CFPB Announces Regulatory Targets
On Thursday, the new Consumer Financial Protection Bureau (CFPB) outlined six areas that could be subject to its supervision. The six areas include debt collection; consumer reporting; consumer credit; money transmitting/check cashing; prepaid cards; and debt consolidation. The Bureau also identified automobile loans and personal loans as large sectors that could fall under its supervision. However, the Bureau is prevented from regulating non-bank firms until it has a Senate-confirmed director, a position that will be difficult to fill given Senate Republicans’ pledge to block anyone President Obama nominates for the job. Republicans have said they will block the nomination unless changes are made to the agency’s structure, including making it a five-member commission rather than headed by a single director. The CFPB is expected to officially begin operations in July.
Cantor Pulls out of Biden Debt Limit Negotiations
On Thursday, House Majority Leader Eric Cantor (R-VA) announced that he was withdrawing from Vice President Biden’s debt limit negotiations over whether tax increases should be included in the deal. The only other Republican in the group, Sen. Jon Kyl (R-AZ), also withdrew citing the President’s involvement as the only remedy to break the logjam. The suspension of the group’s efforts could mark the start of the final stage of negotiations, which most participants had long assumed would be concluded by the President, Speaker John Boehner (R-OH), and Senate Majority Leader Harry Reid (D-NV). While it had been assumed that the Congressional leaders and the President would ultimately have to strike the final deal, the Biden talks were expected to extend at least through the end of June.
Greece Secures Second Bailout
On Friday, Prime Minister George Papandreou announced that Greece had secured a second bailout from the European Union and the International Monetary Fund totaling $156.83 billion. For Greece to receive the money, the country’s parliament must approve next week a multi-billion dollar austerity package that includes higher taxes and cuts to government programs.
White House Announces Release from Oil Reserve
On Thursday, President Obama announced the Strategic Petroleum Reserve would release 30 million barrels of oil. The decision sparked a plunge in crude oil prices in the U.S. and Europe. According to Energy Secretary Steven Chu, the oil will be released over the next 30 days and constitutes half of the 60 million barrels that the nations in the International Energy Agency plan to bring to market. Chu also said that the Energy Department estimates that the conflict in Libya has caused a loss of roughly 1.5 million barrels per day from global oil markets.
Goldman Settles Massachusetts Trading Investigation
On Thursday, the Massachusetts Securities Division announced that Goldman Sachs agreed to a consent order to pay $10 million and to ban so-called “trading huddles.” The Massachusetts Securities Division had been investigating Goldman for the past two years to determine whether the trading ideas that analysts had shared with traders during these huddles “favored the interests of certain priority clients.” Goldman settled the matter without admitting or denying the state regulator’s allegations and agreed to disclose to future research clients that they would not all be treated equally. In its consent order, the Massachusetts regulator said it found no instances of fraud.
Senate Defeats Bill to Delay Interchange Fee Caps
On Wednesday, after a long and divisive lobbying fight, retailers defeated the banking industry in the Senate on a vote to delay new caps on debit-card swipe fees. The legislation was offered by Sens. Jon Tester (D-Mont.) and Bob Corker (R-Tenn.) and failed on a 54-45 vote, falling just six votes shy of the 60 needed for passage and clearing the way for a provision in last year’s Dodd-Frank Wall Street reform law to take effect July 21. The provision, often referred to as the “Durbin Interchange Amendment,” required the Federal Reserve to establish fair and reasonable interchange fees for many debit and prepaid card transactions. Last fall, the Federal Reserve proposed new rules which (among other things) would limit to 12 cents per transaction the fee that large banks (with more than $10 billion in assets) can charge merchants every time a consumer uses a debit card or a prepaid gift card. These proposed rules garnered significant criticism and final rules, which are now overdue from the Federal Reserve, are expected shortly. Senators Tester and Corker initially proposed legislation to delay the Durbin amendment from taking effect for 24 months. The final version of the Tester-Corker bill cut the delay in half to 12 months and called for a six-month study of the costs associated with debit transactions and their impact on consumers and community banks.
Bernanke Signals End to Fed’s Monetary Stimulus
On Tuesday, in a speech at the International Monetary Conference in Atlanta, Fed Chairman Ben Bernanke signaled that the central bank plans to end its “quantitative easing” program on schedule this month. Bernanke’s announcement comes seven months after the central bank began a historic round of monetary stimulus. In his speech, Bernanke acknowledged the recovery has fallen short of the central bank’s expectations because of the high unemployment rate and falling home prices.
Goolsbee Leaving Council of Economic Advisors
On Monday, Austan Goolsbee, chairman of the White House Council of Economic Advisers, announced that he plans to leave the White House and return to teaching economics at the University of Chicago this fall. Goolsbee has been on leave for four years from the University’s Booth School of Business where he was a professor for 14 years before joining the Administration.
Diamond Withdraws Fed Nomination
On Sunday, MIT professor Peter A. Diamond announced he was withdrawing his nomination to the Federal Reserve Board from consideration before the Senate. Diamond’s nomination had been blocked by Senate Republicans for over a year because of Senate Banking Committee Ranking Member Richard Shelby’s (R-AL) contention that Diamond lacked the proper qualifications. President Obama first nominated Diamond in April 2010.
IMF Leader Resigns
On Wednesday, International Monetary Fund (IMF) President Dominique Strauss-Kahn resigned following his arrest in New York. European officials quickly moved to assert their claim over the leadership of the IMF, however emerging economic powers Brazil, China and India are seeking a process that prevents the top position from being granted to a European, as has been the convention since the fund was founded 65 years ago. European leaders appeared to unite behind Christine Lagarde, France’s finance minister, as their preferred candidate to succeed Mr. Strauss-Kahn. Other possible candidates include Kemal Dervis, a former finance minister of Turkey; Arminio Fraga Neto, former governor of the central bank of Brazil; Tharman Shanmugaratnam, finance minister of Singapore; Agustín Carstens, governor of the central bank of Mexico; and Montek Singh Ahluwalia, deputy chairman of India’s planning commission. The IMF’s 24-member executive board has begun discussions about the selection process for the new managing director. The board is scheduled to hold its regular weekly meeting on Friday when the timetable for succession, like deadlines for nominations, may be discussed. Countries will nominate their candidates, and then the board will vote, with large financial contributors like the United States and Japan getting a bigger share of voting rights. The entire process could take months, as it has in the past.
Fed to Propose New Stress Tests
On Monday, press reports indicated that a draft of the Federal Reserve’s new rules regarding stress tests is set to be approved by the Federal Reserve Board and put out for public comment within weeks. The Fed is seeking to subject banks to annual capital tests and to reserve the right to veto dividend pay-outs. In between the Fed’s annual reviews, banks would be able to resubmit capital plans should they wish to increase dividend payments or stock buybacks. However, industry executives say the restrictions on capital distribution are excessive and will inhibit their ability to compete globally.
DOJ Forces Nasdaq/ICE to Withdraw NYSE Proposal
On Wednesday, Nasdaq OMX Group and IntercontinentalExchange said they were withdrawing their April joint proposal of $11 billion to acquire NYSE Euronext, citing discussions with the Justice Department’s Antitrust Division that “surprised and disappointed” Nasdaq and ICE. Speculation has been that the Justice Department’s Antitrust Division blocked the merger for two reasons. First, because the combined company would have too much market power — 50% of the market for U.S. stock trading NYSE with 28%, Nasdaq 22%. Second, because the merger’s $740 million in proposed cost savings would cause massive layoffs. Experts now believe that Deutsche Boerse’s (DB1) $10 billion bid for NYSE Euronext will prevail. The Futures Industry Association estimates that the NYSE/DB1 merger would create the top-ranked global futures trader, controlling 11 derivatives markets in the U.S. and Europe with 4.8 billion in contracts.
HUD to Release Report Accusing Five Biggest Mortgage Firms of Fraud
On Tuesday, press reports indicated that the Department of Housing and Urban Development will soon release audits that accuse the nation’s five largest mortgage companies (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial) of defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans. The reports indicate the audits accuse the five major lenders of violating the False Claims Act, a Civil War-era law crafted as a weapon against firms that swindle the government. The audits were completed between February and March. According to the reports, HUD’s auditor has referred its findings to the Department of Justice, which must now decide whether to file charges.
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Bank Regulators Testify on Wall Street Reform Act
On Thursday, Deputy Treasury Secretary Neal Wolin, Federal Reserve Chairman Ben Bernanke, and Federal Deposit Insurance Corp. Chair Sheila Bair testified before the Senate Banking Committee on implementation of the Dodd Frank Wall Street Reform Act. The most salient piece of testimony came from Fed Chairman Bernanke who said the central bank is set to finally publish this summer tighter rules for big financial firms that pose a risk to the economy. The new rules will likely include more stringent requirements for large banks and financial companies, including stricter standards on capital and leverage ratios.
Treasury Auctions Will Exceed Debt Limit Monday
This week, the Treasury Department auctioned $72 billion in three and ten-year notes. When the notes are formally settled Monday, this will cause the U.S. Government to officially exceed its federal borrowing ceiling. As of Tuesday, total debt subject to the limit was $14.274 trillion. The Obama administration has asked Congress to raise the limit, warning that failure to act could lead the government to default by August 2nd. The federal budget deficit widened in April, with the government spending $ 40.49 billion more than it collected.
Bipartisan Housing Reform Bill Introduced
On Thursday, two members of the House Financial Services Committee — Rep. John Campbell (R., Calif.) and Rep. Gary Peters (D., Mich) — introduced legislation to replace troubled government-seized housing giants Fannie Mae and Freddie Mac and set up as many as fifteen or twenty private firms that would buy loans, then package and sell them with explicit government guarantees. The bill does not specify whether the new mortgage companies should hold a portfolio of mortgages the way Fannie and Freddie currently have on their books. It also seeks to limit taxpayer liability by creating a private sector financed reserve fund to cover any losses. The fund would be capitalized by assessing a special guarantee fee to buyers of the packaged mortgage securities. It also would seek to recoup any taxpayer funds spent to bail out the firms through a special assessment levied on the firms.
April Unemployment Rises to 9%
On Friday, the Department of Labor announced that the United States economy added 244,000 jobs in April, but the unemployment rate rose to 9 percent from 8.8 percent in March. The jobs numbers beat forecasts estimates of an expected gain of 185,000 jobs.
Bank Regulators to Testify on Dodd-Frank in Senate
The Senate Banking Committee announced that next Thursday, May 12, Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corp Chairman Sheila Bair, Commodity Futures Trading Commission Chairman Gary Gensler, Securities and Exchange Commission Chairman Mary Schapiro, Acting Comptroller of the Currency John Walsh and Deputy Treasury Secretary Neal Wolin will testify on the implementation of the Dodd-Frank financial oversight law. The hearing is slated to focus on monitoring systemic risk and promoting financial stability and will likely include questions over a recent settlement bank regulators entered into last month with large banks over mortgage servicing abuses.
Roemer Is Newest Rumor to be Next Commerce Secretary
As current Commerce Secretary Gary Locke prepares to depart for his new assignment as Ambassador to China, former Representative and current Ambassador to India Timothy Roemer’s name has surfaced as Locke’s possible successor. Roemer was an early backer of President Obama’s 2008 presidential campaign. Obama is also rumored to be considering current U.S. Trade Representative Ron Kirk and General Electric CEO Jeffrey Immelt for the position.
Q1 GDP Slows to 1.8%
On Thursday, the Bureau of Economic Analysis announced that the U.S. GDP growth rate in the first quarter of 2011 slowed to an annual rate of 1.8 percent, compared to a rate of 3.1 percent in fourth quarter 2010 and 3.7 percent in first quarter 2010. The Bureau cited a combination of lower-than-expected economic data, global energy uncertainty, and concerns about the budget deficit as causes of the growth rate decelerating.
Bernanke Announces Rates to Stay at Near Zero, Ends Bond Buying Program
On Wednesday, Federal Reserve Chairman Ben Bernanke held his first quarterly press conference in which he said that the economy and job market are improving moderately, but the housing market and other factors such as gas prices continue to be a drag on growth. He announced that the Fed plans to end the $600 billion treasury bond-buying program in June and will leave interest rates at their current levels. The event followed a two-day meeting of the Fed’s policymaking committee at which the central bank indicated continuity in its strategy. The Fed’s bond buying program known as the second round of quantitative easing, or “QE2,” will expire as scheduled at the end of June. The Fed also maintained its near-zero target for short-term interest rates, where it has been since December 2008, and indicated that it expects to keep rates “exceptionally low” for “an extended period.”
Debt Ceiling Vote
The vote to increase the U.S. government’s borrowing ceiling beyond the current limit of $14 trillion has become the hot topic in Congress. While the Treasury Department’s original estimate was that the ceiling would need to be raised by mid-May, the Department is now saying it could hold out till July but would need to take extraordinary measures. While the measure is expected to easily pass the Senate, the question remains whether the House can pass such a bill. House Speaker John Boehner (R-OH) said this week that he will not guarantee a vote on bill to raise the debt limit, much less passage of such a bill, without cuts in discretionary spending and alterations of entitlements such as Medicare and Medicaid. Congress returns next week from its two week recess, and House Republicans plan to hold a series of meetings to gather feedback from their Members about the debt ceiling.
Japan Announces Disaster Relief Fund
On Friday, Japanese Finance Minister Yoshihiko Noda announced a 4 trillion yen ($48.5 billion) emergency budget for disaster relief in the wake of the nuclear crisis triggered by the March tsunami. Noda said the government would not issue new bonds to pay for the fund, and the cabinet plans to submit the emergency budget to parliament on April 28. Given that the material damage alone from the disaster could top $300 billion, the government is expected to seek additional future disaster funding that will likely require tax increases and debt financing.
Justice Department Examines NYSE/Nasdaq/ICE Merger
On Wednesday, Nasdaq-OMX CEO Robert Greifeld and ICE CEO Jeffrey Sprecher disclosed in a letter to NYSE Euronext’s board that they are in discussions with the antitrust division of the Justice Department (DOJ) after buying NYSE Euronext stock which triggered the DOJ’s antitrust review. The letter also disclosed that Nasdaq-OMX and ICE are willing to pay NYSE Euronext $350 million if DOJ blocks their proposed takeover, an offer they say is now based on “fully committed financing” of $3.8 billion.
On April 10, NYSE Euronext ’s board rejected the Nasdaq/ICE unsolicited $11.3 billion proposal and affirmed its February agreement to merge with Deutsche Boerse AG for $9.5 billion in stock. The agreement with Deutsche Boerse includes a payout of 250 million euros ($358 million) should that deal fall apart. NYSE Euronext acknowledged that it had received the Nasdaq/ICE reverse break up free proposal and that its board is reviewing the matter.
S&P Changes U.S. Long Term Rating from Stable to Negative
On Monday, Standard & Poor’s Ratings Services (S&P) changed its outlook on the U.S. long-term credit rating from stable to negative because ” the U.S. has relative to its ‘AAA’ peers very large budget deficits, rising government indebtedness, and the path to addressing these is not clear.” While the S&P affirmed the U.S. ‘AAA’ long-term and ‘A-1+’ short-term sovereign credit ratings, it also predicted at least a one-in-three chance that it could lower its long-term rating on the U.S. within two years because of the increased risk that the political negotiations over when and how to address both the medium and long-term fiscal challenges will persist until at least after the elections in 2012.
Shutdown Averted, House Passes Budget, Debt Ceiling Vote Next
Last Friday night, Senator Harry Reid (D-NV), Speaker John Boehner (R-OH), and President Obama came to an agreement to fund the federal government for the remainder of the fiscal year, averting a possible shutdown. On Thursday, the House passed the legislation by a bipartisan vote of 260-167. 59 Republicans voted against the bill, and 81 Democrats voted for it. Hours later, the Senate acted with far less suspense but again on a bipartisan 81-19 roll call. With over six months of the current fiscal year already completed, the funding bill reduces the spending level by nearly $38 billion below what it was when the new Congress began in January, making it the largest one-year cut from the President’s budget request in the nation’s history.
This Friday, the House approved a fiscal year 2012 budget resolution drafted by Budget Committee Chairman Paul Ryan (R-WI), which imposes $5.8 trillion in spending cuts over the next decade. The final tally was 235-193, with four Republicans and every Democrat opposing it. The GOP resolution will not be approved by the Senate, and budget resolutions do not go to the president or hold the force of law. However, Ryan has said that the GOP will deem his budget as the ceiling for spending for 2012. For this reason, the most important aspect of the resolution is the allocation it gives to the Appropriations Committee for next year: $1.019 trillion in non-emergency spending. This number will play a big role in a looming spending fight in the fall. If Republicans and Democrats cannot agree on appropriations spending by September 30, the end of the current fiscal year, the government will shutdown.
Congress will now turn to the issue of raising the so-called “debt ceiling,” or the statutory limit on federal debt. The U.S. government had $14.216 trillion in total debt outstanding as of Monday, and the cap is $14.294 trillion. The U.S. Treasury Department released a statement saying the ceiling is projected to be breached in the next 30 days, although it could make adjustments to postpone default until early July. On Thursday, Majority Leader Harry Reid (D-NV) said he wants a clean vote to raise the debt ceiling, but Republicans have insisted they want the vote paired with other budget reform measures.
European Central Bank Announces Interest Rate Hike; Portugal Bailout Next
On Thursday, Jean-Claude Trichet, European Central Bank president, announced a 25 basis point rise in eurozone borrowing costs, to 1.25 percent. This will be the first of such an increase since the 2008 financial crisis. In response to the news, the euro initially dipped against the dollar but later appreciated to trade above $1.43. In his remarks, Trichet also said the ECB had encouraged Portugal to request an international bailout, which is estimated at 80 billion euros, roughly the same amount as Ireland but less than the 110 billion euro package offered to Greece. EU, European Central Bank and International Monetary Fund officials will meet in Lisbon next week to negotiate the cuts that are deeper than those that were rejected by Portuguese opposition politicians last month.
SEC Reviews Private Company Share Rules
On Wednesday, SEC Chairman Mary Schapiro sent a letter to House Government Reform Committee Chairman Darrell Issa (R-CA) saying that she had ordered a review of all the rules that affect share issues by privately held companies. According to the letter, the likely changes would include raising from 499 the number of shareholders private companies can have without being required to open their books, and also making it easier for such companies to publicize share offerings. The SEC review also will examine issues raised by the growing use of “special purpose vehicles” that allow a pool of investors to buy a stake in a company, while counting as only one shareholder for the purposes of the SEC rules. Shapiro’s letter also indicated that the SEC is considering relaxing a strict ban on private companies publicizing share issues, known as the “general solicitation” ban.
FDIC Introduces New Fed Borrowing Fee
Last Friday, the Federal Deposit Insurance Corp. (FDIC) issued a new rule that increases the fees on banks that borrow overnight funds from the Federal Reserve. The FDIC introduced the higher fees as called for in last year’s Dodd-Frank financial reform law. The higher fee has led some companies to step out of the short-term lending markets, exacerbating an already low supply of Treasury bills used to back borrowing. On Tuesday, the FDIC issued a response to criticism of the rule saying that the notice of proposed rulemaking was announced in November giving banks sufficient time to make adjustments and that the Congressionally-mandated change better reflect risks to the industry-funded Deposit Insurance Fund.
Government Shutdown Looms
With the current temporary funding resolution set to expire April 8, House and Senate Appropriations committees worked toward crafting a six-month compromise bill, setting annual spending at $1.055 trillion, $28 billion more than the House-passed level but still a $33 billion cut from the original spending measure. However, House Republicans remain splintered over whether a shutdown would be good politically, or whether they should compromise with Democrats in order to move on to larger future battles such as next year’s budget and the debt ceiling increase. Meanwhile, Democrats also remain divided over whether to allow a shutdown to happen or acquiesce to Republican cuts. Whether a compromise can be reached to avoid a shutdown will be known next week.
Unemployment Rate Drops to 8.8%
On Friday, the Department of Labor announced that the unemployment rate dipped to 8.8% in March from 8.9% in February. Nonfarm payrolls gained 216,000, with private-sector employment rising by 230,000. Payroll employment stood at 130.7 million in March. There were gains of 199,000 jobs in services and 17,000 jobs in manufacturing in March. Government employment fell by 14,000 and 9,000 jobs were lost in education. Nearly half of the unemployed have been out of work for 27 weeks or more. Private-sector wages fell 2 cents an hour to $19.30.
Ally Financial Files for IPO
On Thursday, Ally Financial, the former finance arm of General Motors, filed for an initial public offering that would allow the federal government to begin selling off its 73.8 percent stake. Ally said in its registration statement with the Securities and Exchange Commission (SEC) that it was seeking to raise $100 million. Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley are the lead underwriters. The company did not give an estimated date or share price for the offering. The Treasury Department, which invested more than $17 billion in Ally, did not say how much of its stake it intended to sell. In addition to common shares, the Treasury Department owns $5.9 billion in convertible preferred stock. Earlier this month, the Treasury Department began unwinding its holdings in Ally, selling $2.7 billion in trust preferred securities.