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Speaker 1: Wells Fargo has failed a key regulatory test for the

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Speaker 1: second time this year. The bank was unable to persuade

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Speaker 1: regulators that it could unwind its business in the event

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Speaker 1: of a bankruptcy without posing a threat to the broader

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Speaker 1: financial system. Wells Fargo is the only major bank who

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Speaker 1: so called living will did not get a passing grade.

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Speaker 1: The backdrop is at present, elect Donald Trump has pledged

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Speaker 1: to dismantle Dodd Frank, and Republicans like Texas Congressman Jeb

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Speaker 1: Henserling are already working on that. Warning outgoing Securities and

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Speaker 1: Exchange Commissioned Chair Mary Joe White not to issue any

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Speaker 1: new rules during the lame duck period. I would strongly

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Speaker 1: urge you to respect the results of last week's election

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Speaker 1: and resist the temptation to finalize any regulations, including Dodd

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Speaker 1: Frank Title seven regulations, in deference to the right of

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Speaker 1: the incoming administration to set its own priorities. But Democrats

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Speaker 1: like New York Senator Chuck Schumer say there is no

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Speaker 1: way Trump dismantle Dodd Frank when he's opposed to our values.

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Speaker 1: We're going to go after on tooth and nail, for instance,

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Speaker 1: We're not going to let him repeal Dodd Frank or

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Speaker 1: the the the rules we put in place to limit

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Speaker 1: Wall Street. They're gonna regret the day they tried to

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Speaker 1: repeal the a c A. Wells Fargo says it's committed

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Speaker 1: to bring its living will up to regulators expectations by

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Speaker 1: the next deadline on March thirty one. Our guests are

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Speaker 1: David Cass, professor at the University of Maryland Law School,

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Speaker 1: and Michael Criminger, partner at Cleary gottlieb In, a former

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Speaker 1: General Counsel of the f D. I C David. Four

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Speaker 1: other banks were given failing grades on their living wills

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Speaker 1: in April. Does it surprise you that Wells Fargo, one

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Speaker 1: of the strongest banks during the financial crisis, was the

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Speaker 1: only one not able to pass. Yes. I found out

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Speaker 1: extremely surprising since Wales has the reputation for being one

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Speaker 1: of the best managed banks in the country along with

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Speaker 1: JP Morgan Chase, for example, And it's very surprising. I

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Speaker 1: think it will be actually relatively easy, uh and doable

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Speaker 1: for Wells to meet this requirement at the next deadline

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Speaker 1: at the end of March seventeen. But it was a

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Speaker 1: big surprise. Michael, what are the consequences of this finding

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Speaker 1: to to Wells Fargo. Well Wells Fargo did by having

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Speaker 1: UH not past this step, if you will, for October one,

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Speaker 1: does have a couple of limitations. But to the prior point,

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Speaker 1: I mean, I think these are issues that they can

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Speaker 1: address to their primarily analysis and providing additional rigor for

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Speaker 1: their analysis for their resolution plans. But the constraints on

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Speaker 1: them really we're just not being able to acquire far

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Speaker 1: banks or branches or non bank subsidiaries until they remedy

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Speaker 1: these I think these are things that can be resolved, David.

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Speaker 1: The living wills test is a key element of Dodd Frank.

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Speaker 1: Will you explain it's importance. Um, Yes, The basically within

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Speaker 1: UH Dodd Frank, UH, the living will was set up

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Speaker 1: in effect UH two, UH set up a mechanism so

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Speaker 1: banks will not need to be bailed out in the

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Speaker 1: next financial crisis or severe recession. UH US taxpayer money

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Speaker 1: would not have to be used to bail out the banks.

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Speaker 1: And the living will is to set up a procedure

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Speaker 1: in which banks could UH systematically or individually unwind in

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Speaker 1: a way that UH they if they had to go

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Speaker 1: through bankruptcy, go through the proceeding in a way that

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Speaker 1: they would not require any public funds at all. And Michael,

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Speaker 1: is that law does this does what happened yesterday suggested

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Speaker 1: that that law that system is working as intended. No,

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Speaker 1: I think it does. I mean, there's been a lot

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Speaker 1: of progress over the last few years. And I think

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Speaker 1: sometimes so things we hear UH about in the marketplace

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Speaker 1: imply that these the living wheels are not particularly helpful,

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Speaker 1: and that there have been some failures. But you know,

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Speaker 1: there's any This is a new process. It was something

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Speaker 1: that regulators had to learn how to do, and it's

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Speaker 1: something the banks have had to learn how to do.

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Speaker 1: I mean, I helped put together the rules for the

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Speaker 1: living wheels, and I'll say that one of the primary

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Speaker 1: lessons coming out of the financial crisis was that there

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Speaker 1: needed to be pre planning and that's really what they are.

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Speaker 1: And the fact that most of these banks, the vast

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Speaker 1: majority of the banks that they were looking at UH

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Speaker 1: this time, were able to address their deficiencies and we're

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Speaker 1: able to move forward UH. And the fact that Wells

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Speaker 1: Fargoes deficiencies themselves are really more of analytical and following

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Speaker 1: up on some of the analytical steps that they've already taken.

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Speaker 1: I think should give people a lot of comfort that

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Speaker 1: there has been a lot of progress. This there's not

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Speaker 1: an event. It's something that's a longer term process. And

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Speaker 1: you're not gonna take these living wheels, pull them off

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Speaker 1: the shelf and just implement them. They're gonna be things

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Speaker 1: that people are gonna learn from and develop Ongoing. During campaign,

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Speaker 1: President elect Donald Trump promised to dismantle Dodd Frank and

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Speaker 1: was highly critical of Federal Reserve Chair Janet Yellen. We

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Speaker 1: have a Fed that's doing political things. This Janet Yellen

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Speaker 1: does this put Trump on a collision course with Yellen,

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Speaker 1: who has spoken and acted in supportive Dodd Frank. I

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Speaker 1: certainly would not want to see all the improvements that

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Speaker 1: we have put in place. I wouldn't want to see

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Speaker 1: the clock turned back on those because I do I

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Speaker 1: do think they're important in diminishing the odds of another

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Speaker 1: financial crisis. And today the Fed governor, is led by Yellen,

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Speaker 1: voted five to nothing to lay down new requirements requiring

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Speaker 1: the eight biggest US banks to build cushions against losses

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Speaker 1: to reduce the chances of future taxpayer bailouts. We've been

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Speaker 1: talking with David Cass, professor at the University of Maryland

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Speaker 1: Law School, and Michael Criminger, a partner at Cleary Gottlieb. Michael,

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Speaker 1: is this vote by the Fed governors a sort of

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Speaker 1: in your face to Trump and the Republicans. Well, I'm

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Speaker 1: certainly not going to get into any of the political

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Speaker 1: issues involved. I think what I would just say that

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Speaker 1: the voting on the total lossit sorbing capacity, which is

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Speaker 1: what they voted on today, is is definitely an additional

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Speaker 1: step in trying to make the financial system more resolvable,

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Speaker 1: the large financial institution is more resolvable. It's really just

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Speaker 1: kind of a progressive step that's been part of the

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Speaker 1: process over many years since the financial crisis involving the

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Speaker 1: US in many other countries. So the total asite or

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Speaker 1: capacity is in fact an important element to try to

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Speaker 1: get that right. So it's a strengthening of the system

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Speaker 1: that Dodd Frank supports. I think it's a strengthening of

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Speaker 1: the system in terms of ensuring that the companies would

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Speaker 1: be more likely to be resolvable if there ever a

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Speaker 1: crisis in the future, because what it allows for would

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Speaker 1: be the large financial companies if they got into trouble

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Speaker 1: to be able to recapitalis themselves using UH debt that

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Speaker 1: was already issued out to the market. So it's really

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Speaker 1: making sure that the private sector market UH participants would

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Speaker 1: be funding any need to recapitalize rather than the public. David,

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Speaker 1: I want to go back to something that Michael said

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Speaker 1: a little while ago when when he suggested that that

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Speaker 1: Wells Fargo wouldn't have too much difficulty dealing with these deficiencies.

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Speaker 1: Wells Fargo stock took a bit of a hit immediately

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Speaker 1: after the day after UH this announcement came out. Do

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Speaker 1: you agree that it will be UH as simple as

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Speaker 1: Michael seems to suggested, is for Wells Fargo to fix this. Yes,

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Speaker 1: the living will failing the living will test should be

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Speaker 1: very easy for Wells Fargo to fix. And indeed, UH

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Speaker 1: the initial reaction to Wells Fargo stock, as you mentioned,

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Speaker 1: on the first day of the news, the stock went

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Speaker 1: down roughly two but now it's covered pretty much that

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Speaker 1: two over the next day of trading, so virtually an

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Speaker 1: unchanged stock prime. So the market is largely discounting UH

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Speaker 1: any negative significance or major negative significance from this news. Michael,

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Speaker 1: the Republicans have been talking for quite a while about

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Speaker 1: dismantling Dodd Frank and there is movement there. What are

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Speaker 1: the chances that they will be able to dismantle Dodd

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Speaker 1: Frank or sections of it. Well, I think there's certainly

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Speaker 1: a lot of interest in the Republican caucus, both in

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Speaker 1: the Senate and the House to make some changes, and

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Speaker 1: need to be quite honest, Dodd Frank was a very

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Speaker 1: large expansive law, and any large advantacy law typically would

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Speaker 1: have some mid course corrections, as you see areas that

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Speaker 1: could be improved or that might not be needed, and

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Speaker 1: so I think some mid course corrections would be very important.

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Speaker 1: I also think that there are some elements of Dodd

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Speaker 1: Frank and that are probably important to retain. There are

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Speaker 1: certainly somels. I think you can probably find a consensus

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Speaker 1: probably among a lot of Democrats as well, although I

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Speaker 1: certainly can't speak for anybody and others out of the

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Speaker 1: isl that would find some mid course corrections appropriate. Unfortunately,

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Speaker 1: we've just not been able to do those up to

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Speaker 1: this date. David, what's your take on that. Are we

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Speaker 1: going to see uh some just a small adjustments to

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Speaker 1: Dodd Frank or is there a real possibility we'll see

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Speaker 1: the whole thing thrown out. Well, I think um that

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Speaker 1: there will be an effort made to make major changes

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Speaker 1: to it. I don't believe the entire legislation itself will

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Speaker 1: be thrown out. Uh, there aren't. There is. There is

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Speaker 1: a consumer protection component in it along with Wall Street reform.

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Speaker 1: But I think, um, the incoming administration with a Republican Congress,

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Speaker 1: will probably make major changes to it. Uh. Deregulation is

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Speaker 1: more of the main goals of this new administration. I

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Speaker 1: think Dodd Frank will be altered to a large extent. Michael,

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Speaker 1: could de regulatory shift of the Trump administration be forgetting

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Speaker 1: the lesson of the last crisis and be opening us

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Speaker 1: up to something that we don't want to go through again. Well,

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Speaker 1: I think there's a question that some of the provision

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Speaker 1: of the provision of Dodd Frank was certainly designed to

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Speaker 1: help address some of the issues in the last crisis.

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Speaker 1: There's also no question, as I mentioned, that there's there

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Speaker 1: will be some corrections that would be appropriate to the

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Speaker 1: law as well. I mean, I think we don't want

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Speaker 1: to go back to the completely to the pre crisis

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Speaker 1: era where you didn't have for example, UH, some of

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Speaker 1: us some of the protections that are in place now

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Speaker 1: there's been a lot of additional capital. The institutions are

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Speaker 1: wholly much greater capital, much greater liquidity resources. I think

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Speaker 1: having the resolution playing process, having gone forward to stantiord

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Speaker 1: degree has made them more resolvable. And I don't really

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Speaker 1: think from what I've seen that there. I think there

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Speaker 1: are a lot of areas uh like that that I

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Speaker 1: think people in both sides of the probably would support continuing,

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Speaker 1: though certainly there would be adjustmice to them. And I

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Speaker 1: don't don't disagree with the virus speaker at all or

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Speaker 1: the professor that UH, there certainly would be intent to

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Speaker 1: make some very substantial changes. It was that to see

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Speaker 1: how they roll out. David how well has the banking

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Speaker 1: industry adjusted to Dodd Frank is it? Uh? Are we

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Speaker 1: now to the point that it's it's more or less

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Speaker 1: taking it in course or would there be significant relief

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Speaker 1: for the industry if if some of the burdens were

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Speaker 1: lifted under the Trump administration. Well, the banking industry has

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Speaker 1: done fairly well. It certainly has survived the crisis, and

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Speaker 1: one uh can just look at the behavior of the

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Speaker 1: common stock of the leading bank companies, Wells, far Ago,

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Speaker 1: Bank of America, City Group, um JP, Morgan Chase, uh

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Speaker 1: SO a limb or at certainly twelve month highs or

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Speaker 1: multi year or all time highs. Part of the good health,

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Speaker 1: you might say, looking forward for the banking stocks is

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Speaker 1: the very likely upward path of interest rates, which has begun,

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Speaker 1: and certainly with the Froll Reserve just yesterday announcing a

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Speaker 1: quarter point increase in the fellow funds rate. The increase

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Speaker 1: in interest rates over time produce a wider profit margin

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Speaker 1: for the banks. This is being anticipated and will uh

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Speaker 1: make their investing in those companies more attractive. So the

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Speaker 1: banks I think have pretty well adjusted h to the regulations.

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Speaker 1: I think they're doing pretty well well. Of course, at

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Speaker 1: the time of the crisis, it was a very uncertain outlook,

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Speaker 1: but I think they've adjusted pretty well. And Michael, in

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Speaker 1: just about a minute, we're talking about the seventy billion

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Speaker 1: dollars short in building up this cushion of funds on

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Speaker 1: the federals are of passing regulation today. Will the Wall

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Speaker 1: Street banks have a problem raising that? I think the

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Speaker 1: market certainly, I think will be open for that type

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Speaker 1: of debt raising I would just note in particular that

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Speaker 1: is the calculated by the Federal Reserve and its announcement

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Speaker 1: of the final rule. That seventy billion, of course, is

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Speaker 1: much lower than the hundred and twenty billion aggregate shortfall

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Speaker 1: that were estimated based upon the proposed rules. So there

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Speaker 1: were some important positive developments in the final rule. We're still,

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Speaker 1: of course looking at it. It just was released a

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Speaker 1: couple of hours ago and it comes to about two

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Speaker 1: nine pages, so we're still looking at it, but I

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Speaker 1: would have the aggregate shortfall is definitely a lot lower

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Speaker 1: than it was. We'll give you a few more hours

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Speaker 1: to look through those two hundred nine pages. Thank you.

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Speaker 1: That's Michael Criman journey as a partner at Clearing Gottlieb

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Speaker 1: and David Cass, professor at the University of Maryland Law School.

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Speaker 1: Thank you both for being on Bloomberg Law. Coming up,

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Speaker 1: we're going to be talking about a judge being able

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Speaker 1: to stop a newspaper from printing a confidential complaint in

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Speaker 1: a child custody case. That's what's called a prior restraint

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Speaker 1: and it's something the Supreme Court has ruled against time

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Speaker 1: and time again. We'll be talking to constitutional law expert

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Speaker 1: Eugene Vallick. That's coming up. I'm June Grasslo with Greg Store.

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Speaker 1: This is Bloomberg