The Vault

The Vault2023-11-21T07:33:18-05:00

Karen Petrou: What MAGA Republicans and Rohit Chopra Both Want

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 agencies launched what came to be called “Operation Chokepoint” to bar banks from doing business with entities the agencies didn’t much care for.  The agencies said that their distaste derived from financial risk; Republicans strongly differed and the agencies backed down.

Matters did not end with fears about governmental financial censorship.  The battlefield […]

FedFin: Taking Trump Still More Seriously

In the wake of last week’s debate, clients have asked that we advise about what a second Trump term might mean for U.S. mortgage finance.  We reviewed our forecast at the start of this year on exactly this point.  Much of it remains as before, but there are several areas where an update is warranted due to recent Trump fiscal- and monetary-policy trial balloons.  Our updated, complete forecast follows….

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

Karen Petrou: The Latest Faustian Fintech Bargain and How the Devil Gets Its Due

The sums lost in Synapse’s debacle are small when it comes to the financial system as a whole.  But, as the American Banker described last week, small amounts of money judged in the grand scheme loom large to many households.  Who’s to blame for losses due to the latest fintech’s playing fast and loose with FDIC-insured deposits? The perpetrators of course, but also the regulators who didn’t stop banks from striking Faustian deals with fintech companies, deluding themselves that issuing supervisory guidance would stop ruthless, agile speculators from preying on vulnerable banks and the still more susceptible customers.

Synapse has a cool name, but it sported red-hot warnings well before its bankruptcy.  That banks were willing to do business with a firm this dubious is a sign of deep strategic trouble for many small companies.  This is sad, but corporate survival often forces high-risk choices.  That regulators allowed bets that endanger both banks and their customers makes clear yet again that supervisory agencies take far too long and then do too little.

Was Synapse a clear and present danger before it became disastrous?  Just for starters, Synapse’s founder had apparently never worked a day in his young life.  Banks are supposed to know their customers and regulators are supposed to be sure they do.  Thus, this deal from day one was a bad idea for banks that should know better or quickly be told so. Drinking from the devil’s cup of “accelerating innovation” may be bewitching, but it’s also very dangerous.

With no one apparently saying anything, Synapse joined the flock of fintechs exploiting the unique privileges of a bank charter by, as critics rightly assert, “renting” the charter to use FDIC deposits as bait.  Promising that a customer’s funds will be FDIC-insured, these bank “partners” in fact only put consumer-derived […]

FedFin on: Squeezing Closed Ends

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.

June 24th, 2024|Tags: , |

Karen Petrou: Why Synthetic CRT Isn’t the Crisis It’s Cracked Up to Be

Last week, several press reports slammed synthetic credit risk transfers (CRTs) on grounds that the biggest U.S. bank in this sector which is of course the biggest global bank ever – JPMorgan – is creating new and serious risks when it scores SCRTs.  It’s easy to assume that anything “synthetic” is more dangerous than the “natural” way a bank absorbs credit risk, but this is simply not the case as a whole lot of financial crises make all too clear.  SCRTs are a rare example of a complex structured deal that gives the issuing bank a safe, sound way to reduce its capital requirements.  Regulatory arbitrage, yes, regulatory evasion, no.  The real risk SCRTs actually pose lies in the way some banks are using “natural” credit – i.e., loans – to lever up SCRT investors in ways dangerous to everyone but the SCRT issuer.

Let me explain.  FedFin laid out how SCRTs work in a September 2023 report following conditional FRB approval of the first of these deals since the great financial crisis.  One of the hard-learned GFC lessons was that structured financial instruments can be toxic due to opacity to regulators, counterparties, and even bank sponsors.  Given this, the regulator’s SCRT okay has several significant strings attached.

Most importantly, the bank making use of the credit-linked notes (CLNs) usual in these deals must issue the notes via a bankruptcy-remote vehicle and get cash or like-kind collateral to enjoy any regulatory-capital offset.  In short – and this is very short given SCRT complexity, these deals are no riskier to the issuing bank than any other credit exposure backed by high-quality collateral.

This is not to say that SCRT is risk-free.  For the issuing bank, collateral could be rehypothecated or otherwise elusive when needed.  This is, though, a risk common to all collateral, […]

June 17th, 2024|

FedFin on: AI Implementation

Although pressed by Congress to reach conclusions about AI’s risk in the financial sectors, Treasury is following up the worries in the most recent FSOC report with only a request for information (RFI) from the public.  The RFI follows an Executive Order (EO) from President Biden in 2023 instituting a “whole-of-government” program to identify best-use and high-problem aspects of AI from both a private- and -public sector perspective….

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

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