Bitcoin Needs to Be Understood, Not Feared
Michael del Castillo, CoinDesk 

A think tank that advises several US government agencies is now exploring the potential threats bitcoin poses to national security. Still in its earliest phases, the research is being headed by the director of analysis at the Center on Sanctions and Illicit Finance in Washington, DC, and crafted to gather data on how state actors might currently use bitcoin and other cryptocurrencies to evade sanctions.

A Message from SIFMA:

The Department of Labor must delay its harmful fiduciary rule until the review directed by President Trump is completed. Up to 14.7 million consumers could face significant changes to their retirement and financial advice, and lose up to $109 billion over 10 years. American investors deserve better. DOL needs to take the time to get this right and review the entire rule. Protect the retirement savers. Delay the DOL rule.

Opinions, Editorials and Perspectives

Comprehensive Tax Reform: The Only Fix to Our Broken Tax Code
David Williams, Morning Consult 

Today’s full House Ways and Means Committee hearing on tax reform should finally set the stage for comprehensive legislation to fix America’s broken tax code. Four months into the Trump administration — and more than 30 years since significant reform — it’s well past time to stop penalizing American taxpayers and American enterprise, and time to start instituting policies to unleash productivity, create jobs, and grow our nation’s economy.

My new tax plan provides relief from growth strangling policies
Sen. John Thune, CNBC

The United States is long overdue for a major tax reform bill. After eight years of economic weakness, we need a tax code that works for workers and job creators, not against them. Our current tax code is strangling business growth, job creation, and higher wages.

It’s time for lawmakers to get the facts straight on housing finance
Peter Wallison and Edward Pinto, The Hill 

With a new administration in office, members of Congress have awakened once again to the unsolved problem of Fannie Mae and Freddie Mac — the country’s two government-sponsored enterprises (GSEs) that have been in a conservatorship since 2008, when they were bailed out by American taxpayers. Once again members of Congress are pledging to work together to develop a workable housing finance system to replace the two GSEs. We are skeptical about the success of these efforts.

America’s Most Dangerous Temp
David Dayen, The American Prospect 

Two weeks ago, 44-year-old Keith Noreika was just another corporate lawyer, advising bank clients on evading regulatory enforcement. Today he runs the Office of the Comptroller of the Currency (OCC), the second-most important banking regulator in the federal government.

A Message from SIFMA:

The Department of Labor’s fiduciary rule is harming retirement savers and it must be delayed for a minimum of 180-days. Recently, the DOL provided a 60-day delay of the rule, which temporarily helped prevent further service changes, customer confusion and market disruptions. However, this is not enough time to fully review the consequential impact of the entire rule, as requested by the president. Further delay is needed to conduct the review and protect retirement savers from additional harm and turmoil.

Research Reports

CCAR Scenarios Are Countercyclical, But Fed Staff’s Projections Show Them to Be Farfetched
Bill Nelson and Myya McGregory, The Clearing House 

The annual Federal Reserve CCAR stress test begins with a design of stress scenarios. The severely adverse scenario is the most important, because it is almost always the one that binds.