In Thursday’s testimony before the Senate Banking Committee, Treasury Secretary Steven Mnuchin took a beating from Senator Elizabeth Warren over the issue of Glass-Steagall. There are many policy issues in which I disagree with Senator Warren but when it comes to Wall Street regulation, she is one of the most knowledgeable people in the Senate and far beyond those walls. During the Great Financial Crisis she appeared regularly on CNBC and Bloomberg television networks. While merely a Harvard law professor, she offered great insights and understood the depths of the problems that caused the crisis. If Jamie Dimon had not blocked her appointment as head of the Consumer Finance Protection Bureau (a wild conjecture on my part), she would not be a U.S. Senator. After president Obama caved in to Wall Street pressure, Warren ran for the Senate in Massachusetts in 2012, defeating Scott Brown.
When Senator Warren confronts Wall Street crony capitalism she finds powerful bipartisan support, which gives her added weight on regulatory issues. Secretary Mnuchin wilted under the barrage of lefts and rights as Warren made the case for Trump’s campaign pledge to bring back Glass-Steagall, defined as the separation of commercial and investment banking. Senator Warren could’ve knocked out Mnuchin by reminding the Treasury Secretary that Glass-Steagall and the FDIC were passed on the same day, June 16, 1933. The problem with the repeal of Glass-Steagall was that FDIC was left in place, a great gift to the U.S. supermarket bank. Secretary Mnuchin proved to be just another crony. He kept telling the Senator Warren he would discuss it in her office, which was like Ernie Terrell hoping that the bell would ring, ending the round.
The bank stocks were immediately sold as the beating continued but rallied back with the afternoon rise in the equity markets. The regional and community banks were also sold but as I listened to the Senate Banking Committee queries it seems to me that any roll back in financial regulation will favor the smaller banks. Again, if large financial institutions wish to risk money they OUGHT NOT have FDIC insurance. The market should set the rate for risk capital.
***And the award for Greatest Financial Heist In The History of Mankind goes to … THE SWISS NATIONAL BANK. As the U.S. dollar was under severe pressure Wednesday, SNB Chairman Thomas Jordan said the Swiss franc was overvalued and the bank would keep interest rates negative in an effort to thwart investor demand for the Swiss currency. It seems that the more currency the SNB prints the more global equities it buys. Therefore, it seems that investors are rewarding the SNB for being the best run hedge fund in the world. It doesn’t have to raise capital it merely prints it. The more it prints the better its portfolio performs.
In contrast to the SNB, Richard Milne wrote about Norway’s discontent with its sovereign wealth fund in Thursday’s Financial Times. Norway’s oil earnings have been placed in a national pension fund, which invests in assets the around the world. The SWF is overseen by the NORGES BANK, its central bank. The allocation policy is overseen by a committee of bureaucrats and all investments are subject to political approval. The fund is so massive that it owns “… 1.3 percent of every listed company globally.” The article notes that funds performance has lagged many other SWFs and a change in the management structure is needed. My advice is to turn it over to the Swiss. The FUND‘s assets are currently at $945 billion, with 60% equity and 40% bonds. The Swiss have been far more successful by printing money rather than pumping oil. The Swiss should close up their economy and just rely on its earnings as a hedge fund.
In Mnuchin’s testimony, he said Switzerland is not a currency manipulator but is on the watch list. It appears Secretary Mnuchin got many things wrong today for if the Swiss are not currency manipulators then the identification is devoid of meaning. Alchemy on a national level is the paradigm of the malady plaguing the global financial system. Every measure of economic fundamentals yells sell the Swiss franc with its massive currency printing and negative interest rates. Unfortunately, the market says not so fast! The philosopher’s stone indeed.
Tags: currency manipulator, Elizabeth Warren, Glass-Steagall, Secretary Mnuchin, SNB, Thomas Jordan
May 18, 2017 at 9:04 pm |
Yra – one of your best.
Glass Steagall addressed some of the causes of the 1929 crash. Special counsel Pecora did a thorough job of identifying the financial swamp of its day.
When Citibank was allowed to buy Salomon the die was cast. As a depositor in the bank would I want my funds put at risk in oil futures? Or Mortgage Backed Securities? But as you point out the FDIC is the financial pacifier in the mouths of the unsuspecting saver.
Before this is over we will have another Pecora/Mueller person recommending a Warren/Paul act. The carnage however will have been devastating.
May 18, 2017 at 10:08 pm |
I always thought the 2 and 20 fee formula for hedgies was unbelievable. The Swiiss formula eviscerates the 2/20. The question is who do the SNB sell to when the elephants hit the door.
May 19, 2017 at 3:14 am |
Frank–it is the classic OPM–other peoples money and also just print more—-also if I was Chair of the SNB I would be selling some stocks and buying crypto currency and/or gold –very stealthily
May 19, 2017 at 7:22 am |
Yra-
Your typically clear-eyed view is once again spot on.
I was especially impressed with Warren (who I also do not intrinsically like or agree with on many issues) calling out Mnuchin on that “21st Century Glass-Steagall” BS, which he was then at a loss to explain other than to note “It’s complicated.”
I would imagine it is if you’re both separating retail and investment banking and also NOT doing so at the same time.
And on the SNB, might they just be the most aggressive investors in the ‘Trump Trade’? Maybe THEY should be ‘colluding’ with the Trump administration to diminish the Left’s attempts to hogtie it with the scandals restraining the reform agenda? How about some dirt on Schumer, Cummings and Warren?
Looking forward to more. And did you catch Tuesday morning’s http://www.rohr-blog.com “The ‘Risk-Off’ Rally” post? It seemed glaringly obvious equities were going the wrong way early this week.
May 19, 2017 at 11:55 am |
Al–thanks for the great post and keep up the great work.
May 22, 2017 at 1:40 pm |
Not since The Honorable Timothy Geithner, has the Treasury had such a selfless public servant serving as leader! (I cannot believe I said that without gagging)
May 22, 2017 at 4:24 pm |
Professor–as well said as possible