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Talking With Rep. Gottheimer; SVB Goes Down; Fed's Barr Skeptical About Crypto; A GOP Roadmap for ESG; Three Big Players Offer 'Consensus' on SEC Trading Rules
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Things are heating up on many fronts in financial regulation. It was an especially tough week for federal bank supervisors who watched two lenders go down. That hasn’t occurred in a long time. We heard the first extensive remarks on cryptocurrency oversight from the Fed’s vice chair for supervision — he’s certainly not an industry booster. And no, Republicans aren’t going to drop their attacks on the environmental, social and governance movement. In fact, one influential conservative group issued a detailed blueprint to help politicians and state attorneys general do a better job investigating (and suing) “woke” companies. We also dug deeper into the SEC’s broad plan to revamp stock trading. Three of the major firms impacted, all on different sides of the business, offered a “consensus” plan for what the agency should pass, and what it should toss out. No shock, Chair Gary Gensler isn’t likely to agree. For our Friday Q and A, we spoke to a New Jersey Democratic congressman who sits on the Financial Services Committee about the prospects for bipartisan legislation.
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Friday Q and A: The Republican takeover of the House has brought a new agenda, and leadership, to the Financial Services Committee. But with Democrats controlling the Senate and the White House, its legislative efforts aren’t likely to go anywhere unless there is some bipartisan agreement. Wondering how likely that is, we called up Rep. Josh Gottheimer, a moderate Democrat from New Jersey – who knows a lot about working across party lines. He’s co-chair of the Problem Solvers Caucus, a group of Republican and Democratic lawmakers dedicated to finding common ground on issues ranging from infrastructure to guns to immigration. Gottheimer also helps lead a bipartisan push to restore the state and local tax deduction, or SALT.
On financial services, Gottheimer has taken a special interest in setting a regulatory framework for crypto and stablecoins. He’s a member of the new digital assets and fintech subcommittee, as well as the capital markets panel where he helps oversee the SEC. Read on to hear his views on digital assets and the potential for compromise under Chairman Patrick McHenry. Gottheimer, who got his start as a speechwriter for President Bill Clinton, has known SEC Chair Gensler (also a Clinton administration alum) for years – and has some thoughts on his packed regulatory agenda. What follows is our (lightly edited and condensed) conversation.
Capitol Account: What’s your district like?
Josh Gottheimer: What I love about my district is you've got everything. From great suburbs of New York, and people who work in the city – a lot of heavy financial services sector, which is key for jobs here. Then you've got a big rural swath in the northwest part of my district with farms. It's just absolutely beautiful, and there’s a lot of ecotourism. There are more urban areas like Hackensack…I feel like there's not an issue that doesn't come up to me every week – everything from the farm bill to financial services are front and center here.
CA: You mention financial services. Most Democrats seem to be almost reflexively anti-Wall Street. But you represent people in the industry. What are your thoughts?
JG: The financial services sector is not only key to driving the economy in my district and state, but obviously key to driving our country's economy. We're at the center of the global economy and we’re the peg currency of the world. Our markets help drive huge amounts of jobs. I’ve got the back end of the New York Stock Exchange running through part of my district – literally...So yeah, I'm a strong supporter of business and a good capitalist.
CA: Does it frustrate you that many members of your own party don’t seem to share those views?
JG: I think most folks in the country and in Congress, including on our side, are about common sense solutions and are reasonable – they're not extremists. We've got extremists on both sides. I co-chair this group called the Problem Solvers Caucus, which now has more than 60 members, half Democrat and half Republican. We’ve been finding bipartisan solutions and getting things done. I think that's what people want; I know it's what my voters want.
CA: What’s it like being on the Financial Services Committee now that Democrats are in the minority? Are there areas for compromise?
JG: The key is actually making sure we talk to one another. A lot of the time I spend on the committee is talking to the other side, not just our side. When it's been extremely partisan on either end, not a lot has found its way to the floor. I think there's a reason for that. It's not good for the economy, it's not good for job creation and it's not actually what people want.
CA: Any early thoughts on McHenry?
JG: I have found him to be incredibly reasonable. We've worked very closely together. He and ranking member [Maxine] Waters have historically had a very good relationship….It's not a very shrill committee, where people are throwing mud at each other.
CA: Any specific issues that you think are ripe for cooperation?
JG: Digital assets. There's a new subcommittee, which I'm a member of. I’ve been very involved with that space, and pushing to make sure that we have proper guardrails.
CA: You’ve been particularly focused on stablecoins. Should Congress address them first, or try a comprehensive approach?
JG: You have to deal with stablecoins because it's very difficult to do more in the space without dealing with the basics. Then, my sense is the chairman will try to legislate around custody issues. I generally believe that if you try to boil the ocean, nothing gets boiled in the end. The realistic outcome is something more of an incremental approach. But the bottom line is we have to actually, as I've said for years, make it clear who the regulators are.
CA: You've been critical of Gensler’s approach on digital assets.
JG: What I said to the chairman and, publicly, is what I believe: We need to have rules of the road in place. And you actually have to regulate through proper rulemaking and not just use enforcement…It just leads to more, in my opinion, problems. The SEC hasn't proposed a single rule…and has done a haphazard job.
CA: How so?
JG: You can't regulate through – and I said this – a random patchwork of letters. And say to people, `come in, talk to me if you want,’ and hope that they do. You actually have to go through a proper rulemaking. It's interesting, they've been very aggressive in rulemaking [in other areas]...which I think they should run a better process on.
CA: That’s true. The SEC is proposing a lot of rules on issues, like market structure, where not many people see a pressing problem. But crypto is in crisis. Why not more attention there?
JG: It's a head scratcher. I'm not sure…(Friday)
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SVB Down: Silicon Valley Bank’s collapse – the biggest bank failure since the 2008 financial crisis – is a seismic event that will have far-reaching policy implications. And it comes in the same week that Silvergate, a bank that thrived on crypto business, went down. So there’s intense pressure on regulators to show they are in control of the situation. The main fear is that jittery investors and depositors conclude that other lenders are in trouble, triggering a contagion that quickly spreads.
In a clear sign that anxiety is high in Washington, Treasury Secretary Janet Yellen convened leaders from the Fed, FDIC and the OCC today to discuss the SVB debacle. According to a Treasury statement, she “expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient.” (A spokesperson for Senate Banking Committee Chairman Sherrod Brown said he is “monitoring the situation closely,” adding that “the FDIC and other banking regulators are on the job to protect insured depositors and our banking system.”)
It’s worth pointing out some of the unusual circumstances involved in the failure of SVB, a bank with more than $200 billion in assets that has catered to tech startups since it was founded 40 years ago. The FDIC pretty much always shutters problem banks on Fridays after the market closes – but this time the agency was forced to act in the middle of the day. Also, instead of lining up a buyer (typically the preferred course of action) the FDIC is setting up a sort of bridge bank that will immediately take on all of SVB’s insured deposits.
These moves underscore how quickly the situation was unraveling – and how few options federal overseers felt they had, some former government officials we spoke with pointed out. They noted that regulators may have been a bit handcuffed by the Biden administration’s own regulatory policies, especially its strong opposition to bank mergers. The Fed, FDIC and OCC have all indicated that they are pretty lukewarm on large banks making acquisitions, because such deals increase systemic risk. With $200 billion of assets, only a good-sized competitor would be able to buy SVB…(Friday)
Barr Speaks on Digital Assets: While it’s not likely a surprise to those who’ve been following bank regulators’ recent actions on crypto, Fed Vice Chair for Supervision Michael Barr placed himself squarely in the skeptic camp.
Making his first extensive remarks on digital assets, Barr gave a nod to the “potential” public benefits of the technology, but then quickly pivoted to noting: “the actual experience of the many people whose hope and enthusiasm for crypto-assets have met with disappointment and sometimes devastating loss.” Barr even raised the specter of tulip mania. “When it comes to certain crypto-assets, some of which have no intrinsic value beyond the faith of their owners, the law of gravity will eventually apply, as it did with the tulip frenzy in Holland more than 400 years ago,” he said.
Speaking at the Peterson Institute for International Economics, the Fed’s top bank cop was especially pointed on stablecoins. Again digging into the past, Barr equated them to the private money era in America. “There is a long and messy history of the use of private money in the United States that shows the need for robust regulation and oversight,” he said. Barr also toed the Fed line, stressing that Congress should lay out the proper regulatory framework for stablecoins – and give the job to the banking agencies. He noted that the tokens are mainly used to trade crypto, so there’s not yet a big danger they could infect the financial system. But that could change:
“Consider the consequences if a stablecoin not subject to appropriate supervision and regulation were to be adopted as a widespread means of payment, which some stablecoin developers state as a goal. Stablecoins have the potential to scale quickly because of network effects. An unregulated, unsupervised, deposit-like asset could create tremendous disruptions, not just for financial institutions but for people who might rely on the coin if it were to get wide adoption.”
What follows are a few other interesting moments from the vice chair’s talk.
New team: Not a lot of details, but Barr said the central bank is “enhancing” its supervision process and setting up a group to monitor crypto activities. “We are creating a specialized team of experts that can help us learn from new developments and make sure we're up to date on innovation in this sector.”…(Thursday)
ESG Wars: It seems like hardly a day goes by without a GOP official – on the state or federal level – complaining about “woke capitalism” and firing off a letter accusing a company of prioritizing progressive politics over profits. But despite the bluster, it’s fair to say that the Republican strategy for dismantling the environmental, social and governance movement hasn’t been that clear. On Wednesday, a well-funded dark money group that’s influential with Republicans is taking a step toward filling that void.
Consumers’ Research, known for the flashy anti-ESG campaigns it ran against BlackRock and Coca-Cola, released a 30-page report designed to be a blueprint for how politicians can bring businesses to heel. Notably, it includes a section that lays out ways state attorneys general can sue green-friendly corporations under antitrust laws. It also offers extensive advice for lawmakers wanting to conduct oversight. Will Hild, the group’s executive director, says he hopes the document helps lawmakers in Washington turn their rhetoric into concrete actions.
“We were worried that while there was a lot of consternation at the federal level around ESG, it didn’t seem like people were putting together a roadmap for pushing back,” he says in an interview. “We wanted to provide at least an attempt at a comprehensive plan for lawmakers and their staffers to do more than just messaging.”
If the plan gains traction, the ESG backlash could be entering a more troublesome stage for corporate America. Thus far, Republican attacks have largely taken a reputational toll. While there have been a few red state attempts at boycotts (see BlackRock, for example) in most cases the Sturm und Drang hasn’t had much of an impact on companies’ bottom lines. But if AGs start firing off lawsuits and members of Congress really dig into firms’ operations, it could be a game changer.
Not a surprise, but the finance industry is a main focus of the report – and it frequently highlights the so-called “Big Three” asset managers, BlackRock, Vanguard and State Street. Consumers’ Research accuses them of being at the center of the ESG cabal because they’ve adopted shareholder voting guidelines that promote issues like workplace diversity. Proxy advisors Institutional Shareholder Services and Glass Lewis, as well as a number of activist investment firms focused on environmental issues, also come in for a lot of criticism.
On legal challenges, Consumers’ Research contends that there is ample evidence that entities pushing ESG investments are coordinating their efforts. As a result, opponents may be able to “establish violations of federal antitrust law prohibitions on collusion,” the group writes…(Wednesday)
Market Structure Battle: The question now may be: Who’s left to support Gensler’s controversial plan to send retail stock orders to auctions? In what certainly is big news in the market structure world, the New York Stock Exchange came out against the effort – an especially notable move because its business would likely benefit. Less surprisingly, but still interestingly, the NYSE was joined on a letter to the SEC that laid out the opposition by Charles Schwab and Citadel Securities.
The three are among the major companies impacted by the auction idea, but come from different sides of the industry; Schwab is the biggest U.S. retail broker, Citadel the largest market making firm and NYSE the top stock exchange. Their comment also argues that the agency should withdraw its proposal for a federal standard for what constitutes “best execution” for a trade.
The note, which bills itself as a “consensus position” on the stock trading rules overhaul, also offers support for two other planks: changes to the price increments that shares can be traded at, and new disclosures for brokers that detail the quality of execution they provide for customers. (The SEC issued all four proposals in December, setting off market-wide angst, a big lobbying campaign and threats of lawsuits.)
“We are deeply concerned that the commission has simultaneously issued multiple far-reaching proposals that would dramatically overhaul current market structure without adequately assessing the cumulative impact on the market or the potential for unintended consequences,” the three firms wrote. “While we agree that there are certain regulatory enhancements that should be advanced, we recommend pursuing a deliberate process focused on identifying tailored solutions that address clearly-identified issues as well as related industry concerns, and that enable the commission to evaluate expected outcomes before proposing further reforms.”
In a blog post, NYSE President Lynn Martin called the suggestions a “thoughtful compromise that we believe will quickly achieve the SEC’s core policy objectives while reducing the risk of negative outcomes.” And Schwab, in a statement, said: “We believe, with the SEC’s participation, this commonsense approach could be a model for a productive path forward for the industry regarding market structure.” Citadel, in an email, noted that “our recommended approach would improve the equity markets without introducing the significant risk of unintended consequences.”
Not everyone, however, was buying the kumbaya moment. Dave Lauer, the co-founder of the advocacy group We the Investors, immediately took to Twitter to declare that NYSE was being pressured by “it’s biggest customer” – Citadel. In an interview, Lauer says that NYSE’s position on the auctions is “surprising on the surface, but once you dig into how NYSE makes money, it becomes less surprising.” Lauer notes that exchanges earn much more from data and technology, so giving up the chance to handle the retail auctions probably won’t hurt that much.
An SEC spokesperson didn’t respond to a request for comment. But Gensler isn’t likely to let the three companies’ letter shake his belief that auctions will help investors save on fees and get better prices for their trades. At its core, the proposal is designed to move the bulk of retail trading (now handled largely by market making firms like Citadel) onto exchanges where prices are publicly displayed. The SEC chief contends that the current arrangement, which includes market making firms paying brokers for the orders (the process known as payment for order flow), is a conflict of interest. Auctions, the agency estimated, could save small investors some $1.5 billion annually, most of which would come from the boost in competition…(Monday)
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