Eliza Allen – Page 2 – Federal Financial Analytics

9 09, 2024

Karen Petrou: Workers’ Rights and Merger Wrongs

Eliza Allen2024-09-09T13:28:07-04:00September 9th, 2024|The Vault|

In all the fuss and fury over banking-agency merger policy, many have missed a consequential late-August announcement from other U.S. antitrust authorities laying out how workers’ rights will drive merger approvals. This follows 2023 guidelines from the Department of Justice and Federal Trade Commission retracting the old price criterion by which consumer welfare has long been judged in favor of policies taken factors such as network effects and “soft” market power fully into account. The guidelines addressed workers’ rights, but the new agreement adds sharp, sharp teeth. Thus, it’s clear that Administration policy is focused on economic justice along with its tough stand on monopolization. Bankers take warning: operational-integration rationales now cut two ways when it comes to merger approval.

To be sure, bankers are used to one economic-justice criterion when it comes to merger approval: those requiring consideration of customer “convenience and needs” based in large part on how this is demanded of them under the Community Reinvestment Act. Banks planning an acquisition thus typically accompany an offer with a massive CRA pledge promising more loans to low-and-moderate individuals and communities, affordable-housing investments, and the like.

This won’t cut it under the pending merger-policy rewrites from the OCC and FDIC, but these proposals generally do not replace CRA-style approval criteria. Instead, they beef them up, with the FDIC’s policy most notably (and dubiously) requiring acquirers to prove that communities not only will be better served, but also better served than if each bank remained independent.

However, the FDIC also …

26 08, 2024

Karen Petrou: Next Up: Federal Preemption Standards for Elder-Fraud Prevention

Eliza Allen2024-08-26T12:13:45-04:00August 26th, 2024|The Vault|

As we noted before the August recess, Senate Democrats have pressed a new bill designed to make the CFPB Director’s wish the command of law: banks would be clearly accountable for many instances in which consumers fall prey to those impersonating bankers, FBI agents, the CIA, and anyone else they think will persuade a customer, often elderly, to part with a whole lot of cash. Nothing will come of this bill in this Congress, but it will surely be back in the next. With it will come measures also to create a federal framework for the patchwork of state laws holding banks accountable for elder fraud. This sounds good, but drafting here is devilishly difficult.

There is no question that elder fraud is a grievous concern. I saw it firsthand as my father slipped farther and farther from being able to discern that the “nice” people happy to talk to him for hours were not beguiled by his avuncular charm – they wanted his bank account number. Washington media is full of stories of the “gold-bar” fraud stealing millions from local retirees and this is, of course, just a tiny sample of a problem estimated to cost at least $3.4 billion a year.

Is there a need for federal preemption? Last week’s American Banker had a helpful run-down of various state approaches. In general, state laws or pending measures seek remedies such as notifications to adult protective services or law enforcement, mandatory holds on suspect transactions, or at the …

12 08, 2024

Karen Petrou: Why the 1951 Fed-Treasury Accord Doesn’t Matter in 2024

Eliza Allen2024-08-12T10:24:30-04:00August 12th, 2024|The Vault|

Later this month, FedFin will issue a brief assessing whether Fed independence is really at risk, taking into account not just what Donald Trump has said, but also what progressives and populists agree should be done to change the U.S. central bank’s governing law. As we’ve frequently noted, Donald Trump can talk tough about the Fed, but Congress has to agree to get tough before he can do anything but gradually change Fed leadership and hope his appointees do his bidding despite formidable resistance across the Fed’s entrenched institutional culture. The forthcoming brief will put much of the daily back-and-forth on this critical question into the often-missing context needed to understand how much risk the Fed really runs. However, I’ve gotten so many questions in the last few days following an American Banker article that I’ll answer a few of them now.

The questions revolve around the Fed-Treasury agreement in 1951 putting Treasury fully in the debt-pricing lane and keeping it out of Fed decisions setting monetary policy based on its macroeconomic judgment, not national fiscal or political demands. The question? It’s whether Treasury under Trump could revoke the 1951 Accord and regain control over monetary policy.

The best independent analysis of the history surrounding the 1951 Accord and its substance comes in a paper written in 2001 on the Accord’s fiftieth anniversary by staff at the Federal Reserve Bank of Richmond. It rightly puts the Accord squarely in the historical context necessary to understand if the 1951 Accord has …

22 07, 2024

Karen Petrou: The Toxic Brew of Insurance Companies, Private Equity, and High-Risk Mortgages

Eliza Allen2024-07-22T11:13:54-04:00July 22nd, 2024|The Vault|

As financial regulators fret about risk migration to nonbank financial intermediaries, a new race to the sunny side of the regulatory street is already underway. As detailed in a comprehensive Bloomberg article, insurance companies are increasingly investing in high-risk whole residential-mortgage loans, doing so either with no capacity to service them unless they rely on parent-company private-equity firms to do so somehow. What could go wrong?

This transaction is redolent – indeed, it’s a repeat – of how nonbanks barged into mortgage finance before the great financial crisis without a clue about the real risks they ran. Well, I recall Bear Stearns’ big bet on mortgages placed without any concomitant servicing capacity because, as they said at the time, mortgages never go to foreclosure. Speculative house-price increases led them to this sanguine conclusion because there hadn’t been many foreclosures for a couple of years, but neither Bear Stearns’ mortgage portfolio nor the firm is here today to ruminate over hard lessons learned in the 1980s.

Bear Stearns’ failure quickly became a systemic threat, with wider damage delayed until the 2008 crash thanks only to the first of the Fed’s high-cost subsidized mergers that bred moral hazard that fired speculation up to a still more frenzied height until Lehman Brothers failed.

As before the great financial crisis, insurance companies are investing in high-risk mortgages because yield-chasing and capital arbitrage rewards them, at least for now. The whole mortgage loans insurance companies are buying carry wide spreads over RMBS is only …

15 07, 2024

Karen Petrou: The Problem With Preemption

Eliza Allen2024-07-15T10:20:49-04:00July 15th, 2024|The Vault|

Last week, I wrote about the populist and progressive tie that binds each side of the U.S. political spectrum, pointing in particular to how the left and right are each calling for an end to “financial censorship.” MAGA Republicans in Florida have taken the lead here for populists with new legislation barring banks from closing accounts based on pretty much anything but the fact that the account holder took out all the money and maybe not even then. As FedFin subsequently described, Members of the House Financial Services Committee called first on Secretary Yellen and then on Chair Powell to declare that federal law preempts the state statute, noting that the Florida law bars banks from closing accounts even when money laundering is feared, imperiling law enforcement and financial integrity. Secretary Yellen called for preemption, although it’s hers only to urge, not to grant. Mr. Powell was more circumspect, but he surely supports preemption. But, this is also not for the Fed to declare; the power of preemption indeed rests with only the Office of the Comptroller of the Currency. So far, it’s done nothing and the nothing it’s done points to the consequences of one of the quieter decisions in this year’s tumultuous Supreme Court term and the threat this poses to the national-bank charter.

As you well know, almost all the attention on the Supreme Court that isn’t glued to Donald Trump targeted two end-of-session decisions revoking Chevron and extending ad infinitum the statute of limitations for regulatory …

12 07, 2024

FedFin on: How Will the End-Game Play Out?

Eliza Allen2024-09-09T11:59:41-04:00July 12th, 2024|The Vault|

…

8 07, 2024

Karen Petrou: What MAGA Republicans and Rohit Chopra Both Want

Eliza Allen2024-07-08T13:20:21-04:00July 8th, 2024|The Vault|

Following last week’s celebration of American independence, my thoughts turned to the confluence of concern from both sides of the political spectrum about an issue at the heart of the Bill of Rights: “financial censorship.” When Florida Gov. Ron DeSantis and CFPB Director Chopra agree – as they do – on a hot-button point such as freedom of thought as it may be expressed in financial transactions, a new framework is upon us no matter who wins in November. Virtuous as this ideal is, putting it into practice is fraught with consequences, more than a few unintended.

That Mr. Chopra chose to address the Federalist Society is notable in and of itself. I’ve done this more than a few times and emerged not only unscathed, but often enlightened. But that was before Democrats viewed the Society as a cabal meant to subvert rules such as those Mr. Chopra is fond of issuing. But the CFPB director knew his crowd – he and even super-MAGA conservatives fear that powerful financial companies threaten freedom of thought because giant platforms have undue control over each of our wallets. This may not be true, but at least one such company gave it a try and those taking aim at financial censorships think that once is enough, and they are right.

However, the focus on financial censorship goes beyond what payment companies allow us to express via what we purchase. The debate is over a decade old, beginning as it did when Obama Administration banking …

24 06, 2024

FedFin on: Squeezing Closed Ends

Eliza Allen2024-06-24T16:47:53-04:00June 24th, 2024|The Vault|

Late Friday afternoon, FHFA hoped quietly to announce that, while it was approving the gist of Freddie’s request to purchase certain closed-end second liens, it heard many critics and would sharply curtail the approval and, should it go any farther, seek still more public comment. For good measure, FHFA Director Thompson even invited comment on the new program approval process, one of the more controversial provisions in 2008’s GSE-regulatory rewrite…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.

…

28 05, 2024

Karen Petrou: Why Regulators Fail

Eliza Allen2024-05-28T12:38:29-04:00May 28th, 2024|The Vault|

Last week, the House voted on a bipartisan basis to stick its collective fingers in the SEC’s eye over its cryptoasset jurisdiction. And, in recent weeks, the Vice Chair of the Federal Reserve has been forced to concede that the end-game capital rules that are his handiwork as much as anyone’s will get a “broad, material” rewrite. What do these two comeuppances have in common? Each results from regulatory hubris so extraordinary that even erstwhile allies abandoned the cause. For all MAGA fears about an omnipotent “administrative state,” these episodes show that those seeking sweeping change without plausible rationales are still subject to the will of the people even if the people’s will befuddles those in the government’s corner offices.

First to the SEC. Chairman Gensler’s position on cryptoassets over the past three years is that many ways to use them are securities and anything that’s a security is his for the enforcing. I’m not even going to venture a conclusion on who’s right or wrong when it comes to abstruse Supreme Court rulings on complex definitions. What underpins the SEC’s downfall – temporary though it may be – is that any question as big as what’s a cryptoasset and who can do what with it should be answered by rules subject to public notice and comment, not episodic enforcement actions meant to teach everyone else a lesson.

Most people would learn the lesson if a coherent regulatory policy spelled it out. When policy is set by whack-a-mole instead of …

20 05, 2024

Karen Petrou on: How FSOC Enables Systemic Risk

Eliza Allen2024-05-20T11:37:05-04:00May 20th, 2024|The Vault|

One can and should debate the extent to which nonbank mortgage companies (NBMCs) are as systemically-risky as FSOC says they are. But it’s indisputable that, if FSOC believed what it said, then the paltry and politically-improbable recommendations it announced are proof of only one unhappy conclusion: all FSOC can meaningfully think to do when it sees a systemic risk is figure out how to bail it out. This is certainly what taxpayers have learned the hard way and investors have come to expect. Or, as humorist Dave Barry pointed out after the mid-March systemic deposit bailout, “Eventually the financial community calms down, soothed by the reassuring knowledge that American taxpayers will, as always, step up and cheerfully provide billions of dollars to whichever part of the financial community screwed up this time.”

As we noted in our detailed analysis of FSOC’s report, the Council lays out the rapid-fire growth of NBMCs, the role regulatory arbitrage played in pushing banks to the sidelines of the residential-mortgage business that once defined so many charters, and the direct taxpayer and resulting systemic risk of NBMC liquidity shortfalls. Asked about this at Wednesday’s HFSC hearing, Acting Comptroller Hsu said that NBMC stress could lead to “widespread contagion risk” that could prove “severe.”

Could NBMCs be pulled off the brink under current law? In a little-noticed aside, FSOC says no because NBMCs lack the assets that would make viable orderly liquidation by the FDIC under its systemic authority even if the FDIC finally figured out …

ElizaAllen

About Eliza Allen