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Mar 19
Financial Regulation & Policy Outlook – A View from Washington D.C.

​Thursday, March 8, 2018

Speaker: Jaret Seiberg, Managing Director, Cowen Washington Research Group.

1.    Political environment in Washington DC.

  • Trump is controversial. However, we should admit that despite a political chaos, he achieved a lot for the economy.
  • Good news: Trump certainly has been successful. After 14 months of Trump's ruling:
    • There is no longer a traditional pro-business Republican Party.
    • There is no grand strategy in Trump's twitting – he doesn't try to distract us from what regulators are doing, he is a performer - just wants to be popular. He often attacks his own team.
    • Trump introduces a new model for President and presidency.
    • Tax bill - positive for business in the short-term.
    • Trump has filled the agencies with his people, and they are aggressively pursuing a pro-business deregulatory agenda.
    • All of these are designed on boosting GDP and getting the economy to grow faster.
  • Bad news: we are probably at the peak now. Going forward the situation will become far more challenging, and the impact on the economy far more negative.
    • The protectionist trade agenda.
    • No movement on an infrastructure bill.
    • Entitlement reform – zero progress and no White House interest in the subject.
    • Deficit cut – no progress, instead added $1.5trln (tax cut) + $500bn (increased domestic and defense budget spending).
  • Democrats may retake the House in November – need to pick up seats in California, New York and other predominantly democratic states, that are particularly hard hit by the tax cut.
  • Trump is borrowing from the future to give us stronger economic growth now. The $2bn stimulus (the tax cut and increased spending) are good for the short term but worse for the longer term. The question to ask: what policy tools are on the table if we are going for another downturn?
  • Trump will likely be a one period President by choice – he has raised about $100m in campaign contributions before he makes his decision to run for the second time, and we may see him using those money to subsidize his lifestyle.
  • If everything stays calm in the following 2.5 years, Trump has probably done enough in year one to be able to declare he'd made the country great again at the end of his term.
  • Republicans are eager to speak about the tax cut as they see the tax bill as a legacy issue that will help them to get through the next couple of elections.

 

2.    Macro threats.

  • Trade War:
    • Questions yet to be answered: What happens when it comes to a retaliation? Are Canada and Mexico going to be exempted? Whether Europe will be covered by the sanctions or some allies will be exempted?
    • Trump is getting "tough" on tariffs, and we do think these could be the path he cannot retreat from. If we get higher prices for steel and aluminum that will negatively affect manufacturers - users of steel and aluminum - by making their products less competitive. In terms of retaliations, the agricultural sector is the most vulnerable.
  • Federal Reserve.
    • President expects economy to grow from 3% to 5% a quarter.
    • Powell will raise rates. We may probably see 4 rate hikes in 2018 and could be even more aggressive if there are signs of inflation after all those stimulus.
    • That may lead to a twitter fight with Trump going after Federal Reserve. Federal Reserve has not been attacked politically by White House since Carter's administration.
    • Politicizing the Fed is never a good idea. However, we have the President that is more than willing to press the boundaries and we don't know how the market would react to that.
    • The risk with Federal Reserve has not yet been taken into account by the market.
  • Russian investigation:
    • We don't see a risk of impeachment, as there are simply not enough votes in the Senate.
    • Trump is a delegator – his family, particularly Jarod Kushner is at risk (due to issues related to security clearance application, secret meetings with Russian officials before the inauguration, etc), as well as some campaign staff. Mueller is going to expose all of that with his final report.
    • We think that the most controversial part of the Trump's legacy is going to be that before he leaves he pardons everybody.
  • Gary Cohn leaving – a big threat, he was the most important person for business and the economy in the White House. Peter Navarro is a leading candidate for a replacement, however we think Larry Kudlow is more likely to takeover – Trump needs a "buddy".

 

3.    Key policy issues in financials and housing.

  • Banking:
    • Rise of conservatives within the White House: seek 10% capital leverage level, want to separate commercial and investment banking, limit size of a bank to eliminate "too big to fail".
    • There are non-traditional policies that conservatives in Trump administration favor (e.g. Marc Calabria) and those policies could catch the market by surprise.
  • Housing:
    • Conservatives want to dramatically shrink the government's footprint in housing market – shrink the FHA Program, shrink and then eliminate Freddie Mac and Fannie Mae.
  • This week the Senate is considering the bank deregulation bill designed to help regional banks giving them more control over capital distributions, liquidity management, etc. The bill is expected to pass Senate next week, while getting through the House is expected to be a challenge. However, we think that sometime in October, just before the election, the House will pass whatever gets out of the Senate and the President will sign that near the Halloween - that makes us positive on regional banks.  

 

Q&A:

1. Do you think the Congress is going to elaborate on some issues on a bipartisan basis? Also, how they might shrink GSEs?

  • The banking bill is bipartisan – probably the most bipartisan thing we have seen since Trump got elected. A lot of other bills that you see moving in the House have a lot of democratic co-sponsors. However, that is the exception rather than the rule. Elizabeth Warren's wing of the Democratic Party sees no benefits to working with the Republicans.
  • In terms of GSEs: one idea is to bring down loan limits to 5-10% a year and keep doing that until they are insignificant; another idea is raising guarantee fees to the point where it would be price competitive to restart the private-label RMBS market. This is what officials like Marc Calabria and others in the White House are thinking about, however this is not what Congress wants – the reform will likely be done very gradually.

 
2. With the potential rise of conservatives in the administration there are more pressure on banks. Earlier, President Trump made a comment about bringing back Glass-Steagall. Can you talk a little bit more about it?

  • Bringing back Glass-Steagall is not an actual policy – Trump may actually have no idea about what Glass-Steagall does.
  • If the White House pursues the so called 21-century Glass-Steagall Act they will seek to force bigger banks to get rid of their trading desks. They might also push the banks to separately capitalize units in a holding company, but that would be too radical and would dramatically change the economics of the business. We may see E. Warren forming an alliance with conservatives to vote for the very populous idea of bringing back Glass-Steagall Act - it is one of the big threats.
  • Never overestimate the actual understanding of any of these issues on Capitol Hill.


 3. How do you see Paul Ryan's future?

  • Hope it is still possible for him to run for President – his mistake was not running 2 years ago.
  • If the House stays Republican he may not survive as a Speaker.

​​​​4. Can you comment on Infrastructure bill?
  • We are very pessimistic on it - there is no way to pay for it. They are relying on a very controversial idea of reforming Fannie and Freddie as a way to get $200bn to pay for infrastructure.
  • Trump's idea to provide incentives for a private sector to build more toll roads and to charge for these infrastructure is not politically popular.​

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