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Financial Services Update – May 13, 2011

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.

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Financial Services Update – April 29, 2011

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.

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Dodd-Frank Living Will Proposed Regulation

Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires each nonbank financial company supervised by the Federal Reserve and each bank holding company having assets of $50 billion or more (a “Covered Company”) to develop what has commonly become referred to as a “living will,” essentially a plan of orderly liquidation (the “Resolution Plan”). The Federal Reserve and the FDIC published a proposed rule on March 29, 2011, to implement this provision. The proposed rule requires a Covered Company to provide its initial plan within 180 days from the effective date of the final rule or the date the entity becomes a Covered Company. Each Covered Company will then be required to submit an updated plan within 90 days of the end of each calendar year. Interim updates are required if an event occurs that might have a material impact on the Resolution Plan. The Resolution Plan must be submitted the Federal Reserve and the FDIC for their approval. The Plan must take into account what type of distress in the world financial markets might result in failure of the Covered Company and, most importantly, it must assume that the government will not provide any extraordinary support. The Resolution Plan must provide for the “rapid and orderly liquidation” of the Company and should include provisions that protect any FDIC insured institutions from risks created by nonbank subsidiaries of the Covered Company. It should also assess the feasibility of the Covered Company’s plan, including timelines, for executing any sales, divestitures, restructurings or other similar actions.

Editorial Comment: When the credit markets freeze and it is impossible to value financial assets, how exactly will a huge financial company liquidate itself in a “rapid and orderly” manner? A dearth of buyers in such a situation will make the liquidation impossible to accomplish in a short period of time and if it is accomplished it will likely be a very messy affair. An orderly liquidation really presumes that the credit markets are working normally and that the financial distress a large bank is suffering is restricted to it alone. In such a situation there would be willing buyers for the assets and the liquidation would not trigger a broader crisis. One suspects that any Resolution Plan will be much more aspirational in nature than a true blueprint for what to do in a financial panic.

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Financial Services Update – March 11, 2011

OCC Criticizes Durbin Amendment

Last Friday, John Walsh, the Acting Comptroller of the U.S. Currency who oversees regulation of the nation’s largest banks, sent a letter to the Federal Reserve criticizing the Fed’s proposed rule to implement the Wall Street Reform Act’s “Durbin debit card swipe fee” amendment. In the letter, Walsh said the Durbin amendment “takes an unnecessarily narrow approach to recovery of costs that would be allowable under the law and that are recognized and indisputably part of conducting a debit card business. This has long term safety and soundness consequences – for banks of all sizes – that are not compelled by the statute.”

Locke to Leave Commerce for China

On Thursday, President Obama announced that he had chosen Commerce Secretary Gary Locke to succeed Jon Huntsman as U.S. Ambassador to China. While the President has yet to announce Locke’s replacement, speculation has centered on the former Mayor of Dallas and current U.S. Trade Representative Ron Kirk.

Attorneys General Mortgage Settlement Stalled

The proposed settlement by state attorneys general with the five biggest U.S. mortgage servicers leaked out this week. The proposal, which calls for a dramatic increase in loan modifications, is intended as the basis for settling allegations of widespread wrongdoing by the big loan servicers in handling millions of foreclosures. The settlement would be with Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co, Citigroup and GMAC/Ally Financial Inc. In a press conference earlier this week, Iowa Attorney General Tom Miller, who led an investigation on behalf of the 50 states’ attorneys general, predicted that a broad settlement could be reached within about two months. Miller said the agreement was worked out jointly with federal agencies including the Federal Deposit Insurance Corp, the newly created Consumer Financial Protection Bureau and Justice Department. On Tuesday, Brian Moynihan, chief executive of Bank of America, the largest U.S. servicer, said at a meeting with analysts and investors that he opposes widespread principal reductions for homeowners in default. On Thursday, Rep. Spencer Bachus (R-AL) and Sen. Richard Shelby (R-AL), the top Republicans on the House and Senate banking committees, also criticized the proposed settlement as a “regulatory shakedown.”

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Financial Services Update

Financial Services Update

September 25, 2010

Authored by: Matt Jessee

House Passes Small Business Tax Credit Bill — President to Sign Monday

On Thursday, the House passed a $42 billion bill designed to provide tax credits and to make more capital available to small businesses.  The bill was originally passed by the Senate last week and will be signed into law by the President on Monday.  The “Small Business Jobs Act” is intended to make credit more available by authorizing the creation of a $30 billion fund run by the Treasury Department that would deliver low-cost capital to banks with less than $10 billion in assets.  The bill also provides $1.5 billion in grants to state lending programs that in turn support loans to small businesses.  The bill would also extend and/or create $12 billion in small business tax credits over the next ten years including a 100% exclusion of capital gains taxes on investments for qualifying C corporations, a five year extension of the “carry back” provision, an increase and extension through 2011 of Section 179 deductions for up to $500,000 worth of equipment, an extension of bonus depreciation for capital expenditures made in 2008 or 2009, and an increase to $10,000 in the deduction for start-up expenses for 2010.

Tax Cut Extension Vote Postponed Until After November Election

On Tuesday, Senate Majority Leader Harry Reid (D-NV) said he was “working hard for a vote most likely next week” on an extension of the Bush income tax income tax cuts for taxpayers making less than $250,000 per year.  On Thursday, Reid and House Majority Leader Steny Hoyer (D-MD) announced the vote on the extension will be delayed until after the November elections.  However, if Republicans take back the Senate and or the House, they could attempt to block that vote in the hopes of getting a more favorable bill early in the next Congress.

House Republicans Unveil “Pledge to America”

On Thursday, House Republican leaders unveiled their “Pledge to America” which details a series of policy proposals House Republicans will attempt to enact if they gain the majority in the November elections.  The proposal includes promises to freeze federal government  hiring, cut Congress’ budget, place hard caps on domestic spending accounts, extend the Bush tax cuts that are set to expire in 2011, and “repeal and replace” the new health care law.

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