|From: The Ox||11/12/2020 12:23:22 PM|
Last week, the New York Times’ Emily Flitter, Jeanna Smialek and Stacy Cowley provided an excellent rundown of the dangerous rollbacks of regulations on the big banks by federal regulators appointed by Donald Trump.
Today, in preparation for a hearing with these regulators, the House Financial Services Committee has released a Memorandum that further outlines how the safety and soundness of the biggest banks have been impacted by changes to regulations.
Many of the rollbacks or watering down of the bank rules have occurred quietly or without the attention of mainstream media. Taken together, the rule changes are striking in their reckless disregard for the safety and soundness of a sector that blew itself up just 12 years ago, taking the U.S. economy and U.S. housing market down with it, while getting propped up with the largest taxpayer and Fed bailout in U.S. history.
Today’s House Memorandum contains one paragraph regarding the de-regulation of derivatives (swaps) that should send a shiver down the spine of every American. It reads:
“Swap Margin Rule. The Dodd-Frank Act required most swaps to be cleared, with margin required. Margin is also required for uncleared swaps involving financial institutions whose primary regulator included one of the three banking regulators. Initial margin is the amount of margin posted when the swap is entered into, while variation margin is changes in the amount of margin posted over time to reflect changes in the underlying swap’s value. In June 2020, these regulators issued a final rule modifying the 2015 swap margin rule, exempting uncleared swaps with inter-affiliates from initial margin requirements, while keeping variation margin requirements. Fed Governor Brainard argued that the rule would significantly weaken a key capital requirement for the largest banks.”
(more at above link)
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|From: The Ox||11/24/2020 12:04:50 PM|
Shortly after Yellen made this statement, the federal regulator of national banks, the Office of the Comptroller of the Currency (OCC), was reporting this:
“A total of 1,364 insured U.S. commercial banks and savings associations reported derivative activities at the end of the fourth quarter of 2017. A small group of large financial institutions continues to dominate derivative activity in the U.S. commercial banking system. During the fourth quarter of 2017, four large commercial banks represented 89.4 percent of the total banking industry notional amounts and 85.9 percent of industry net current credit exposure (NCCE)….”
Those four banks were: JPMorgan Chase with $48.55 trillion in notional (face amount) of derivatives; Citigroup with $48.5 trillion; Goldman Sachs with $41.3 trillion; and Bank of America with $18 trillion.
As of the last quarterly report from the OCC for the quarter ending June 30, 2020, the dystopian bank situation looked like this: JPMorgan Chase had increased its derivatives exposure to $52.6 trillion notional; Goldman Sachs had moved into second place with $43.3 trillion; Citigroup stood at $41.1 trillion; and Bank of America hadn’t budged much at $18.5 trillion.
This massive, concentrated exposure to derivatives at four mega Wall Street banks has been allowed to persist by both Democrat and Republican-led administrations despite the fact that derivatives played a central role in blowing up the U.S. economy in 2008.
Until Congress gets serious about restoring the Glass-Steagall Act, which would separate federally-insured, deposit-taking banks from the trading casinos on Wall Street, the financial system of the United States remains at grave risk, regardless of who sits at the helm of the regulators.
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|From: ggersh||1/26/2021 9:50:46 AM|
|"The FED has a Problem" ROFL.....|
By Pam Martens and Russ Martens: January 26, 2021 ~
The chart above reminded us of what happened in the London Whale saga at JPMorgan Chase. The London derivatives traders at JPMorgan Chase were making such huge bets in a specific credit index that they effectively became the market with no escape route to unwind their losing trades. The bank had, insanely, used customer deposits to make those wild bets and ended up losing at least $6.2 billion.
Since August 6 of last year, the Fed has purchased $400 billion of U.S. Treasury notes and bonds. Despite that massive amount of propping up the market, the yield on the 10-year Treasury has more than doubled, from half of one percent to a yield of 1.05 percent at 7:30 a.m. this morning. That means that all of those billions of dollars in Treasuries that the Fed bought at lower yields are now trading at losses.
On September 16 of last year, one day before the repo market blew up and forced the Fed to intervene for the first time since the Wall Street crash of 2008, the Fed authorized the New York Fed to release a statement indicating that it would continue to purchase Treasury securities at a rate of “approximately $80 billion per month” but would also be allowed to purchase “additional amounts…as needed to sustain smooth functioning of markets for these securities.”
That statement should be interpreted as “the Fed will do whatever it takes to push interest rates down to prevent the trillions of dollars in derivative bets at the mega banks from blowing up, taking down the banks, and forcing an even greater expansion of the Fed’s balance sheet from bank bailouts.”
On August 5 of last year, the Fed’s balance sheet stood at $6.99 trillion. As of January 20 of this year, it had grown to $7.463 billion, with the bulk of that coming from its purchases of Treasury securities. On January 30, 2008, before the Wall Street crash, the Fed’s balance sheet had been $906 billion and had been growing at a modest pace over the prior two decades. But in just the past 13 years, the Fed’s balance sheet has multiplied by more than 8 times. Is that really sustainable?
Last March we reported the following:
“According to the U.S. Treasury, as of February 29, 2020, there was $16.9 trillion in marketable U.S. Treasury securities outstanding. Of that amount, at the end of February, the Federal Reserve held $2.47 trillion or 14.6 percent – making it, by far, the largest single holder of U.S. Treasuries anywhere in the world.”
As of December 31, 2020, there was $20.98 trillion in marketable U.S. Treasury securities outstanding. According to the Fed’s H.4.1 for January 20, 2021, the Fed owns $4.74 trillion of those or 22.6 percent.
This is not a good trend and both Treasury yields and the prices of bank stocks are starting to reflect misgivings
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|From: Sam||1/31/2021 12:46:18 AM|
|This is from Dealbook's newsletter. The formatting can't be helped. Here is the URL for easier reading:|
Rules for renegades
|There is a lot going on in crypto right now. Some say too much, too fast. Others complain that the United States is too slow, falling behind because its rules are outdated and unfit to address the inventions that blockchain technology has created.|
|But markets and regulators have been here before. “The basic, overarching issue is that digital asset innovation has outpaced our regulatory framework,” said Timothy Massad of Harvard, who is formerly the chairman of the Commodity Futures Trading Commission and has written extensively about crypto asset oversight. “That’s not unusual. There’s always a tension between innovation and regulation.”|
|It is not problematic, he said, unless regulators wait for a crisis and then respond in a rush, which they often do. “Regulation won’t stop innovation,” Mr. Massad said, “unless it’s done badly.”|
|But there is reason to believe the Biden administration’s financial regulators will be crypto savvy, based largely on the fact that Gary Gensler, the nominee for chairman of the Securities and Exchange Commission, has taught courses on blockchain and digital currencies at M.I.T. Let’s drop in on a class to get a sense of him as a regulator …|
|Excerpts from an opening class in 2018 of the “ Blockchain and Money” course taught by Mr. Gensler at the M.I.T. Sloan School of Management:|
|Are cryptocurrencies commodities or securities? “It’s a moving target,” he said of one the biggest debates among crypto regulators (more on that below). In a “broad sense of what the S.E.C. is trying to accomplish,” he said, consider this: “Whenever you’re thinking about public policy, folks like myself who once was a regulator, we think in the ‘duck test.’ And then we secondarily think about the actual words in the congressional act. Where is the common sense? And if it quacks and walks like a duck, it’s probably a security.”|
|Regulators deal with start-ups and incumbents in different ways. In the fintech world, new challengers “take risks and beg for forgiveness, whereas incumbents tend to have to ask for permission,” Mr. Gensler said. This creates an “unlevel field,” but “I’m not crying for JPMorgan,” he added. “The big incumbents, they have their advantages.”|
|Robinhood is a “wonderful” app. When he asked the class if they had ever used the fee-free trading app, half of the students raised their hands. “If anybody is interested, show up and I’ll do office hours on how Robinhood commercializes your order flow,” he said. “But it’s a sort of wonderful app. Millennials love it.”|
|The S.E.C.: Ripple of uncertainty|
|Many of the things that Mr. Gensler lectured about will soon be applied in real-life regulatory scenarios, perhaps most immediately what to do about brokers straining to handle the trading volumes in heavily shorted stocks. For crypto, specifically, a priority will most likely be a case the S.E.C. filed late last month against Ripple Labs and two of its executives.|
|The agency accuses the execs and the company of having raised more than $1.3 billion since 2013 in unregistered securities offerings by selling the cryptocurrency XRP to investors. By not registering as a security, Ripple created an “information vacuum” for investors about how XRP was used to fund Ripple’s operations, the S.E.C. said.|
|The Ripple case is a moment of reckoning for many cryptocurrencies issued and distributed by companies or people, unlike Bitcoin, which is released via a decentralized network of computers and considered by most to be a commodity, which triggers fewer rules for buying and selling. To judge whether XRP is a security, the agency will apply the “Howey Test,” which refers to a Supreme Court case in 1946 involving a citrus farm in Florida.|
|The “complaint is historic, and not in a good way,” said Ripple’s defense counsel, Joseph Grundfest, a professor at Stanford Law and a former S.E.C. commissioner. The agency has “no coherent crypto strategy” and is imposing 20th-century precedent on 21st-century technology, he said. He declined to predict what Mr. Gensler’s crypto credentials might mean for the matter: “I’m not in the speculation business.”|
|Two other issues to watch at the S.E.C.:|
|Will it ever approve a Bitcoin exchange traded fund? Many have tried, and it would be a major move toward mainstreaming crypto investment.New rules for brokers holding digital assets. Last month, the agency requested input for custody regulations for cryptocurrencies that would address their “unique attributes.” The Blockchain Association, a trade group, was working on its submissions, but its executive director, Kristin Smith, said the crypto community was more worked up about rules proposed by the Treasury Department.|
|The Treasury: Riled up about reporting|
|This week, the Treasury Department’s Financial Crimes Enforcement Network, known as FinCEN, extended by 60 days the comment period for proposed reporting rules on digital wallet transactions that it says would prevent money laundering. First announced on Dec. 23, with a 15-day comment period, the move incited outrage in the crypto community. The regulator has twice relented, noting the “robust” engagement that came after what opponents called “midnight rulemaking” by Steven Mnuchin, the secretary of the Treasury at the time.|
|The incongruity between the treatment of cash and cryptocurrency under FinCEN’s proposal will inhibit adoption of cryptocurrency and invade the privacy of individuals. Yet, the rule fails to explain the difference in risk.|
|The procedural win doesn’t guarantee that the new secretary of the Treasury, Janet Yellen, will shift gears on the matter. At her confirmation hearing, she suggested that many cryptocurrency transactions were associated with illicit activity, which Ms. Smith of the Blockchain Association called “a very disappointing reaction.” In written testimony released later, Ms. Yellen offered a more nuanced take, saying regulators should “look closely at how to encourage their use for legitimate activities while curtailing their use for malign and illegal activities.”|
|Chris Brummer, a professor at Georgetown Law and a “ fintech guru,” is in the running to become the next commissioner of the C.F.T.C. Picked for the same gig in 2016, his nomination was withdrawn by the Trump administration. Since then, Mr. Brummer has testified before Congress on blockchain policy, edited an online journal and book on crypto assets, and written a textbook, “ Fintech Law in a Nutshell.” He’s an expert, in other words.|
|But whoever takes over, “knowledge can’t fill the major regulatory gaps,” Mr. Massad, of Harvard, said. In his view, however crypto savvy the next financial regulators are, they can’t solve the problems that are raised by new technologies without a comprehensive law designed for digital assets. Otherwise, too much crypto activity will be left unregulated for too long.|
|A case in point, perhaps, is the civil enforcement action filed in the fall by the C.F.T.C., accusing BitMEX, a cryptocurrency exchange, of operating an unregistered trading platform selling crypto derivatives. It is accused of facilitating transactions that earned more than $1 billion in fees since 2014 without “the most basic compliance procedures.” BitMEX owes a reply next month.|
|The O.C.C.: Crypto comptrollers|
|The Office of the Comptroller of the Currency briefly had a crypto insider at its helm: Brian Brooks left his job as chief legal counsel at Coinbase to become O.C.C.’s acting chief for eight months. Among the achievements that he cited when stepping down earlier this month was helping to clarify “certain activities related to crypto assets” for federal bank regulations.|
|The President’s Working Group on Financial Markets, which features the heads of the Treasury, Fed, S.E.C. and C.F.T.C., sought his views on stablecoins — cryptocurrencies with steady values designed to be used as means of exchange — and the group’s statement seemed to bear his mark. It’s positive about the potential for digital tokens to “improve efficiencies, increase competition, lower costs and foster broader financial inclusion.”|
|Michael Barr, the dean of public policy at the University of Michigan who served as an assistant Treasury secretary under the Obama administration, is a leading candidate for the top O.C.C. job. He was once a member of Ripple’s board (he left before it was sued by the S.E.C.) and had advised a fintech trade group. The O.C.C. decides whether to grant banking charters to new firms, like fintech and crypto companies, and his ties to these firms have led some progressives to lobby against his appointment.|
|This week, Representatives Jamaal Bowman of New York and Ayanna Pressley of Massachusetts urged President Biden to nominate Mehrsa Baradaran, a banking law scholar at U.C. Irvine, to lead the agency and prioritize racial and economic equity. In Senate testimony in 2019, Ms. Baradaran said, “I do not believe cryptocurrency is the best solution to the problems of financial inclusion and equity in banking.”|
|What three crypto market watchers predict for rules and regulators in 2021:|
|?? Petal Walker, special counsel at Wilmer Hale, formerly a chief counsel at the C.F.T.C.|
|Wants: A robust regulator to simplify the process for entrepreneurs.|
Dreads: Fear-driven regulation that’s not data-driven and stifles innovation.
Person to watch: Mr. Gensler. On the Hill, the S.E.C. is seen as the top cop on the beat.
|?? Nikhilesh De, regulatory reporter at CoinDesk|
|Expects: Scrutiny on decentralized finance, or DeFi, after its banner year in 2020.|
Suspects: Approving the FinCEN wallet rules will deter U.S. crypto businesses.
Person to watch: Mr. Gensler. The industry claims to seek clarity. He may provide it.
|?? Timothy Massad, senior fellow at Harvard’s Kennedy School, formerly the chairman of the C.F.T.C.|
Wishes: Nonbank payment systems reliant on digital assets get more scrutiny.
Rejects: A piecemeal approach to crypto oversight.
Person to watch: Overall strategy, not specific individuals.
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