September 2016

Peter E. Knight

As America makes the final turn in its marathon effort to select a new president, students of government will tell you that being elected to the most powerful position in the world does not mean you can snap your fingers and achieve instant results. The despotic Dr. Evil (nemesis of fictional spy action hero Austin Powers), experienced the same frustration when trying to direct his own inner circle, with poor results. "You know, I have one simple request," he laments. "And that is to have sharks with laser beams attached to their heads. Now evidently my colleague informs me that that cannot be done. Ah, would you remind me what I pay you people for, honestly? Throw me a bone here!" It is more likely than not that Dr. Evil's experience will be shared by our next president.

Wells Fargo House and Senate Hearings Signal a Change in Bank Policy Environment

In brutal oversight hearings before the Senate Banking Committee and the House Financial Services Committee, Wells Fargo Chairman and CEO John Stumpf experienced firsthand a political dynamic normally in short supply in Washington - bipartisan consensus. No one defended the bank's actions. All members selected their criticism from a long list of options: the creation of more than 2 million customer accounts without the customer's knowledge or consent, the firing of 5,300 low-level employees as the real culprits in the scandal, the lack of actions taken against senior executives in terms of discipline or compensation, the nature of disclosure of material weaknesses to stockholders, and more.

Wells now faces a growing number of challenges stemming from disgruntled interested parties, including fired employees, account holders who face weaker credit scores and fees associated with accounts they had not initiated, stockholders whose purchase decisions were based on less-than-complete information, regulators under attack for not discovering the problems and responding earlier, and the general public.

Unlike many controversial actions in the world of high finance that may be appreciated by a small cadre of sophisticated market professionals, everyone can understand what has happened in this matter. Apparently thousands of impacted citizens have reached out to their elected officials in an organic grassroots lobbying effort involving myriad aggrieved parties. In the House and Senate hearings, member after member related personal stories from constituents who were fired, had weakened credit scores, faced financial challenges posed by unpaid account fees, or were harmed by their investment in company stock.

Even though Congress is now in recess until after the elections, the investigations and hearings of both committees will continue. When the next Congress convenes in January, financial policy debates impacted by the actions of Wells Fargo will include the regulatory power of the Consumer Financial Protection Board, the broader assessment of regulatory burden on financial institutions, the benefits to the country of having mega-banks and the ability of regulators to oversee their operations, the role of the largest banks in future mortgage markets, and others.

Congress Funds the Government Until Dec. 9

The last thing Congress had to get done before leaving to campaign for re-election was to fund the government for the beginning of the next fiscal year, which begins Oct. 1. Leaders on both sides of Capitol Hill hoped to pass the legislation weeks ago, but things did not go smoothly, and a bill was passed at the last minute. The issues that delayed passage included money to combat the Zika virus; addressing water issues in Flint, Mich.; and assistance for Louisiana flood victims.

When Congress returns Nov, 14 following the elections, appropriators will resume negotiations on a broad appropriations bill to fund all of government through Sept. 30, 2017. The outcome of this effort will depend in large part on the underlying atmospherics of the lame-duck session, which in turn will be determined by political messages gleaned from the election results.

There are two ways that Congress funds government in broad funding bills when it has not passed separate appropriations bills, as is so often the case in recent memory. One approach is to fund government with an across-the-board bill that makes no line-item decisions. This is known as a continuing resolution, or CR. A CR does not make targeted line-item funding decisions. The other approach is through an omnibus appropriations bill, which combines individual appropriations bills with specific spending decisions to be codified in law.

Concerns about the use of CRs in the area of housing legislation were recently highlighted by the National Low-Income Housing Coalition in its analysis of another CR in December. The NLIHC made the following points: "A long-term CR that extends into 2017 could cause thousands of families to lose access to stable housing. This is because HUD needs approximately $1 billion more than FY16 spending levels, and USDA needs $18 million more, to maintain current program levels and renew existing housing assistance contracts. A long-term CR at FY16 levels would result in deep cuts to critical housing programs that could cause thousands of families and children to lose access to stable housing, putting them at increased risk of homelessness."

Major Reg Relief Bill Markup Ends Quickly After Democrats Decline to Offer Amendments

On Sept. 19, the House Financial Services Committee approved Chairman Jeb Hensarling's (R-Texas) Financial CHOICE Act (HR 5983), a 512-page bill that would repeal substantial portions of the 2010 Dodd-Frank financial reform law while creating what Hensarling called an "off-ramp" for banks, exempting them from a number of prudential requirements if they agree to maintain a 10 percent leverage ratio that would require them to hold more capital in reserve. The committee vote was 30-26, with all but one Republican supporting Hensarling's bill.

The markup, which was expected to consume two or three days of work on a bill with 11 separate titles, ended abruptly less than two hours after it started when Democrats announced they would not try to amend the bill.