Monthly Archives: May 2017

Fed’s Stress Tests Bolster Case for Easing Bank Rules- WSJ

Here’s a shocking revelation: bank owners don’t like to take loses even more than regulators.  Know why?  Because bank owners put their own money into their bank to capitalize it.  Regulators don’t.  Yet the current bank regulatory environment has gotten so regulator-driven that Fed, OCC and FDIC bank regulators make most decisions about bank capital.

They may be good at regulating, but they don’t have a clue about running a bank and they aren’t expected too.  The fact is that both bankers and regulators should live by a set of rules.  That does not happen today; regulators make up new rules on a whim, they are not held accountable for their actions and regulatory excess is the major reason for the anemic economy during the entire 8 years of Obama.

A few TBTF bankers got greedy during and before the Great Recession.  Know what? The other 6,000 banks did not.  But these community banks are suffering under the yoke of extreme excess by bank regulators.  It has been ten long years (2007 is when regulators brought out the first CRE 1 and 2 and new capital guidelines) of this regulatory excess; it is time to right the ship and hold bank regulatory agencies accountable to a set of reasonable rules.  The nation and our economy will benefit tremendously. – Jay Davidson

Direct link at WSJ here

Results give ammunition to Trump administration for scaling back postcrisis rules

The Federal Reserve building in Washington. Next week, in the second part of its stress-test results, the Fed will release its decision whether to approve banks’ plans to return capital to shareholders.

The Federal Reserve building in Washington. Next week, in the second part of its stress-test results, the Fed will release its decision whether to approve banks’ plans to return capital to shareholders.Photo: andrew caballero-reynolds/Agence France-Presse/Getty Images

WASHINGTON—The largest U.S. banks survived a hypothetical “stress test” and could continue lending even during a deep recession, the Federal Reserve said, a strong report card that could bolster the industry’s case for cutting back regulation.

In the first part of its annual tests, the Fed on Thursday said 34 of the largest U.S. banks have significantly improved their defenses since the 2008 financial crisis. The results signal that many banks could win the Fed’s approval to increase dividend payouts to investors next week, in the second round of the tests.

The outcome gives ammunition to the Trump administration and congressional Republicans who see some of the rules put in place after the financial crisis as excessive and want to ease them in the name of boosting economic growth. Supporters of the rules say healthy banks show the regulations are working, not that they need to be rolled back.

“Anticipation of some form of Trump-led deregulation could not be any higher,” William Hines, an investment manager at Aberdeen Asset Management, wrote in an email Thursday. “The banks themselves are lobbying hard for it, and a clear bill of health from the stress tests will help their cause. But it is anything but a foregone conclusion.”

The exams are one of several new drills that banks must run in the name of preventing a repeat of the 2008 crisis and subsequent federal bailouts, from liquidity rules preventing a short-term cash crunch to “living will” bankruptcy plans.

This year’s results come in the midst of a broad rethink of those rules. Last week, the Treasury Department released a banking policy report that recommended the Fed consider changes to the stress tests.

The Treasury report said no firm, even the largest, should have its capital plans rejected for solely “qualitative” reasons. Fed officials are already considering that change. In the second round of the tests, scheduled to be released next week, the Fed typically judges banks’ “qualitative” risk-management practices.

The report also said the tests should occur only once every two years, instead of annually, except “in the case of extraordinary events.” It said the Fed should solicit public input on the tests, including the hypothetical scenarios and mathematical models.

Fed officials have resisted similar recommendations in the past when they were suggested by bankers, saying they would undermine the exams by making them less flexible. Fed governor Jerome Powell, the Fed’s regulatory point man, said in Senate testimony Thursday that the Fed would solicit public input on how to make the tests more transparent.

Mr. Powell said he believes it would be appropriate to exempt “firms that achieve and sustain high-quality capital planning capabilities” from the qualitative part of the exams, meaning the largest U.S. banks could win that exemption in future years.

He also said the Fed is open to other rule changes, but not a reduction in risk-based capital requirements. “I don’t think what we’re talking about here amounts to…broad deregulation,” Mr. Powell told the Senate Banking Committee. “I think it amounts to making regulation more efficient.”

Any broad rollback of rules would take time. The Trump administration has few officials in place at the banking regulators. And efforts to change regulations in Congress must overcome potential opposition from Senate Democrats.

Sen. Sherrod Brown, the ranking Democrat on the Senate Banking Committee, said Thursday that policy makers could undo important consumer protections if they push to deregulate too far. “There is no evidence that relaxing rules will lead banks to lend more,” Mr. Brown said at Thursday’s hearing.

It was the third straight year the initial results showed all big banks meeting the Fed’s definition of good health. A Fed official said big banks finished the hypothetical downturn with an even higher level of capital than they had before the 2008 crisis began.

The more closely watched part of the annual tests occurs next Wednesday, when the Fed will release its decision whether to approve, or block, banks’ plans to return capital to shareholders through dividends or share buybacks. The positive results may also allow banks to make larger payouts than in past years.

This week’s results don’t necessarily predict the Fed’s verdict next week. In some previous years, banks have shown strong capital ratios in the first part of the tests, only to be deemed as failing in the second round, which uses a broader set of criteria. Thursday’s results don’t include banks’ individual capital-distribution plans.

The Fed said the banks would experience collective loan losses of about $383 billion but still meet its required minimum capital ratios, even in a hypothetical scenario that envisions the U.S. unemployment rate more than doubling to 10% and severe strains in corporate-loan and commercial real-estate markets.

Fed officials attributed the positive results to the fact that banks have worked through problematic loans like soured mortgages, while steadily increasing loss-absorbing capital on their books as a result of stiffer postcrisis requirements.

Fewer banks are expected to come up short in the second round of tests next week than in previous years. This year, only 13 of the largest, most complex banks will have to take the qualitative exam. Fed officials say that reflects its conclusion that, broadly, banks have improved their ability to track risks in real time.

The stress tests were first conducted in 2009 to help convince investors that the banking system wasn’t about to collapse. They are now a legal requirement to force banks to think about the possibility of an unexpected crisis.

The Fed said the 34 banks collectively maintained at least 9.2% high-quality capital as a share of assets on one measurement, staying well above the Fed’s 4.5% minimum even after being pounded by a severe economic downturn. The Fed changes the details of its recession scenarios from year to year.

Credit cards were one trouble spot for banks, with loan losses rising 9% from last year’s test to $100 billion. U.S. card performance has recently been weakening at several lenders, driven in part by an increase in subprime borrowing. Fed officials said they were finding higher delinquency rates in bank card portfolios at the same time that card lending was increasing.

A new bar for banks to clear in this year’s test was the supplementary leverage ratio, which applied to the largest and most complex banks. That measure, which comes into effect in 2018, is meant to indicate whether banks also hold sufficient capital to cover their off-balance-sheet exposures. That includes derivatives contracts, a big cause of the panic of 2008. A handful of banks, including Morgan Stanley and Goldman Sachs Group Inc., fell within a couple percentage points of the minimum for that ratio during the Fed’s hypothetical scenario. That could end up limiting their shareholder payouts.

In addition to Thursday’s public results, banks also learned privately whether their individual plans to return capital to shareholders would push them below the Fed’s minimum required threshold. If that happens, they may take a one-time shot at cutting their request for dividends or buybacks to stay above the Fed’s minimum requirement.

Write to Ryan Tracy at and Telis Demos at telis.demos@wsj.comAppeared in the June 23, 2017, print edition as ‘Fed Tests Buoy Case For Easing Bank Rules.’

Step Back Federal Agencies – Let the People Handle This

Federal agencies must step back from, and leave alone, the only source of true economic growth: Private Enterprise, Private Capital and individual initiative.  It is a mistake to allow one’s fear of the unknown to drive the nation to ever greater federal control over our lives.

There is no doubt the Federal Reserve is the 900 pound gorilla in the room.  Their slightest move influences the market.  Is that wise?

Has anyone asked what impact Fed Reserve actions have on markets and on the economy?  For instance, the Fed printed $1.75 Trillion, in QE in 2009, to save TBTF banks by purchasing toxic MBS from their books.  That in turn was a bailout of Congressional action with sub-prime lending through Fanny and Freddie.  After all that, the nation is left with $4.5 Trillion in excess Fed balance sheet and we are now concerned about how to drain that excess from the market.  Why did the Fed Reserve not think of those consequences when they printed $4,5T?

Second question: what impact did the Fed have on the economy?  The past eight years, in spite of massive federal monetary intervention, have resulted in the most pathetic post-recession growth in GDP in history.

Third question: do we really want a more activist Federal Reserve Monetary Policy in light of their past actions?  Just because people don’t understand what the fed does or the consequences of their actions, is that any reason to bestow even greater power in this 900 pound Unknown?

Articles like this, though well researched and intelligent, totally miss the point.  It is not the Fed Reserves’ job to manipulate markets or direct the economy.  Their tools are far too gross, too “nuclear,” to make markets.

We have seen too many examples of the failure of excessive government: this is the path all Progressive/Socialist and Communist nations have gone.  There is absolutely no safety in giving up individual freedom to an all-powerful federal agency.

– Jay Davidson

Here’s Why the Fed Will Stay Central to Markets

Returning to a precrisis playbook risks disruptions

The Federal Reserve building in Washington.

The Federal Reserve building in Washington. Photo: Chuck Myers/Zuma Press


Katy Burne

Federal Reserve officials grappling with the legacy of expansive stimulus would find it difficult to return to the central bank’s precrisis role on the sidelines of financial markets, analysts and central-bank watchers say.

A long list of programs adopted to help foster economic growth, along with changes in money markets and bank regulation, have vastly expanded the Fed’s balance sheet and its involvement in markets. The Fed’s assets now total $4.5 trillion, up from less than $1 trillion a decade ago. Since 2013 the central bank has become one of the largest traders with U.S. taxable money-market funds, according to Crane Data.

Many analysts and investors worry that significantly rolling back the Fed’s expansion, a course advocated by some in conservative circles, risks disrupting markets and the economy at a time when growth remains tepid. It would also reduce the connections the institution has built with a diverse set of Wall Street firms, beyond the group of banks it dealt with before the crisis.

The Fed has become “like an octopus,” said Jeffrey Cleveland, chief economist at Payden & Rygel, a Los Angeles money manager. “Once you get the power and you are influencing all these markets, do you really want to retreat from all that?”

Investors are already assessing how stocks and bonds might react, when the central bank begins the latest stage of its yearslong retreat from stimulus—likely later this year—by ending the practice of reinvesting the proceeds of maturing bonds into new bonds. The Fed is scheduled to publish Wednesday the minutes of its latest policy meeting, where officials may have continued their debate over the mix of policy tools they plan to use in the future.

Some Fed officials say they are attracted to maintaining parts of their current approach. Minutes of their November meeting also showed officials discussing the advantages of keeping something similar to the existing system in place, in part because it is simpler to operate than the precrisis one.

The Fed hasn’t decided the issue, but its choices will be closely watched because its leadership is in transition. President Donald Trump is preparing to fill three vacancies on the Fed’s seven-member board. The White House hasn’t named its picks, but its choices could set Fed policy in new directions, including by limiting its role in markets. Republican lawmakers have also revived legislation to subject its decisions to greater public scrutiny, and some want monetary policy conducted by preset rules.

“It’s not your father’s Fed,” said Adam Gilbert, partner at PricewaterhouseCoopers LLP and a former New York Fed official. Changes could herald “incoming policy makers who are by nature skeptical of a Fed that continues unorthodox approaches to both monetary and regulatory policy.”

New York Fed President William Dudley told an audience this month the portfolio isn’t likely to return to its precrisis size. Federal Reserve Bank of San Francisco President John Williams said this month the portfolio would be “significantly smaller” than it is today, but likely above $2 trillion in assets.

The ultimate size will be closely tied to which system the central bank decides to use to control interest rates in the future. A handful of Fed officials have already begun questioning the wisdom of returning to the blueprint for controlling rates that they used before the crisis, although they have more time to decide.

At the center of the debate is a special investment program the Fed launched in 2013. Through the facility, it lends money-market funds and others Treasurys in exchange for cash, temporarily draining excess cash from money markets and discouraging lenders from lending at rates below the target range for interest rates.

Initially, the central bank said it would reduce the capacity of this so-called reverse repo facility “fairly soon after” it had begun raising short-term rates in 2015. Today, the Fed has no current plans to do so. Mr. Dudley suggested in April the Fed likely wouldn’t phase out the facility.

Without the Fed repos, short-term rates could slip too low, and demand for Treasurys in the open market would surge, causing problems for money-market funds seeking alternative places to park cash overnight. Removing the program would “cause huge dislocations from a bond-market standpoint,” said Debbie Cunningham, chief investment officer for global money markets atFederated Investors .

A balance sheet that is smaller than today’s, yet still substantial, would enable the Fed to keep the reverse repos around. It would also support the Fed’s foreign repos for overseas accounts, where weekly balances have averaged $250 billion, up from $30 billion precrisis, as well as the $1.5 trillion in currency outstanding and changing cash-management policies at the Treasury Department.

If the Fed reduces its bond portfolio, the burden will be on private market participants to step in. In 2018, Morgan Stanley calculates investors may have to absorb $400 billion in mortgage bonds alone, a level not seen since 2008. In the past, such transitions were smoothed by the banks authorized to trade opposite the Fed, called primary dealers. Now those firms are grappling with new leverage rules, and some have less capacity.

Communicating a strategy for unwinding risks some unintended signals. In 2013, when the Fed surprised investors with talk of slowing bond purchases, financial markets convulsed, thinking the Fed meant earlier rate rises than were expected.

The Fed is wary of destabilizing the Treasury market, in particular, because of increasing lurches driven by algorithmic trading. To avoid market disruptions, former Fed Chairman Ben Bernanke wrote in a recent blog post for the Brookings Institution, “There’s no need to rush.”

Write to Katy Burne at

Regulating the De Regulators

The Rule of Law is diametrically opposed to the Rule by Regulation.  The ultimate Rule of Law is set down by our Constitution and governed by elected officials that we citizens choose, and fire, through voting.  The Rule by Regulation is not governed by our Constitution, but is implemented by federal bureaucrats, most often on whim, but not on law.

Further, Congress abrogated their singular right to make law when congressmen allow federal bureaucracies to make their own regulations.  Dodd-Frank is the most recent example of this dereliction.  The most notorious example was the Chevron Deference when congress allowed the EPA to unilaterally write law in the 1980’s.

The Constitution, Bill of Rights and Amendments do one thing: they all limit the power of the federal government, not the rights of the citizen.  This makes America, and its Constitutional Republic unique in the world: Our Rule of Constitutional Law limits the power of the powerful.

The Rule by Regulation accrues power to employees of the federal government.  Don’t confuse the Rule of Law with the lawless Rule by Regulation.  Regulation is only one means of federal control over every aspect of our lives; the other is force of arms.  There are numerous examples of the debilitating effect of central control and big-government: Communist Russia and Nazi Germany are prime examples.  There is little doubt that Progressives / Socialists / Communists prefer Rule by Regulation over Rule of Law.

– Jay Davidson

Deregulators Must Follow the Law, So Regulators Will Too

As the Labor Department acts to revise the Fiduciary Rule and others, the process requires patience.

Photo: iStock/Getty Images

President Trump has committed—and rightly so—to roll back unnecessary regulations that eliminate jobs, inhibit job creation, or impose costs that exceed their benefits. American workers and families deserve good, safe jobs, and unnecessary impediments to job creation are a disservice to all working Americans. As the Labor Department approaches this regulatory rollback, we will keep in mind two core principles: respect for the individual and respect for the rule of law.

America was founded on the belief that people should be trusted to govern themselves. Citizens sit on juries and decide the fate of their fellow citizens. Voters elect their representatives to Washington. By the same token, Americans should be trusted to exercise individual choice and freedom of contract. At a practical level, this means Washington should regulate only when necessary. Limiting the scope of government protects space for people to make their own judgments about what is best for their families.

The rule of law is America’s other great contribution to the modern world. Engraved above the doors of the Supreme Court are the words “Equal Justice Under Law.” Those four words announce that no one is above the law, that everyone is entitled to its protections, and that Washington must, first and foremost, follow its own rules. This means federal agencies can act only as the law allows: The law sets limits on their power and establishes procedures they must follow when they regulate—or deregulate.

The Administrative Procedure Act is one of these laws. Congress had good reason to adopt it: In the modern world, regulations are akin in power to statutes, but agency heads are not elected. Thus, before an agency can regulate or deregulate, it must generally provide notice and seek public comment. The process ensures that all Americans—workers, small businesses, corporations, communities—have an opportunity to express their concerns before a rule is written or changed. Agency heads have a legal duty to consider all the views expressed before adopting a final rule.

Today there are several regulations enacted by the Obama administration that federal courts have declared unlawful. One is the Persuader Rule, which would make it harder for businesses to obtain legal advice. Even the American Bar Association believes the rule goes too far. Last year a federal judge held that “the rule is defective to its core” and blocked its implementation. Now the Labor Department will engage in a new rule-making process, proposing to rescind the rule.

Another example of a controversial regulation is the Fiduciary Rule. Although courts have upheld this rule as consistent with Congress’s delegated authority, the Fiduciary Rule as written may not align with President Trump’s deregulatory goals. This administration presumes that Americans can be trusted to decide for themselves what is best for them.

The rule’s critics say it would limit choice of investment advice, limit freedom of contract, and enforce these limits through new legal remedies that would likely be a boon to trial attorneys at the expense of investors. Certainly, it is important to ensure that savers and retirees receive prudent investment advice, but doing so in a way that limits choice and benefits lawyers is not what this administration envisions.

The Labor Department has concluded that it is necessary to seek additional public input on the entire Fiduciary Rule, and we will do so. We recognize that the rule goes into partial effect on June 9, with full implementation on Jan. 1, 2018. Some have called for a complete delay of the rule.

We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input. Respect for the rule of law leads us to the conclusion that this date cannot be postponed. Trust in Americans’ ability to decide what is best for them and their families leads us to the conclusion that we should seek public comment on how to revise this rule. Under the Obama administration, the Securities and Exchange Commission declined to move forward in rule-making. Yet the SEC has critical expertise in this area. I hope in this administration the SEC will be a full participant.

America is unique because, for more than 200 years, its institutions and principles have preserved the people’s freedoms. From administration to administration, respect for the rule of law has remained, even when Americans have been bitterly divided. Some who call for immediate action on the Obama administration’s regulations are frustrated with the slow process of public notice and comment. But this process is not red tape. It is what ensures that agency heads do not act on whims, but rather only after considering the views of all Americans. Admittedly, this means deregulation must find its way through the thicket of law. Casting aside the thicket, however, would leave Americans vulnerable to regulatory whim.

The Labor Department will roll back regulations that harm American workers and families. We will do so while respecting the principles and institutions that make America strong.

Mr. Acosta is secretary of labor.

Appeared in the May. 23, 2017, print edition.

Battle between big-government & individual freedom

Ironic isn’t it, that we taxpayers pay these federally-employed bureaucratic elites through our private-sector work, through our taxes.  In turn, these bureaucrats gather tremendous power over our very existence, through regulation and ignore our duly elected president, elected by us.  Our nation is going through a pivotal battle of ideas: Will we continue federal tyranny or obtain individual rights.  The battle for ideas is not between democrat and republican, its between big-government and individual freedom.

– Jay Davidson, May 30, 2017

Trump Faces the Fury of a Scorned Ruling Class

The ‘threat’ that has elites quaking is his serious attempt to curb federal power and cut spending.

President Trump in Brussels, May 25.

President Trump in Brussels, May 25. Photo: Getty Images

A lobbyist friend who visited Capitol Hill recently came away horrified. “I now am ready to believe that the partisanship is so unhinged that it’s a threat to the Republic,” she writes in an email.

This Washington hysteria comes at a time of full employment, booming stocks, relative peace and technological marvels like an electronic robot named Alexa who fetches and plays for you songs of your choice. What’s the fuss about?

We all know the answer: Donald Trump. The Washington body politic has been invaded by an alien presence and, true to the laws of nature, that body is feverishly trying to expel it. These particular laws of nature demand rejection of anything that threatens the livelihoods and prestige of the permanent governing class.

The “threat” that has Washington quaking is the first serious effort in a long time to curb federal regulatory power, wasteful spending, and a propensity to run up mountainous budget deficits and debt. That’s presumably what the voters wanted when they elected Donald Trump. Democrats—accurately regarded as the party of government—seem to fear that Mr. Trump might actually, against all odds, pull it off.

The Washington Post, the New York Times and other apostles of the Democratic Party have apparently set out to prove that despite their shaky business models they can still ignite an anti-Trump bonfire. A recent headline in the Post. asserted that “Trump’s scandals stoke fear for the 2018 midterms among Republicans nationwide.”

What scandals would those be? There was of course the firing of FBI Director James Comey. Democrat Hillary Clinton went on TV to claim that Mr. Comey cost her the election. Mr. Trump fired Mr. Comey. Did Democrats praise the president? No, they want him impeached. Devious logic, but devious is a good descriptor of much of what goes on in this fight.

Mr. Comey retaliated by leaking a “big scoop” to the Times—notes taken when Mr. Trump allegedly asked him to back off on the investigation of national security adviser Mike Flynn. But let’s recall the circumstances of this “investigation.” The Obama administration—possibly the FBI—tapped a phone conversation between Mr. Flynn and Russian Ambassador Sergey Kislyak. Then Mr. Obama’s minions used the raw data to “unmask” Mr. Flynn and get the retired general fired for not giving a full account of the discussion. Given that sorry record of political involvement, was Mr. Trump so wrong if he asked Mr. Comey to go easy?

Then there was the Post’s “shocking” revelation that the president gave classified information to Russia’s foreign minister. The president is commander in chief of the U.S. military and conducts foreign policy. The intelligence agencies work for him, and he is responsible for using what they provide to further U.S. interests. Is it so unlikely that a friendly tip to Russian Foreign Minister Sergei Lavrov about an ISIS tactic was calculated to earn trust? A more interesting question is who walked out of the room and illegally handed the Post this “scoop.”

Russians aren’t popular in the U.S., for many good reasons. That has its uses for Trump baiters. Democratic claims that Mr. Trump conspired with the Russians to swing the November election led the Justice Department to appoint a special prosecutor, former FBI chief Robert Mueller, to investigate. But is this claim even slightly plausible? So far all we have are anonymous officials who claim that intelligence agencies know of individuals with connections to the Russian government who supplied WikiLeaks with hacked emails from the Democratic National Committee and John Podesta’s accounts. But these officials are still unwilling to go on the record.

The Washington community knows how to fight back when it feels threatened. Leakers are having a ball, even if it has taken a lot of journalistic imagination to turn the most notorious leaks into “scandals.” Almost everyone in town has a stake in fending off the Trump threat: government workers and the businesses that serve them, public unions, lobbyists and their clients, owners of posh hotels and restaurants that cater to well-heeled visitors seeking government favors, journalists whose prestige derives from the power center they cover, academics who show politicians how to mismanage the economy, real-estate agents feeding on the boom—to name a few. It’s a good living, and few take kindly to a brash outsider who proclaims it is his mission to drain the swamp.

Mr. Trump is on the attack and Washington is fighting back. Is the Republic in danger? Another question is how much danger will it be in if Mr. Trump loses?

Mr. Melloan is a former deputy editor of the Journal editorial page and author of “When the New Deal Came to Town,” (Simon & Schuster, 2016).”

Appeared in the May 26, 2017, print edition.

A Thank You from a Client

A recent guest on our radio show, Mark, sent us a kind note thanking us for our efforts.

It reads:

“Thank you for letting me share my story! I am looking forward to reading the book you gave me. The opportunity to talk about our school [meant] the [world] to us. I wish you two the best of luck in finding new stories with the community.”

Best regards,