Speaker 1: Bloomberg Intelligence has five hundred analysts and strategists working across
Speaker 1: the globe and focused on all major markets. Our coverage
Speaker 1: includes over two thousand equities and credits, and we have
Speaker 1: outlooks on more than ninety industries, one hundred market indices,
Speaker 1: currencies and commodities. This podcast series examines the intersection of
Speaker 1: business policy and law. My name is Nathan Dean, and
Speaker 1: I'm an analyst with Bloomberg Intelligence. Coming Financials Policy. The
Speaker 1: fourth Covering Conversation was the first of several webinars that
Speaker 1: the Bloomberg Intelligence team has had on the US elections
Speaker 1: and October first, Nathan Dean, Elliott Stein, Alison Williams, Hermann Chan,
Speaker 1: and Arnold Kakuda met to discuss the implications of the
Speaker 1: US elections on financials, banks and asset managers. If you
Speaker 1: have any questions, please feel free to reach out at
Speaker 1: NDS at Bloomberg dot net. Thank you, Okay, Well, I
Speaker 1: have it at two minutes after the hour, so why
Speaker 1: don't we go ahead and get started. Hello and welcome.
Speaker 1: My name is Nathan Dean. I am a senior policy
Speaker 1: anost with Bloomberg Intelligence, and joining me on the discussion
Speaker 1: today is our senior investment banks analyst Alison Williams, our
Speaker 1: senior regional banks analyst Hermann Chan, our senior credit analyst
Speaker 1: Arnold Kakuda, and our senior litigation analyst Elliott Stein. All
Speaker 1: of this is focused on financials, and we'd like to
Speaker 1: welcome you to the first of many of our elections
Speaker 1: series on the US elections, and again we're going to
Speaker 1: talk about financials. We're also going to record this as
Speaker 1: an episode for our Votes and Verdicts podcasts. So if
Speaker 1: you're listening to this after the fact, you can reach
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Speaker 1: and strategists working across the globe and focused on all
Speaker 1: the major markets. Our coverage includes over two thousand equities
Speaker 1: and credits, and we have outlooks on more than ninety
Speaker 1: industries and market indices, currencies, commodities, and so if you
Speaker 1: want need to access any of those, you can always
Speaker 1: reach that via the BEC function BICO. So let's go
Speaker 1: ahead and get started. So thank you again everybody for attending.
Speaker 1: What I want to do is just take a few
Speaker 1: minutes to talk about the election and the implications from
Speaker 1: the financial sector, and then I'll ask questions to Herman, Alison,
Speaker 1: Arnold and Elliott to give us their views on certain
Speaker 1: aspects of how it can assist your portfolio and how
Speaker 1: you should be thinking about the impact on the financial sector.
Speaker 1: So I want to start with the US House of Representatives, because,
Speaker 1: as many of you may know, we have other elections
Speaker 1: this November other than the presidential race. We have the
Speaker 1: US House of Representatives, we have the Senate, we have
Speaker 1: the presidency. Now the House of Representatives, they're four hundred
Speaker 1: and thirty five members. Each member serves a two year term.
Speaker 1: About forty four individuals. According to our friends over at Bloomberg,
Speaker 1: government are either in toss up or leaning races, meaning
Speaker 1: that it can go either way. Now, this is about
Speaker 1: twelve percent of that four hundred and thirty five. So
Speaker 1: the majority of House members when they go to bed
Speaker 1: on election night, their work is already done. They're going
Speaker 1: to go to bed knowing that they have already secured
Speaker 1: their vote. But with the House right now in control
Speaker 1: of the GOP two hundred and twenty to two hundred
Speaker 1: and eleven. It only takes a few individuals either way
Speaker 1: to secure the next, you know, the next control of
Speaker 1: the House of Representatives. The reason why that the control
Speaker 1: of the House of Representatives is important to the financial
Speaker 1: sector is because twenty twenty five is going to be
Speaker 1: a year of tax reform tax debate. The Trump era
Speaker 1: tax cuts expire at the tail end of twenty twenty five,
Speaker 1: and this was from two and twenty seventeen, and so
Speaker 1: things like the corporate tax rate, the state and local
Speaker 1: tax deduction, uncapitalized games, and so forth like that, all
Speaker 1: this is going to be in the discussion because neither
Speaker 1: party at this point wants to see those individual tax
Speaker 1: rates for most Americans to increase, and so there is
Speaker 1: going to be a discussion. And if the Democrats control
Speaker 1: the House of Representatives, they will control the House in
Speaker 1: waves means committee or vice versa. And whoever controls the
Speaker 1: House and ways and means committee controls the opening salvo,
Speaker 1: the first step of negotiations, the base case, if you will,
Speaker 1: of tax reform. And that is why the House is
Speaker 1: so important. Now I can't get into polling of the
Speaker 1: House races, But our general view is is that whoever
Speaker 1: wins the presidency takes the House, and it's going to
Speaker 1: be very close. So let's talk about the Senate. One
Speaker 1: hundred senators, thirty four of them are up for re
Speaker 1: election this year. It's actually usually one third, one third,
Speaker 1: one third thirty four this year because Nebraska has two
Speaker 1: Senate seats up due to Senator Ben Sass retiring. Now,
Speaker 1: this is a very difficult race for the Democrats. The
Speaker 1: reason being is of those thirty four seats, twenty three
Speaker 1: of them are held by Democrats, and right now the
Speaker 1: Democrats have a fifty one to forty nine majority. There
Speaker 1: are four independents that caucus with the Democrats. But Stor
Speaker 1: Joe Mansion of West Virginia is retiring, and you don't
Speaker 1: need to be me or political strategist to know that
Speaker 1: it's more likely than not the Republicans are going to
Speaker 1: take West Virginia. So now you're at a fifty to
Speaker 1: fifty and fifty to fifty control goes to the Vice
Speaker 1: president or whoever wins the presidency. But for the Democrats
Speaker 1: to keep the Senate, they essentially have to run the
Speaker 1: table and have an extremely good, extremely well run election night,
Speaker 1: because there are several seats that are up for risk.
Speaker 1: For example, Senator Cheron Brown, who's the chairman of the
Speaker 1: Senate Banking Committee in Ohio, he's running a very tough race.
Speaker 1: He's a couple of points behind right now according to
Speaker 1: the latest statistics that I'm just reading off the terminal.
Speaker 1: The next thing is Senator John Tester, also a member
Speaker 1: of the Senate Banking Committee. He's in Montana. He's fighting
Speaker 1: for his political life right now because the last two
Speaker 1: election cycles in Montana he's barely been able to squeak
Speaker 1: out a win. And right according to the polling again,
Speaker 1: he's about six points behind Senator Jackie Rosen and Nevada
Speaker 1: a swing state, Senator Debbie Stabanaw who's retiring come from Michigan.
Speaker 1: She's the chairman of the Senate and Committee. So my
Speaker 1: point here is is that for the Democrats, who essentially
Speaker 1: have control of the Senate, they have to run the table.
Speaker 1: And the reason why that's important for financial services is
Speaker 1: because the Senate does not have a fillibuster for nominations
Speaker 1: or appointments. And so if you think the SEC Chairman
Speaker 1: Gary Ginsler may leave under a Kamala Harris presidency. The Republicans,
Speaker 1: if they take the Senate, will effectively be able to
Speaker 1: jam up a lot of time against her nominees and
Speaker 1: prevent her from putting into place individuals that she may seek. Now,
Speaker 1: the FED, for what it's worth, their tim appointments go
Speaker 1: through the end of twenty twenty five and beginning twenty
Speaker 1: twenty six. And I'm talking about FED Chairman Jerome Powell,
Speaker 1: FED Vice Chairman Michael Barr. But if you're looking at
Speaker 1: the SEC, the FDIC, or the c of DC, if
Speaker 1: any of those individuals leave, the Republicans can effectively jam
Speaker 1: up the Vice president if she were to win. And
Speaker 1: if President Trump wins the Republican state the House, there's
Speaker 1: very little that Democrats could do to stall, slow, or
Speaker 1: or change those appointments. Now, the last thing I want
Speaker 1: to talk about is the presidential cycle. Now, I often
Speaker 1: say that this is a race between three individuals. It's
Speaker 1: Vice President Kamala Harris, former President Donald Trump, and the couch.
Speaker 1: And what I mean by that is is that this
Speaker 1: is an election about turnout. The last two elections have
Speaker 1: had the most votes ever in US election history, and
Speaker 1: if that remains the same here, turnout is good, more
Speaker 1: likely than not, Vice President Kamala Harris will win. You know,
Speaker 1: if turnout is poor, more likely than not, Former President
Speaker 1: Donald Trump will win. And now I can show you
Speaker 1: polling on both sides that says that both sides are
Speaker 1: going to win. It is going to be that close.
Speaker 1: Out of a one hundred and fifty or so million Americans
Speaker 1: that are going to vote in this election cycle, it's
Speaker 1: ultimately going to be around one hundred thousand Americans across
Speaker 1: seven swing states that are going to decide who the
Speaker 1: next president is. It's not going to be me. I
Speaker 1: live in Virginia, and more likely than not won't be
Speaker 1: anybody else in my call who lives in New Jersey
Speaker 1: or New York. It's going to be individuals that live
Speaker 1: in Pennsylvania, Arizona, North Carolina, Nevada, Michigan. They are going
Speaker 1: to be the ones that decide who the next president
Speaker 1: will be. And it could be as close as if
Speaker 1: there's a potential snowstorm in Philadelphia that could swing in
Speaker 1: Pennsylvania a certain way, if there is a bad storm
Speaker 1: in Phoenix that could swing states another way. It's going
Speaker 1: to be that close. So what it's important to keep
Speaker 1: in mind is what if scenarios Under a Kamala Harris presidency.
Speaker 1: You're going to see a couple of key themes. One,
Speaker 1: the Bosso three end game, which we're about to talk
Speaker 1: about in a minute, is going to likely move forward.
Speaker 1: You will see increased capital requirements for the banks ranging
Speaker 1: from two hundred and fifty billion in assets and up.
Speaker 1: There will be another proposal coming out on executive compensation,
Speaker 1: probably additional proposals out there on curbing certain aspects and
Speaker 1: bonuses and deferrals and so forth. You may see another
Speaker 1: bite of the apple in terms of a new proposal
Speaker 1: on the enhanced supplementally leverage ratio. But in a Kamala
Speaker 1: Harris presidency, the one thing to keep in mind is
Speaker 1: is that in her history as Attorney General California, she
Speaker 1: has a history of going after the enforcement side of
Speaker 1: the financial services sector. And we often have seen in
Speaker 1: her history that she will use investigations enforcement examinations, and
Speaker 1: we don't see that we see that trend continuing if
Speaker 1: she were to win. Now, I don't think you're going
Speaker 1: to see much in the way of legislation. Remember, Congress
Speaker 1: is very difficult to get legislation through so again that
Speaker 1: examination and that enforcement side, and you will see a
Speaker 1: much more focus on consumer aspect of financial regulation, namely
Speaker 1: coming from the Consumer Financial Protection Bureau, the Federal Trade Commission,
Speaker 1: and so forth. Now in a President Trump presidency, well
Speaker 1: it could be a little it's a different story. You know,
Speaker 1: there's a deregulatory effort. But for as long as it
Speaker 1: takes regulations to come into force, it also takes probably
Speaker 1: the same amount of time for deregulation efforts to take place.
Speaker 1: Now you have to go through a proposal, you have
Speaker 1: to go through a comment period, you have to go
Speaker 1: through a finalization. So if you ever hear Republicans talking
Speaker 1: about deregulation, they can do that and they can bypass
Speaker 1: the opposition, but it takes time. It takes years. And
Speaker 1: so keep that in mind that if President Trump were
Speaker 1: to come into office and he says that I'll want
Speaker 1: to do something, more often than not, it will take
Speaker 1: time or it will take an active Congress. And for
Speaker 1: what it's worth, the only immediate thing that we're talking
Speaker 1: about that if President Trump were to come into fruition,
Speaker 1: the only true immediate impact that we see out there
Speaker 1: right now is tariffs. Because the power of the presidency
Speaker 1: is a lot more powerful when it comes to executive
Speaker 1: orders in tariffs, but everything else either requires an Act
Speaker 1: of Congress which is difficult to come by, or ask
Speaker 1: to go to the regulatory route. The last thing I
Speaker 1: want to say about President Trump is his stance on crypto.
Speaker 1: He's made several remarks about how he wants to make
Speaker 1: the United States the crypto capital of the world. But
Speaker 1: here's where I'm going to get a little out of consensus.
Speaker 1: My view is is that the crypto framework, of the
Speaker 1: regulatory crypto framework that firms like coinbase and other crypto
Speaker 1: players are seeking, I think can come back, whether or
Speaker 1: I think it can come and move into law, whether
Speaker 1: President Trump wins or where whether Vice President Harris wins.
Speaker 1: And the reason being here, and this is what Elliott
Speaker 1: will hint at in his remarks is the courts are
Speaker 1: becoming more and more and more willing to get into
Speaker 1: the regulatory status of enforcement actions and regulations and so forth.
Speaker 1: And we currently have a murky regulatory environment because the
Speaker 1: courts will say one thing in one case but another
Speaker 1: thing in another case. In Congress itself does not like
Speaker 1: it when courts come in and try and tell them
Speaker 1: what their job is. And so I do think a
Speaker 1: version of the Financial Innovation and Technology Act, and I
Speaker 1: don't want to get into specifics, but essentially tells the
Speaker 1: SEC you have authority over these types of tokens versus
Speaker 1: the CFTC having authority over these types of tokens will
Speaker 1: pass either if Vice President Harris or President Trump were
Speaker 1: to win. So I'm going to stop talking at this point.
Speaker 1: I'm going to open up four questions, and so I
Speaker 1: want to start with Herman and Herman, you know, you
Speaker 1: cover the regional banks. Last year, you had one of
Speaker 1: the busiest first quarters in the history I think of
Speaker 1: Bloomberg Intelligence. So just at a high level question, are
Speaker 1: there any high level thoughts that you would like to
Speaker 1: have about how people should think about their portfolios as
Speaker 1: we approach the US election. Yeah?
Speaker 2: Sure, So you touched on a couple of things. I
Speaker 2: guess I can highlight on Basle three end game. First,
Speaker 2: the regional banks that I cover, the banks between two
Speaker 2: hundred and fifty billion one hundred million in assets. There's
Speaker 2: a lot of relaxation in the reproposal of those rules,
Speaker 2: so they actually are in a very solid position of
Speaker 2: already meeting or exceeding the bast three end game guidelines
Speaker 2: for capital. Just as a refresher, the reproposal eliminates the
Speaker 2: risk rayed asset inflation for the regional banks for those
Speaker 2: under two hundred and fifty billion and assets. So that's
Speaker 2: a modest win. And you've already seen a lot of
Speaker 2: these regionals re answer the buybacks game, with a number
Speaker 2: of banks announcing share repurchases, including US Bank recently at
Speaker 2: their investor day a few weeks back. So that's all positive.
Speaker 2: Capital is in a really good place for them, and
Speaker 2: they'll have plenty of time to meet these rules given
Speaker 2: the delayed implementation process. Corporate tax rates is something that
Speaker 2: you mentioned earlier. That's something I don't think has been
Speaker 2: really contemplated in the bank stalks now. But I would
Speaker 2: say that regional banks, in particular, with all of their
Speaker 2: earnings and activities here in the US, any changes in
Speaker 2: the corporate tax rates would affect them more versus other
Speaker 2: types of corporations here in the US.
Speaker 1: So, you know, you mentioned the fossil three endgame, and
Speaker 1: one thing that we should tell our viewers and listeners
Speaker 1: is that when this proposal initially came out, it was
Speaker 1: calling for a nineteen percent increase on Allison's banks, the
Speaker 1: investment banks, the mid sized banks were around five to
Speaker 1: six percent, And then Vice Chairman Michael Barr came out
Speaker 1: and gave a speech where he said there is going
Speaker 1: to be a reproposal and the overall impact for the
Speaker 1: investment banks would be nine percent and for the regional
Speaker 1: banks would be three to four percent. But there's a
Speaker 1: little bit of a problem happening at the moment with
Speaker 1: the Basil three endgame, because the FETIS said, this is
Speaker 1: a plan, this is what we want to go forward with,
Speaker 1: but there seems to be a hiccup over at the
Speaker 1: FDIC because the FDIC is made up of five individuals
Speaker 1: and three of them currently are a no on this plan.
Speaker 1: It's the two Republicans, and then it's the Consumer Financial
Speaker 1: Protection Bureau Director Rowhee Chopra, who doesn't seem to be
Speaker 1: on board with this weakening or this loosening of the
Speaker 1: Basil three endgame. Now, I do think that eventually this
Speaker 1: proposal will come forward, especially if Vice President Harris wins,
Speaker 1: but again they could be delayed until after the election.
Speaker 1: You have the c FPB Director Chopra does not want
Speaker 1: to move on board with this. But Herman one quick
Speaker 1: follow up in this something that I always ask Herman,
Speaker 1: and I've been asking in this for about eighteen months now. Yeah,
Speaker 1: last year we saw a regional bank turmoil. How are
Speaker 1: the regional banks doing today? Is there any concern whatsoever
Speaker 1: with them?
Speaker 2: I think we've already crossed that bridge at this point,
Speaker 2: given the banks have had plenty of quarters to increase capital.
Speaker 2: As I articulated earlier, they really shored up their deposits
Speaker 2: and their balance sheet in particular paid up for deposits.
Speaker 2: The issue was with what we saw last March with
Speaker 2: SBB and signature First Republic was really a crisis of confidence,
Speaker 2: and the banks collectively have delivered on increasing confidence within
Speaker 2: their customers and their balance sheets. They've done a lot
Speaker 2: to reduce their riskuated assets. A lot of them went
Speaker 2: on a so called ORWA diets online year and we've
Speaker 2: already moved past that with banks actually looking to grow
Speaker 2: their balance sheets, but the loan demand just really isn't
Speaker 2: there for them to do so, and lower interest rates
Speaker 2: going forward will help funding costs. You'll recall last year,
Speaker 2: in particular, after SVB banks had really had to re
Speaker 2: up their deposit game by paying up for deposits to
Speaker 2: really satisfy the customers that could go to other places
Speaker 2: like money market funds and the like. So they've done
Speaker 2: that and they will reap the benefits of lower funding
Speaker 2: costs going forward with the feed a reserve looking to
Speaker 2: cut rates even more potentially later in the year.
Speaker 3: Right.
Speaker 1: So, just as a reminder to our viewers at the moment,
Speaker 1: you can't put in a question into the Q and
Speaker 1: a chat at the bottom and we'll get to that.
Speaker 1: But now I want to turn it to Alison Williams,
Speaker 1: who covers our investment banks. So Alison, I want to
Speaker 1: talk about the busle three end game. You know, Arnold,
Speaker 1: I'm sorry Herman gave us the view from the regional side,
Speaker 1: you know, is there the similar story playing after the
Speaker 1: investment banks and then just thinking about it in a
Speaker 1: global sense, you know, we've seen the UK delayed their
Speaker 1: capital requirements as a result of the US in action,
Speaker 1: if you will. How did the American bank stand in
Speaker 1: terms of global capital requirements? Is there something to be
Speaker 1: concerned about?
Speaker 4: So I think that, you know, the rollback of the
Speaker 4: rules or the softening of the rules is definitely something
Speaker 4: that the banks fought for for a couple of reasons.
Speaker 4: You know, there are a lot of the you know,
Speaker 4: the gold plating of standards relating to some of the
Speaker 4: businesses like residential and retail ending.
Speaker 5: Et cetera.
Speaker 4: But especially for some of the rules that impact things
Speaker 4: like you know, the prime brokerage business, where the US
Speaker 4: banks are truly the global leaders. That's an area that
Speaker 4: the that the banks were very vocal in terms of
Speaker 4: making the US rivals less competitive with these rules, and
Speaker 4: so it really will be I think in the details
Speaker 4: in terms of what the changes are, and so I think,
Speaker 4: you know, JP Morgan had sort of set the expectation
Speaker 4: for a potential having of the impact of the rules
Speaker 4: when they went through a bunch of different scenarios that
Speaker 4: investor day. But I would keep in mind that there
Speaker 4: are several different aspects and at the end of the day,
Speaker 4: it will depend on, you know, which parts of the
Speaker 4: rules are eased. And that that also does make me
Speaker 4: curious and perhaps you can talk about this, Nathan, But
Speaker 4: in terms of the FDIC's objection, are they objecting to
Speaker 4: things that might make these banks more globally competitive, because
Speaker 4: that is generally not something that the FDIC supports. But
Speaker 4: just backing up for a second, and I'll just echo
Speaker 4: something that Herman said in terms of the banks having
Speaker 4: time to implement the rules. So I think that there
Speaker 4: was obviously some negative reactions when the rules came out.
Speaker 4: One thing I would point to is the fact that
Speaker 4: the banks have shown themselves to be very nimble over time.
Speaker 4: The stress capital buffer requirements, which change every year based
Speaker 4: on the US stress tests, have helped them to show
Speaker 4: their flexibility. If we go back to twenty twenty two,
Speaker 4: for example, the JP Morgan, Bank of America and City
Speaker 4: Group had to very quickly shore up their standardized ratios
Speaker 4: by sixty to eighty basis point in a very in
Speaker 4: just a couple of quarters, and so I think that
Speaker 4: illustrates their nimbleness. Part of it is buybacks, of course,
Speaker 4: and part of it is things like non operational deposits.
Speaker 4: At the end of the day, it's not about compliance,
Speaker 4: so it's not about downside risk. But I think it
Speaker 4: is for investors about upside in terms of the fact
Speaker 4: that just by mathematically, if you have a larger denominator
Speaker 4: that's required, returns are going to go down. That's generally
Speaker 4: how bank stock investors value the stock, So that is
Speaker 4: mathematically and negative aside from the fact that there's just
Speaker 4: you know, lesser less capital to be returned to shareholders
Speaker 4: over time.
Speaker 5: So that's how it sort of sort of plays out.
Speaker 4: And so I think it is manageable. Again, I think
Speaker 4: it's it's at this point in time, investors, I think,
Speaker 4: are you know, have sort of digested the revised comments.
Speaker 4: They were in line with what people had expected, and
Speaker 4: the next step is really the election. As to your point,
Speaker 4: if if Trump wins the election, that could mean that
Speaker 4: things are derailed for a longer period of time, where
Speaker 4: as you know, a demo democratic when you know, could
Speaker 4: mean that the rules come sooner and generally more negative.
Speaker 1: So one quick fallow up I had is that, you know,
Speaker 1: I often hear people say that banks do well under
Speaker 1: Republican administrations and banks don't do well under democratic administrations.
Speaker 1: And I was looking at the terminal the other day
Speaker 1: and I saw that under the Obama administration bank stocks
Speaker 1: did quite well in the post global financial crisis era.
Speaker 1: Is there any truth to this or is it really
Speaker 1: there's so much more macro matters, you know, in macro matters,
Speaker 1: is the podcast are fixed? Thinkham folks, I highly recommend
Speaker 1: you to take a listen to that. Are there macro
Speaker 1: issues at play here that are just beyond the US election.
Speaker 4: Well, it is all about rules of thumb, right, So
Speaker 4: I think in general, you know, from the regulatory standpoint,
Speaker 4: you know, as you've written about, and as.
Speaker 5: We've discussed, from a regulatory.
Speaker 4: Standpoint, it generally Republicans tend to be more favorable. Also
Speaker 4: from you know, if we look back to you know,
Speaker 4: the Trump presidency, it really was about a lot of
Speaker 4: the fiscal stimulus, really the tax cuts. Herman talked about
Speaker 4: the help of the tax cuts to his banks. Uh,
Speaker 4: you know, for banks like JP Morgan, they really invested
Speaker 4: a lot in their business aided by those tax cuts
Speaker 4: in terms of building branches, et cetera. So again, it
Speaker 4: does matter what the macro picture is and what the
Speaker 4: policies are. I think, you know, from our discussions, the
Speaker 4: puzzle three endgame is very important to the banks. And
Speaker 4: so to the extent that uh, you know, deregulation is
Speaker 4: favored that would be generally good for banks. Fiscal stimulus
Speaker 4: is always pop for banks. Tax cuts are positive for
Speaker 4: banks directly, but also very positive for the investment environment.
Speaker 5: So I think those are the key considerations, right, thank.
Speaker 1: You, And you know it reminded me I thought on
Speaker 1: the just the fiscal stimulus and tax cuts. One thing
Speaker 1: that we're often tell what we're telling our clients in
Speaker 1: every scenario is the control of Congress will dictate the
Speaker 1: ultimate end game of Vice President Harris's or former President
Speaker 1: Toronto Trump's goals. And what I mean by that, if
Speaker 1: the Republicans take the House, the Senate, and the presidency,
Speaker 1: then they can use their process called reconciliation where you
Speaker 1: can avoid the filibuster, the legislative filibuster, you can avoid it,
Speaker 1: and by a majority vote in the House, the majority
Speaker 1: vote in the Senate, and the signature of the presidency,
Speaker 1: you can have another round of tax cuts and you
Speaker 1: can essentially avoid any Democratic opposition. This is how President
Speaker 1: Obama got Obamacare through. This is how President Trump got
Speaker 1: the first round of Trump tax cuts through. And this
Speaker 1: is how President Biden got the Inflation Reduction Act through.
Speaker 1: And so you know, if you ever think of like
Speaker 1: grandiose trillion dollar bills and either our tax cuts or
Speaker 1: stimulus and so forth, the odds of that increases if
Speaker 1: one party has to house, the Senate, and the presidency.
Speaker 1: Now you can only use it once per fiscal year,
Speaker 1: and you can only do it for things that impact
Speaker 1: the budget. But always something to keep in mind on
Speaker 1: election night, if the Republicans have an extremely good night,
Speaker 1: then a much more broader tax reform bill comes back
Speaker 1: into the conversation. So, and now I'm gonna turn it
Speaker 1: over to I'm gonna ask a questions about the regional
Speaker 1: bank long term Debt rule. This is something that Arnold
Speaker 1: and I talk about almost on a weekly basis. So Arnold,
Speaker 1: can you give us your views? Though this is a
Speaker 1: rule that's over at the Federal Reserve. I don't want
Speaker 1: to steal his thunder here, So can you give us
Speaker 1: a rule you know, synapsis of the rule, plus what
Speaker 1: you think your analysis shows in terms of how the
Speaker 1: banks are gonna respond?
Speaker 6: Yeah, sure, certainly. So this rule, I guess was contemplated
Speaker 6: before the regional bank crisis, right, and just basically, these
Speaker 6: regional banks are getting bigger and bigger, and so something
Speaker 6: would have happened to them. Hey, you know, you don't want,
Speaker 6: you know, ultimately JP Morgan to get even bigger, which
Speaker 6: actually is what we just saw happen by having bail
Speaker 6: ineligible debt. Uh, these banks could by themselves recapitalize or
Speaker 6: in terms of the wind down, it'll cost less for
Speaker 6: the FDIC to do so. Right, we've had these big holes,
Speaker 6: you know, huge FDIC losses with SVB and First Republic
Speaker 6: going down. So and where we see it right now
Speaker 6: with the regional banks, the big regionals like the P
Speaker 6: and c's and the USBs, they look you know, very
Speaker 6: well set in terms of you know, they look you
Speaker 6: know that that whole set of banks, which now also
Speaker 6: includes American Express, given they've been over two hundred and
Speaker 6: fifty billion of assets for over four quarters, they have
Speaker 6: about a thirty billion surplus. Right. But then it's really
Speaker 6: this you know, the one hundred to two hundred and
Speaker 6: fifty billion banks. That's where we see a shortfall about
Speaker 6: thirty billion. And you know, ironically or or interestingly, you
Speaker 6: know the banks with the biggest deficits for citizens as
Speaker 6: well as NYCB for citizens with about nine billion deficit,
Speaker 6: NYCB with the five billion. Now, these were the winners,
Speaker 6: right of this recent regional bank turmoil, you know, both
Speaker 6: picking up assets from failed SBB and signature. Right, and
Speaker 6: so maybe they know something that we don't know, you know,
Speaker 6: will they be an exemption for you know, the one
Speaker 6: hundred to two hundred and fifty billion banks ironically, which
Speaker 6: you know are the banks that you know had all
Speaker 6: these issues. Right, So yeah, that's what we're waiting on that,
Speaker 6: I guess and Nathan you probably have a better sense
Speaker 6: of when we might finally right get get some sort
Speaker 6: of clarity or or an update on the stuff.
Speaker 1: Yeah. So you know this, this this rule has been
Speaker 1: out there and like Arnold mentioned, certainly the bare bones
Speaker 1: of this rule was there before the regional bank turmoil.
Speaker 1: But you know what Arnold was referring to, that one
Speaker 1: hundred and two hundred and fifty billion dollars threshold is
Speaker 1: because when the boss the three D game was first proposed,
Speaker 1: it was proposed for one hundred billion banks and up
Speaker 1: one hundred billion in assets enough and outside of a
Speaker 1: small issue with the AOCI, the accumulating for the AOCI
Speaker 1: get a gang of a drawing blank at the moment,
Speaker 1: just because on my camera, you know, outside of a
Speaker 1: small provision related to unri realized gains and losses, you know,
Speaker 1: the threshold had been pushed up to two hundred and
Speaker 1: fifty billion in assets. So there's this understanding or there's
Speaker 1: this idea out there that the regional bank long term
Speaker 1: Debt rule will also move up to two hundred and
Speaker 1: fifty billion in assets. Now, in terms of where we're
Speaker 1: seeing for the future of this rule, what I will
Speaker 1: say is is that we've heard anecdotally across Washington that
Speaker 1: the regulators are looking for this to move before the
Speaker 1: Bottel three D game and before the elections. So I
Speaker 1: would not be surprised if you see this coming out
Speaker 1: in October. Normally regulators hate putting stuff out right before
Speaker 1: the elections. However, if this rule doesn't come out before
Speaker 1: the elections and President Trump wins the chair, the acting
Speaker 1: control of the currency would immediately flip and also as
Speaker 1: a result, this rule probably would never get done. And
Speaker 1: so I think the current era regulators are going to
Speaker 1: put this out. I think there are going to be changes.
Speaker 1: Don't be surprised if it moves up to two hundred
Speaker 1: and fifty billion in assets. Also, don't be surprised if
Speaker 1: there's changes, like to the denomination aspect of it and
Speaker 1: so forth. I will also state that if the Republicans
Speaker 1: state the House, the Senate, and the Presidency, they could
Speaker 1: use the Congressional Review Act. It's this procedure that allows
Speaker 1: Congress to overturn regulations within sixty legislative days. Because we're
Speaker 1: currently in that window. I'm not saying that they would,
Speaker 1: but I'm just saying that there is a chance, so Arnold,
Speaker 1: My last question to you before we turn it over
Speaker 1: to Elliott is we talked a little bit about about
Speaker 1: the Buzzle three endgame. Do you have any additional thoughts
Speaker 1: you'd want to share on that?
Speaker 6: You know it's right now, you know that they're current
Speaker 6: surplus of capital that they these banks have are you know, astronomical, Well,
Speaker 6: it's about one hundred and thirty billion of surplus capital,
Speaker 6: of which you know JP Morgan is about fifty right,
Speaker 6: and and kind of the the impact of that is,
Speaker 6: you know, they're they're getting ready for potential owners r
Speaker 6: W A inflation, and so they're holding a lot more
Speaker 6: extra equity, right, and you know, any any I guess
Speaker 6: we're hearing that the the reproposal might be fifty percent
Speaker 6: less owners. So if that's the case, then a lot
Speaker 6: of these banks will look so much better, right, they'd
Speaker 6: have a lot of still excess capital and kind of
Speaker 6: aside from the Goldman and Morgan Stanley's but and so
Speaker 6: that'd be welcome news. And in the process, uh, they're
Speaker 6: holding so much extra common equity that they're squeezing their preferreds.
Speaker 6: They're they're they're redeeming their their expensive preferreds. And so
Speaker 6: the technicals are really strong and in the preferred space.
Speaker 6: But you know, actually I want to kind of go
Speaker 6: back if I can to. You know, we talked about
Speaker 6: if if you know, Trump becomes president, there might be
Speaker 6: more inflation. You know, the Terrists might cause inflation and
Speaker 6: stuff like that. But you know, looking at at the
Speaker 6: various asset classes that that I cover and as well
Speaker 6: as you know I partner with uh with with Alison
Speaker 6: and Herman, you know, you know, I think with this,
Speaker 6: you know, in a Harris presidency, I think it's more
Speaker 6: you know, as you guys say, it's it's more of
Speaker 6: the status quo. You know, things are kind of going
Speaker 6: to remain kind of as is, you know, the regulatory
Speaker 6: agenda and whatnot. But with a Trump presidency, you know
Speaker 6: that this this hot air balloon of regulation you know,
Speaker 6: that might get popped like the like like the spy balloon. Right,
Speaker 6: So so basically with less less regulation you might have
Speaker 6: and Alison talked about this, for equities, it might be
Speaker 6: a little bit more positive because you know, return on equity,
Speaker 6: your profits over your equity, that that's a key metric, right,
Speaker 6: And so if if equity requirements you know, might be
Speaker 6: pulled back a little bit, that's going to help your denominator.
Speaker 6: If you can take more risk, you might be able
Speaker 6: to increase your profits. Right, So you know, maybe the
Speaker 6: you know that that might be a little bit more
Speaker 6: positive for equities. And then what we do see some
Speaker 6: risk is actually for preferreds which might have longer duration, right,
Speaker 6: And and where that comes from is you know, with
Speaker 6: with increased terrafs under under Trump presidency, you might see
Speaker 6: the yield curve steepen, right, So the so the long
Speaker 6: end rates might rise and some of these longer duration preferreds,
Speaker 6: which kind of trade off of longer yields, that might
Speaker 6: be impacted a bit. And then in terms of senior
Speaker 6: debt though, we think it's kind of more neutral because
Speaker 6: you know, as Alison mentioned, these stress tests every year
Speaker 6: right when requiring these banks to hold more equity, that
Speaker 6: that's been a positive. And so if that kind of
Speaker 6: goes away, that's not great, but then that's kind of
Speaker 6: offset by Okay, but if profits are higher, you know
Speaker 6: that that's also good for banks. So we see, you know,
Speaker 6: a potential trump when is you know, kind of more
Speaker 6: positive for equities, less positive for for lower longeration preferreds,
Speaker 6: kind of neutrals for the senior debt.
Speaker 1: Right, Thanks, Charld and Alison. I'm gonna come to you
Speaker 1: real quick because we have a question in the Q
Speaker 1: and A. So, for the large banks, are there any
Speaker 1: concerns about the HTM losses anymore? The quarterly banking profile
Speaker 1: still shows large paper losses, but it's largely being ignored now,
Speaker 1: thank you.
Speaker 4: So so maybe i'll answer on behalf of my six
Speaker 4: banks and then the sixth largest, and then Herman can
Speaker 4: speak to some of some of the banks that he covers.
Speaker 4: You know, really among the big six, it was Bank
Speaker 4: of America, I think where there was the most concern.
Speaker 4: And I would say that this this was something that
Speaker 4: investors talked about and we're watching even before the bank
Speaker 4: turmoil that really sort of dominated the at least the
Speaker 4: financial markets in the in March of last year. And
Speaker 4: the one thing I would say is that, you know,
Speaker 4: first of all with rates set to go the other way.
Speaker 4: That generally provides I think some relief and some concerns.
Speaker 4: I would say also, you know, specifically, you know, Bank
Speaker 4: of America was the one that stood out just in
Speaker 4: terms of you know, the metric versus other banks. But
Speaker 4: you know, there is if you did the full analysis
Speaker 4: in terms of the deposits they had, the liquidity they had,
Speaker 4: certainly those all provided some comfort. It was something though
Speaker 4: I think that you know, investors still need.
Speaker 5: To be aware of. But it does.
Speaker 4: It does also work its way over time. So those
Speaker 4: securities run off sort of every quarter every year. It
Speaker 4: is a multi year process as those run off. But
Speaker 4: I think just the fact that you know, time will
Speaker 4: continue to decrease the risk, and the prospects of long
Speaker 4: term rates now sort of going lower also decreases that risk.
Speaker 5: And so with that, perhaps I'll turn it over to Herman.
Speaker 2: Yeah, thanks Allison. So for the industry, now we have
Speaker 2: some research on this. The aff losses available for sale
Speaker 2: losses about two hundred billion dollars helped the maturity losses
Speaker 2: for the industry, it's about three hundred billion dollars and
Speaker 2: this was the second quarter numbers. Those numbers are set
Speaker 2: to narrow. As Alison mentioned earlier, I think you can
Speaker 2: just look at the ten year treasure us the proxy.
Speaker 2: We're at three point seven percent now and in June
Speaker 2: it was over four point four percent, So you're going
Speaker 2: to see those losses narrow as the ten year changes.
Speaker 2: So that's positive for the banks. And as as I
Speaker 2: entriculated earlier with as with three end game changes, the
Speaker 2: regionals had already incorporated these unrealized losses, at least on
Speaker 2: the AFS side, into their capital calculations, and so that
Speaker 2: was already maked in into the studies even before the
Speaker 2: updated reproposal, which didn't change the calculus on that front.
Speaker 2: So thanks for all prepared for that. The losses will
Speaker 2: be manageable and they will narrow over time, and that
Speaker 2: could potentially even accelerate if given the way. That's in
Speaker 2: your effort, right.
Speaker 1: So thank you everybody. And again that question came in
Speaker 1: from the chat, so feel free to use the Q
Speaker 1: and A if you have additional questions. I'm going to
Speaker 1: turn over to Elliott now to talk a little bit
Speaker 1: more about litigation, because if you haven't paid attention to
Speaker 1: the courts yet, and I'm saying this is not as
Speaker 1: a non lawyer, you certainly want to pay attention to
Speaker 1: the courts now because several key rulemakings from the Supreme
Speaker 1: Court over the last few months shut run difference, major questions,
Speaker 1: and so forth are going to dramatically change how Washington
Speaker 1: operates in the next few years. And we haven't seen
Speaker 1: it yet, but it's coming. So Elliott, what are you
Speaker 1: watching in terms of the election, in terms of litigation,
Speaker 1: which courts? You know, will the Supreme Court change all
Speaker 1: that much after the election? Can you give us your thoughts?
Speaker 3: Uh? Yeah, So you know, I'm going to be watching
Speaker 3: similar to what you said at the outset regarding the
Speaker 3: House and Senate, I'm really going to be focused on
Speaker 3: whether the presidency and the Senate majority or from the
Speaker 3: same party, because similar to how that matters for getting
Speaker 3: regulators appointed, it matters for the courts because without a
Speaker 3: Senate majority from the same party, it's going to be
Speaker 3: difficult for the president to get judges confirmed. You know,
Speaker 3: it's a Republican Senate is not going to be willing
Speaker 3: to confirm President President Harris judge Judges. Similarly, you know,
Speaker 3: a Democratic Senate is probably going to be hesitant to
Speaker 3: concern a lot. It's going to be hesitant to confirm
Speaker 3: a lot of President Trump's judges, so at most the
Speaker 3: president will be stuck, you know, having to nominate very
Speaker 3: moderate judges. But you know that that sort of brings
Speaker 3: me to my next point, why why do courts even matter?
Speaker 3: And I think the last four years have really crystallized
Speaker 3: why courts matter so much, similar to what you just
Speaker 3: said in the in the remarks before your questions, because
Speaker 3: without a filibuster proof majority in Congress, you know, either
Speaker 3: president is going to be stuck doing a lot via
Speaker 3: the regulators. And you know, we saw in the last
Speaker 3: four years we had this perfect storm very aggressive regulators
Speaker 3: uh in the Biden administration, running into judiciary and courts
Speaker 3: that were very concerned with administrative overreach. And as a result,
Speaker 3: we saw a lot of Biden's regulations that you know,
Speaker 3: pertain to the financial sector but also other sectors get
Speaker 3: challenged in court and a lot of those lawsuits wound
Speaker 3: up succeeding. For example, the SEES private funds rule was
Speaker 3: struck down by the Fifth Circuit Court of Appeals back
Speaker 3: in June. You know, the year before that, we saw
Speaker 3: Biden's student debt relief plan get struck down by the
Speaker 3: Supreme Court. And you know, I'm tracking a whole number
Speaker 3: of ongoing lawsuits challenging other Biden financial regulations. You know,
Speaker 3: one I'm writing about, you know, pretty actively is the
Speaker 3: CFPB's credit card late feed rule, which would reduce sort
Speaker 3: of the safe harbor for late fees that credit card
Speaker 3: issuers can charge. The SEC's climate Disclosure rule is another
Speaker 3: one that's tied up in litigation. And I have a
Speaker 3: table on the terminal and you know, feel free to
Speaker 3: reach out to me if you're listening to this and
Speaker 3: and you want to see this table. But it shows,
Speaker 3: you know, at least a dozen other lawsuits that we're
Speaker 3: tracking that are uh, you know, these are financial regulations
Speaker 3: that are tied up in litigation, and the are cases
Speaker 3: challenging the SEC's Consolidated Audit Trail, SEC rules over a
Speaker 3: short sales and the definition of a dealer, things like
Speaker 3: the Labor Department's fuduciary rule, also the Labor Department's es
Speaker 3: do Taibricer rule, And like you said, with the major
Speaker 3: questions doctrine doctrine and the end of Chevron deference. You know,
Speaker 3: a lot of these lawsuits have a good chance of succeeding,
Speaker 3: as we've seen in other lawsuits already. So that's why
Speaker 3: the courts matter for whether regulations, you know, will survive
Speaker 3: judicial review.
Speaker 1: So we've heard a lot of people talk about the
Speaker 1: Fifth Circuit, Fifth Circuit, disc Fifth Circuit that Washingtonians even
Speaker 1: like the joke that anything's going to happen, It's going
Speaker 1: to happen in this circuit. Why is the Fifth Circuit
Speaker 1: so important to these regulations? And are there other circuits
Speaker 1: out there that you think are worthwhile looking at?
Speaker 3: Yeah? So, I mean, look, the Fifth Circuit is important
Speaker 3: because it has a pretty wide majority of judges that
Speaker 3: were appointed by Republicans who and these judges, you know,
Speaker 3: it's not always the case that Republican judges are a
Speaker 3: little more pro business and democratic judges are a little
Speaker 3: more pro regulation, but it's often the case, and in
Speaker 3: the First Circuit you see it pretty starkly because the
Speaker 3: judges that there's a lot of judges that were appointed
Speaker 3: by President Trump on that court but also other Republican presidents,
Speaker 3: and they tend to be pretty concerned with administrative overreach,
Speaker 3: and we've seen that in a lot of their rulings.
Speaker 3: You know, sort of bringing back regulatory with what they
Speaker 3: perceive as regulatory overreach. But let me let me also
Speaker 3: talk about the Supreme Court, right because you know, it
Speaker 3: sort of starts there, right the Supreme Court has a
Speaker 3: six to three majority of judges justices appointed by Republicans.
Speaker 3: I don't see that changing anytime soon, but you know,
Speaker 3: it is worth keeping in mind that, you know, vacancies
Speaker 3: can happen at any time, you know, you know, due
Speaker 3: to the laws of nature, and it's worth keeping find
Speaker 3: the ages of some of the justices to sort of
Speaker 3: try to figure out who might be retiring. When the
Speaker 3: oldest justices on the court right now are Clarence Thomas
Speaker 3: and Sam Alito, both you know, very conservative. Thomas will
Speaker 3: be seventy six and Alito will be seventy four on
Speaker 3: inauguration day after that, Justice Soda Meyer, you know, appointed
Speaker 3: by a Democratic president, She'll be seventy on inauguration day.
Speaker 3: After that, they're all under seventy. But if Trump wins,
Speaker 3: if you know, President Trump wins again, you know, I
Speaker 3: think he's likely to get to he'll probably replace Thomas
Speaker 3: and Alito if if they retire, which I think they would.
Speaker 3: And then similarly, if if Harris wins, you know, I
Speaker 3: think it's likely that Justice Soto Mayor will retire and
Speaker 3: Harris would be able to replace her. But again, given
Speaker 3: the ages, you never know when other openings might open up.
Speaker 3: You mentioned the Fifth Circuit that has a twelve to
Speaker 3: five majority of judges appointed by Republicans. Another one, you know,
Speaker 3: another court, another federal appeals court to look at is
Speaker 3: the Eighth Circuit that has an even starker majority of
Speaker 3: judges appointed by Republicans. That's a ten to one majority.
Speaker 3: So you know that, and and that that court is
Speaker 3: where the SEC climate disclosure rule is currently, so you know,
Speaker 3: it's just, uh, it's it's it's just given given the
Speaker 3: balance of the judges on that court, it's likely that
Speaker 3: that the that that rule I think will get struck down.
Speaker 3: And I think, you know, the industry challenging the rule
Speaker 3: has very compelling arguments. But you know, the election matters,
Speaker 3: you know, because there are a bunch of other federal
Speaker 3: appeals courts that are actually much closer that have either
Speaker 3: one or that are you know, have a balance where
Speaker 3: either party only has a one or two seat majority.
Speaker 3: So depending on who wins the presidency, a lot of
Speaker 3: these circuit courts could flip right from you know, one party,
Speaker 3: from judges appointed by one party to judges one by
Speaker 3: the other party. And President Trump was able to flip
Speaker 3: three of the federal appeals courts and Biden was only
Speaker 3: he flipped one of those back.
Speaker 1: But that's it.
Speaker 3: They're all still pretty close. And even with courts like
Speaker 3: the Fifth and eighth Circuit, you know that have large
Speaker 3: majorities of by one party, you know, whoever wins the
Speaker 3: presidency can either expand that or maybe try to narrow
Speaker 3: those majorities.
Speaker 1: Right. Well, thank you, So we're going to end it there.
Speaker 1: You know, while I'm talking, if you do want to
Speaker 1: put a question in the Q and A, I'll come
Speaker 1: to it. But I just want to say thank you
Speaker 1: very much for attending. This is the first of several
Speaker 1: series of election webinars that we are going to be doing.
Speaker 1: If you do have any questions in the interim, please
Speaker 1: feel free to reach out to me. My name is
Speaker 1: Nathan Dean. I'm at Endan ten at Bloomberg dot net.
Speaker 1: And thank you very much for your time. We really
Speaker 1: appreciate you and wish you a great week. Thank you