THE BIG PICTURE
Negotiations over government appropriations bills continued to occupy the headlines last week. On Tuesday, President Trump held a contentious televised meeting with Democratic leaders Nancy Pelosi and Chuck Schumer during which he threatened a partial government shutdown over funding for a border wall, declaring “I am proud to shut down the government for border security.”
President Trump’s former personal attorney, Michael Cohen, was sentenced to three years in prison on Wednesday after pleading guilty to charges of campaign finance violations, tax fraud, and lying to the FBI. The SDNY had requested Mr. Cohen be given a “significant” sentence, with only a “modest downward variance” from sentencing guidelines. He was also ordered to forfeit US$500,000 in assets and pay US$1.393M in restitution. In response to Mr. Cohen’s sentencing, President Trump claimed via Twitter that he had “never directed Michael Cohen to break the law” regarding the campaign finance violations stemming from hush money payments.
The President continued to consider possible candidates to replace John Kelly as chief of staff after Vice President Mike Pence’s aide Nick Ayers declined his offer. Rep. Mark Meadows (R NC), leader of the conservative House Freedom Caucus, expressed interest in the role but was ruled out by the President in his search. Former New Jersey Gov. Chris Christie said on Friday that he is not interested in replacing John Kelly, who is expected to leave the chief of staff job near the end of the year. President Donald Trump announced that Mick Mulvaney, director of the Office of Management and Budget, will become acting White House chief of staff without stating how long Mulvaney would serve in the role. Russell Vought will replace Mulvaney as OMB director as the latter assumes his new role as acting White House chief of staff.
The Senate approved in a 56-41 resolution Thursday to end U.S. support for the Saudi-led war in Yemen, which would require the president to withdraw any troops in or “affecting” Yemen within 30 days unless they are fighting al Qaeda. The resolution would still need to be passed by the House before it could be sent to the President, who has threatened to veto it. “I hope … we send a loud and powerful message by passing this resolution. That we’re going to bring peace to that country and that the United States Congress is going to reassert its constitutional authority to be the body that makes war not the president,” said Sen. Bernie Sanders (I-VT), a sponsor of the resolution.
On Friday, the Department of Homeland Security’s (DHS) inspector general said the DHS would investigate the death of a 7-year-old migrant girl who died after being taken into Border Patrol custody in New Mexico after crossing the border last week with her father and a group of other migrants, and also continue its unannounced inspections of U.S. Customs and Border Protection (CBP) and Immigration and Customs Enforcement (ICE) facilities. The Trump administration has said the 7-year-old girl from Guatemala died from dehydration and shock while in U.S. custody. “My heart goes out to the family for all of DHS,” said Homeland Secretary Kirstjen Nielsen, “this is just a very sad example of the dangers of this journey.”
According to sources familiar with the matter, President Donald Trump is mulling the prospect of making a counter-offer to Democratic leaders that would prevent a partial government shutdown and kick the border wall fight into next year. While the specifics of that offer are unclear, Republicans on Capitol Hill are increasingly considering a two-week stopgap that would fund the government into January. Roughly a quarter of the federal government will shut down next Friday absent a bipartisan deal.
A federal judge in Texas on Friday ruled that Obamacare must be invalidated because Congress struck the penalty for failing to obtain insurance coverage. The California Attorney General, Xavier Becerra, said that the decision will be immediately appealed. Some believe that this could ultimately become the third major Obamacare case to be taken up by the Supreme Court, which has twice voted to uphold the law.
Other highlights of last week include:
- Nancy Pelosi reached a compromise deal with a group of insurgent Democrats, ensuring her support to be elected Speaker of the House next Congress, by agreeing to limit her term to a maximum of four years.
- Senate Majority Leader Mitch McConnell (R-KY) put members on notice that they should “be prepared to work between Christmas and New Year, if necessary,” in order to complete confirmations and their legislative agenda.
- Sen. Jon Kyl (R-AZ) will resign at the end of this year, forcing Republican Gov. Doug Ducey to appoint a new replacement to the late Sen. John McCain’s seat ahead of a 2020 special election to fill the last two years of McCain’s term.
- The House and Senate on Thursday passed new legislation overhauling the process for handling sexual harassment claims on Capitol Hill. A major goal of the legislation is to end the practice of settling harassment claims against lawmakers with taxpayer dollars.
LAST WEEK ON THE HILL
HOUSE FINANCIAL SERVICES COMMITTEE
Committee Updates: As was widely expected, on Monday Rep. Maxine Waters (D-CA) was nominated by the Democratic Steering and Policy Committee to serve as Chairwoman of the House Financial Services Committee in the 116th Congress. Rep. Waters will be the first woman and African American to serve in this role. She vowed to “prioritize protecting consumers and investors from abusive financial practices, ensuring strong safeguards are in place to prevent another financial crisis, expanding and supporting affordable housing opportunities, encouraging responsible innovation in financial technology, and promoting diversity and inclusion in the financial services.” In addition, Rep. Lacy Clay will likely be the next chairman of the House Financial Services subcommittee focused on housing and insurance, according to Rep. Emanuel Cleaver, who was also seeking the gavel. In an interview today, Cleaver said it hasn’t been formally decided but it “seems like that’s the direction that we’re going” thanks to the seniority advantage of his fellow Missouri Democrat. “If you support the concept of seniority, you have to sometimes accept some things that you don’t like,” he said.
On the Committee front, Rep. Joyce Beatty (D-OH) is lobbying to Chair the Subcommittee on Diversity and Inclusion that will likely be formed next Congress. In a letter to colleagues, she described herself as “a stalwart for furthering diversity and inclusion within the financial services industry and federal financial regulatory agencies.” Rep. Gregory Meeks (D-NY), meanwhile, is seeking to Chair the Subcommittee on Financial Institutions and Consumer Credit.
Hearing Entitled “Assessing the Impact of FASB’s Current Expected Credit Loss (CECL) Accounting Standard on Financial Institutions and the Economy”: On Tuesday, the Financial Institutions and Consumer Credit Subcommittee held a hearing to examine the impact that the new Current Expected Credit Loss (CECL) accounting standard will have on financial institutions and the economy, including the effect on the availability and affordability of credit as well as the potential burden on financial institutions.
- Mr. Joseph A. Stieven, Chief Executive Officer, Stieven Capital Advisors, LP
- Mr. Bill Nelson, Executive Vice President and Chief Economist, The Bank Policy Institute
- Mr. Scott Blackley, Chief Financial Officer, Capital One Financial Corporation
- Dr. Mark Zandi, Chief Economist, Moody’s Analytics
Hearing Entitled “Evaluating the Effectiveness of the International Financial Institutions”: On Wednesday, the Monetary Policy and Trade Subcommittee held a hearing to examine the Administration’s efforts to reform the World Bank, International Monetary Fund (IMF), and other international financial institutions (IFIs), with a particular focus on the Treasury Department’s strategy to incentivize IFI staff to produce demonstrable results, its oversight of major lending programs, and its examination of resource levels at the World Bank and IMF. In her remarks, current Ranking Member and soon-to-be Chair Maxine Waters (D-CA) noted that she looked forward to continuing to advance “the international interests of poverty alleviation, growth, and economic stability.”
- The Honorable David Malpass, Under Secretary for International Affairs, U.S. Department of the Treasury
SENATE BANKING COMMITTEE
Committee Updates: Senate Minority Leader Chuck Schumer announced that Senator-elect Kyrsten Sinema (D-AZ) and Senator Tina Smith (D-MN) would join the Banking Committee next term, replacing Senators Heidi Heitcamp (D-ND) and Joe Donnelly (D-IN), who lost their bids for reelection.
Hearing Entitled “Oversight of the U.S. Securities and Exchange Commission”: On Tuesday, the full Committee held a hearing to receive testimony from Securities and Exchange Commission Chairman Jay Clayton regarding the work and agenda of the SEC. In his opening remarks, Committee Chair Senator Mike Crapo noted how proactive the SEC had been in addressing cryptocurrencies and coin offerings in the last year, highlighting the Enforcement Division’s creation of a Cyber Unit, which “led efforts to counter fraud against retail investors involved in initial coin offerings and brought charges against a bitcoin-denominated platform operating as an unregistered securities exchange.” In response to questioning from Senator Bob Menendez (D-NJ), Chairman Clayton said that he would not support legislation to ban and delist Chinese companies who decline to disclose information to the agency.
- The Honorable Jay Clayton, Chairman, U.S. Securities and Exchange Commission
ON THE FLOOR
Senate Confirms Treasury Deputy Secretary: On Tuesday, the Senate voted 55-44 to confirm Justin Muzinich as Deputy Treasury Secretary. Mr. Muzinich, who was nominated in April, has served as a top aide to Secretary Steven Mnuchin since the early days of the administration.
Farm Bill: The 2019 Farm Bill passed both the House (369-47) and Senate (87-13) with strong bipartisan support. The US$867B bill, which provides subsidies to American farmers, also included provisions legalizing the production of hemp and a rejection of House Republicans’ plan to tighten food stamp work requirements.
LEGISLATION INTRODUCED AND PROPOSED
Predatory Loan Check Ban: Senators Tom Cotton (R-AR), Doug Jones (D-AL), and Jeff Merkley (D-OR) introduced legislation that is intended to protect consumers from “the predatory practice of mailing high-interest loans to consumers in the form of live checks.” “People should understand clearly when they are taking on debt,” Senator Cotton said in a statement. “But because ‘live’ checks mailed directly to consumers don’t require an application or any previous relationship with the consumer, many individuals don’t realize that these checks are actually high-interest loans until it’s too late.”
Data Care Act: On Wednesday, Senator Brian Schatz (D-HI) introduced a privacy bill named the “Data Care Act,” which would create new rules around the collection and maintenance of user data by tech companies. The bill would require websites and apps to “reasonably secure” users’ personal data and “promptly” inform them of breaches. Senator Schatz said that tech companies are “going to have to come to the table and be better corporate citizens.”
THIS WEEK ON THE HILL
Thursday, December 20
House Financial Services Committee Hearing entitled “The Peril of an Ignored National Debt”: 10:00 AM in 2128 Rayburn House Office Building.
SEC Chair Says Proxy Reform Is a Priority for 2019: U.S. Securities and Exchange Commission Chairman Jay Clayton told a Senate panel on Tuesday that the SEC will move forward on reforms to the proxy voting process in 2019 that would benefit retail investors, though some senators urged the SEC to rein in stock buybacks instead. Testifying before the Senate Banking Committee, Clayton said improving the proxy process is a priority for next year, noting that so-called proxy plumbing, meaning the mechanics of the actual voting process, needs an overhaul. “There is broad agreement that there are elements of private advisory ecosystem that can be improved fairly quickly,” Clayton said.
CFPB Proposed Revising No-Action Letter Policy: The CFPB has proposed revising its No Action Letter (NAL) policy and introducing a “product sandbox” to encourage companies to innovate without fear of enforcement action. The revisions will eliminate the three-year time limit on NAL protections, as well as elements deemed burdensome, including a data-sharing commitment. Congresswoman Maxine Waters (D-CA) criticized the move as “yet another step to weaken the Consumer Bureau and curtail its enforcement tools” that would “let bad actors that abuse consumers off the hook entirely from enforcement action by the agency.”
FHFA Releases Annual Report on Fannie Mae and Freddie Mac’s Single-Family Guarantee Fees: On Monday, the Federal Housing Finance Agency released its report on Fannie Mae and Freddie Mac’s single-family guarantee fees in 2017. It revealed that the average guarantee fee for a 30-year fixed-rate loan fell by one point to 59 basis points, while the fee on 15-year fixed-rate loans increased by one point to 38 basis points and the fee for adjustable-rate mortgage loans fell one point to 58 basis points.
Treasury Sanctions North Korean Officials and Entities in Response to Human Rights Abuses: Treasury’s Office of Foreign Assets Control on Monday designated three individuals in response to North Korea’s ongoing human rights abuses and censorship. “Treasury is sanctioning senior North Korean officials who direct departments that perpetrate the regime’s brutal state sponsored censorship activities, human rights violations and abuses, and other abuses in order to suppress and control the population. These sanctions demonstrate the United States’ ongoing support for freedom of expression, and opposition to endemic censorship and human rights abuses,” said Treasury Secretary Steven T. Mnuchin.
CFTC Seeks Public Comments on Crypto-Asset Mechanics and Markets: On Tuesday, the CFTC published a Request for Information seeking public feedback on a range of questions related to the underlying technology, opportunities, risks, mechanics, use cases, and markets related to Ether and the Ethereum Network. “The input from this request will advance the CFTC’s mission of ensuring the integrity of the derivatives markets as well as monitoring and reducing systemic risk by enhancing legal certainty in the markets,” said the agency.
Treasury’s Financial Stability Oversight Council to Meet December 19: On Wednesday, the Financial Stability Oversight Council met with an agenda including the current expected credit losses accounting methodology, the work of the Council’s digital assets and distributed ledger technology working group, and potential amendments to the Council’s interpretive guidance on nonbank financial company designations.
Executives Settle ICO Scam Charges with SEC: Two former executives behind an allegedly fraudulent initial coin offering (ICO) that was barred by the Securities and Exchange Commission earlier this year have been ordered in federal court to pay about US$2.7M and prohibited from serving as officers or directors of public companies or participating in future offerings of digital securities.
SEC Official Discusses Cryptocurrency Guidance: Jonathan Ingram, deputy chief counsel in the SEC’s division of corporation finance, discussed the agency’s forthcoming guidance on cryptocurrencies, saying “we’re shooting for early next year for publication.” The guidance is intended to assist industry players in determining if a digital asset should be classified as a security and, if so, how to comply with securities regulations.
EU Drafts No-Deal Brexit Plan to Prevent Swap-Market Rupture: The European Commission took a step toward meeting the financial industry’s call for an equivalence decision that would help prevent a derivatives-market rupture in a no-deal Brexit. The plan, drafted by policy makers in Brussels, would ensure that London’s main clearinghouses could continue to serve EU clients even in a disorderly exit. “We are hopeful that a draft equivalence determination should provide the clarity and legal certainty the market has been waiting for, and should ensure EU27 participants can continue clearing at U.K. CCPs without disruption,” said Roger Cogan, head of European public policy at ISDA.
New Accounting Rules Draw Attention of Enforcement Officials: U.S. regulators are looking at the way in which companies implement new, complicated accounting standards, expecting them to revise internal controls to prevent fraud. “Many companies have systems that support proper reporting, and some will point to those systems and internal controls” when deficiencies or suspected fraud are found, said Stephanie Avakian, co-director of the SEC’s Division of Enforcement.
U.S. Regulators Are Concerned with LIBOR Replacement Impact: That lenders might move from LIBOR to a different overnight bank lending rate is a major concern for banking and securities regulators who have been warning companies for months that a range of transactions involving debt could be materially altered by changes in the way the interest rate is indexed. “For an operating company, maybe it is not as daily of an issue, but think about it, if you are restructuring your debt or if you have variable debt, it is significant,” said Sagar S. Teotia, deputy chief accountant in the SEC’s Office of the Chief Accountant.
FHFA Releases Rule on Fannie Mae and Freddie Mac Credit-Score Models: The Federal Housing Finance Agency today proposed a rule outlining the process for Fannie Mae and Freddie Mac to validate and approve credit-score models, as required under the banking regulatory overhaul enacted earlier this year, S. 2155 (115). The FHFA, Fannie Mae, and Freddie Mac spent three years evaluating potential changes to the companies’ credit-score requirements before dropping the initiative this summer in light of the banking bill’s passage. The agency is seeking comment on the rule for ninety days.
Treasury Floats Rules on Withholding Payments Under FATCA: On Thursday, the U.S. Department of the Treasury proposed regulations that would eliminate a withholding tax on proceeds from property sales that can give rise to income from the U.S. to foreign banks that failed to meet certain requirements under the Foreign Account Tax Compliance Act. The IRS and Treasury have determined that current withholding requirements on U.S. investments are “no longer necessary in light of the current compliance with FATCA.”
SEC Chairman Said That EU Transparency Rules Would Hurt Research Availability: SEC Chairman Jay Clayton said on Thursday that Europe’s new stock market trading and transparency regulations are threatening the availability of analyst research reports. Clayton also called on the agency to study the impact of the European Union’s “Markets in Financial Instruments Directive,” or MiFID II, a regulation that went into effect in January requiring brokerages to disclose how they handle trades for their customers as well as cost details. “My concern is that the availability of research, broad availability, is going to shrink,” and with a reduction in the supply of research, “the big guys win, end of story,” Clayton said.
Crapo Urges Regulators to Rethink Private Flood Insurance Rule: Senate Banking Chairman Mike Crapo (R-ID) and seven fellow Republicans are urging regulators to make it easier for banks to accept private flood insurance policies issued outside the National Flood Insurance Program in connection with property loans. “These concerns would be addressed by the prompt finalization of a rule that gives due consideration to concerns raised by key stakeholders and provides clear parameters for broad acceptance of private flood insurance,” they said.
COMINGS AND GOINGS AT THE AGENCIES
SEC Names Danae Serrano Acting Ethics Counsel and Designated Agency Ethics Official: On Tuesday, the SEC announced that Danae Serrano had been named Acting Ethics Counsel and Designated Agency Ethics Official. Ms. Serrano joined the SEC in 2010 as Assistant Ethics Counsel, and has served as the Deputy Ethics Counsel and Alternate Designated Agency Ethics Official since 2013.
Mark Calabria Nominated to Head FHFA: Mark Calabria, who currently serves as an aide to Vice President Mike Pence, was nominated to serve as Director of the Federal Housing Finance Agency once current Director Mel Watt’s term ends in January. Dr. Calabria has been a vocal critic of Fannie Mae and Freddie Mac and will likely face a tough grilling from Democrats during his confirmation hearing. The nomination was praised by House Financial Services Committee Chairman Jeb Hensarling (R-TX), who said Dr. Calabria “knows what it takes to re energize our housing industry and to promote responsible growth.”
Heath Tarbert Nominated to Lead Commodity Futures Trading Commission: On Tuesday, the President nominated Heath Tarbert, who currently serves as Assistant Treasury Secretary for International Markets, to serve as chairman of the CFTC once current Chairman Chris Giancarlo’s term ends in April. Mr. Tarbert, who was confirmed to his current post by a vote of 87-8, will likely face little difficulty in getting through his confirmation hearing.
SEC’s Office of the Chief Accountant’s Chief Counsel to Retire from the SEC: On Thursday, the SEC announced that that Jeffrey Minton, Office of the Chief Accountant (OCA)’s Chief Counsel, will be retiring from the agency next month after more than 20 years of service at the SEC, with over half of that time spent in his role in OCA.
Former FDIC Staffer Convicted of Stealing Living Will Documents: On Tuesday, a former employee of the FDIC was convicted by a federal jury in Brooklyn on two counts of theft of government property after stealing banks’ confidential filings known as “living wills.” The employee had claimed that she had copied the documents to prepare for job interviews with the financial institutions.
OTHER NOTEWORTHY ITEMS
McConnell Said Senate Will Take Up Trump-Backed Criminal Justice Reform: Senate Majority Leader Mitch McConnell said that the Senate will take up criminal justice reform legislation as soon as this week, the latest version of which could be released as soon as Tuesday.
CBC Chairman Backs Warren Housing Bill: The chairman of the Congressional Black Caucus, Cedric Richmond (D-LA), is backing Sen. Elizabeth Warren’s sweeping proposal aimed at expanding affordable housing. “This bill for us is not only realistic, practical and would create so many jobs and so much investment across the country,” Richmond said.
Equifax Criticizes House Investigative Report on Last Year’s Breach: Equifax faulted the House Oversight Committee for a critical report on its 2017 breach, complaining that the panel gave the company too little time to review the document it said contained numerous errors.
After Equifax, House Democrats Propose Stiffer Penalties: House Democrats today called for comprehensive data breach notification legislation and stronger civil penalties for cybersecurity failures following an investigation into the historic cyberattack that credit reporting company Equifax disclosed last year.
US and UK Reach Bilateral Agreement on Insurance Industry Regulation: In the run-up to the March deadline for Brexit, the U.S. and U.K. have reached a deal to ensure continuity in regulation of the insurance industry.
Wall Street Urgently Pushes Its D.C. Wish List as Time Runs Out: With less than two weeks for Congress to cut a deal to fund federal agencies, financial firms and their allies on Capitol Hill have begun the annual ritual of trying to attach goodies to must-pass legislation that could benefit banks, asset managers, and private equity firms.
Insurers Call on Congress to Pass Retirement Savings Bill: Dozens of insurance companies on Wednesday sent letters to House and Senate leaders, asking them to pass retirement legislation before the end of the year. The retirement savings aspects of the bill, which is a revised, year-end tax bill, have received bipartisan support, but the legislation has failed to gain momentum in Congress.
FHA Raises Loan Limits for 2019: The Federal Housing Administration today released its 2019 schedule of loan limits, with most areas of the country due to get an increase. FHA’s 2019 minimum national loan limit, or floor, of $314,827 is set at 65 percent of the Federal Housing Finance Agency’s national conforming loan limit of $484,350 for areas where 115 percent of the median home price is less than the floor limit.
OCC Sees Sharp Drop in Mortgages Serviced by Large Banks: The amount of mortgages held by national banks has diminished by nearly half since the financial crisis, to $3.26T in the third quarter, according to a report by the Office of the Comptroller of the Currency.
Hensarling Bill in Stalemate amid Dispute with Trump Administration: A sweeping financial deregulation package negotiated by Democrat Maxine Waters and Republican Jeb Hensarling ran into a stalemate due to disagreements among lawmakers and the Trump administration over a number of provisions in the bill.
Piling on: Democratic Lawmakers Join Chorus of CECL Critics: At a Tuesday hearing of the committee’s Financial Institutions and Consumer Credit Subcommittee, the Current Expected Credit Losses standard, or CECL, was the target of sharp criticism by lawmakers from both parties, including prominent Democrats Brad Sherman and Gregory Meeks.
Trump Signs Executive Order Backing Opportunity Zone Program: President Donald Trump signed an executive order creating a new group of government officials charged with developing ways of improving the new Opportunity Zone program to fund designated areas of economic development.