WEBVTT - Wells Fargo Fails Living Will Test (Audio) (Correct)

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<v Speaker 1>Wells Fargo has failed a key regulatory test for the

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<v Speaker 1>second time this year. The bank was unable to persuade

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<v Speaker 1>regulators that it could unwind its business in the event

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<v Speaker 1>of a bankruptcy without posing a threat to the broader

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<v Speaker 1>financial system. Wells Fargo is the only major bank who

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<v Speaker 1>so called living will did not get a passing grade.

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<v Speaker 1>The backdrop is at present, elect Donald Trump has pledged

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<v Speaker 1>to dismantle Dodd Frank, and Republicans like Texas Congressman Jeb

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<v Speaker 1>Henserling are already working on that. Warning outgoing Securities and

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<v Speaker 1>Exchange Commissioned Chair Mary Joe White not to issue any

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<v Speaker 1>new rules during the lame duck period. I would strongly

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<v Speaker 1>urge you to respect the results of last week's election

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<v Speaker 1>and resist the temptation to finalize any regulations, including Dodd

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<v Speaker 1>Frank Title seven regulations, in deference to the right of

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<v Speaker 1>the incoming administration to set its own priorities. But Democrats

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<v Speaker 1>like New York Senator Chuck Schumer say there is no

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

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

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<v Speaker 1>We're not going to let him repeal Dodd Frank or

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<v Speaker 1>the the the rules we put in place to limit

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<v Speaker 1>Wall Street. They're gonna regret the day they tried to

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<v Speaker 1>repeal the a c A. Wells Fargo says it's committed

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<v Speaker 1>to bring its living will up to regulators expectations by

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<v Speaker 1>the next deadline on March thirty one. Our guests are

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<v Speaker 1>David Cass, professor at the University of Maryland Law School,

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<v Speaker 1>and Michael Criminger, partner at Cleary gottlieb In, a former

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<v Speaker 1>General Counsel of the f D. I C David. Four

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<v Speaker 1>other banks were given failing grades on their living wills

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<v Speaker 1>in April. Does it surprise you that Wells Fargo, one

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<v Speaker 1>of the strongest banks during the financial crisis, was the

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<v Speaker 1>only one not able to pass. Yes. I found out

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<v Speaker 1>extremely surprising since Wales has the reputation for being one

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<v Speaker 1>of the best managed banks in the country along with

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

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<v Speaker 1>think it will be actually relatively easy, uh and doable

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<v Speaker 1>for Wells to meet this requirement at the next deadline

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<v Speaker 1>at the end of March seventeen. But it was a

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<v Speaker 1>big surprise. Michael, what are the consequences of this finding

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<v Speaker 1>to to Wells Fargo. Well Wells Fargo did by having

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<v Speaker 1>UH not past this step, if you will, for October one,

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<v Speaker 1>does have a couple of limitations. But to the prior point,

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<v Speaker 1>I mean, I think these are issues that they can

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<v Speaker 1>address to their primarily analysis and providing additional rigor for

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<v Speaker 1>their analysis for their resolution plans. But the constraints on

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<v Speaker 1>them really we're just not being able to acquire far

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<v Speaker 1>banks or branches or non bank subsidiaries until they remedy

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<v Speaker 1>these I think these are things that can be resolved, David.

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<v Speaker 1>The living wills test is a key element of Dodd Frank.

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

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<v Speaker 1>UH Dodd Frank, UH, the living will was set up

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<v Speaker 1>in effect UH two, UH set up a mechanism so

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<v Speaker 1>banks will not need to be bailed out in the

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<v Speaker 1>next financial crisis or severe recession. UH US taxpayer money

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<v Speaker 1>would not have to be used to bail out the banks.

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<v Speaker 1>And the living will is to set up a procedure

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<v Speaker 1>in which banks could UH systematically or individually unwind in

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<v Speaker 1>a way that UH they if they had to go

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<v Speaker 1>through bankruptcy, go through the proceeding in a way that

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<v Speaker 1>they would not require any public funds at all. And Michael,

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<v Speaker 1>is that law does this does what happened yesterday suggested

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<v Speaker 1>that that law that system is working as intended. No,

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<v Speaker 1>I think it does. I mean, there's been a lot

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<v Speaker 1>of progress over the last few years. And I think

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<v Speaker 1>sometimes so things we hear UH about in the marketplace

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<v Speaker 1>imply that these the living wheels are not particularly helpful,

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<v Speaker 1>and that there have been some failures. But you know,

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<v Speaker 1>there's any This is a new process. It was something

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<v Speaker 1>that regulators had to learn how to do, and it's

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<v Speaker 1>something the banks have had to learn how to do.

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<v Speaker 1>I mean, I helped put together the rules for the

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<v Speaker 1>living wheels, and I'll say that one of the primary

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<v Speaker 1>lessons coming out of the financial crisis was that there

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

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<v Speaker 1>And the fact that most of these banks, the vast

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<v Speaker 1>majority of the banks that they were looking at UH

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<v Speaker 1>this time, were able to address their deficiencies and we're

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<v Speaker 1>able to move forward UH. And the fact that Wells

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<v Speaker 1>Fargoes deficiencies themselves are really more of analytical and following

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

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<v Speaker 1>I think should give people a lot of comfort that

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<v Speaker 1>there has been a lot of progress. This there's not

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<v Speaker 1>an event. It's something that's a longer term process. And

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<v Speaker 1>you're not gonna take these living wheels, pull them off

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<v Speaker 1>the shelf and just implement them. They're gonna be things

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<v Speaker 1>that people are gonna learn from and develop Ongoing. During campaign,

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<v Speaker 1>President elect Donald Trump promised to dismantle Dodd Frank and

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<v Speaker 1>was highly critical of Federal Reserve Chair Janet Yellen. We

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<v Speaker 1>have a Fed that's doing political things. This Janet Yellen

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<v Speaker 1>does this put Trump on a collision course with Yellen,

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<v Speaker 1>who has spoken and acted in supportive Dodd Frank. I

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<v Speaker 1>certainly would not want to see all the improvements that

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<v Speaker 1>we have put in place. I wouldn't want to see

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<v Speaker 1>the clock turned back on those because I do I

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<v Speaker 1>do think they're important in diminishing the odds of another

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<v Speaker 1>financial crisis. And today the Fed governor, is led by Yellen,

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<v Speaker 1>voted five to nothing to lay down new requirements requiring

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<v Speaker 1>the eight biggest US banks to build cushions against losses

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<v Speaker 1>to reduce the chances of future taxpayer bailouts. We've been

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<v Speaker 1>talking with David Cass, professor at the University of Maryland

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<v Speaker 1>Law School, and Michael Criminger, a partner at Cleary Gottlieb. Michael,

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<v Speaker 1>is this vote by the Fed governors a sort of

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

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<v Speaker 1>certainly not going to get into any of the political

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<v Speaker 1>issues involved. I think what I would just say that

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<v Speaker 1>the voting on the total lossit sorbing capacity, which is

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<v Speaker 1>what they voted on today, is is definitely an additional

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<v Speaker 1>step in trying to make the financial system more resolvable,

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<v Speaker 1>the large financial institution is more resolvable. It's really just

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<v Speaker 1>kind of a progressive step that's been part of the

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<v Speaker 1>process over many years since the financial crisis involving the

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<v Speaker 1>US in many other countries. So the total asite or

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<v Speaker 1>capacity is in fact an important element to try to

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<v Speaker 1>get that right. So it's a strengthening of the system

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<v Speaker 1>that Dodd Frank supports. I think it's a strengthening of

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<v Speaker 1>the system in terms of ensuring that the companies would

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<v Speaker 1>be more likely to be resolvable if there ever a

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<v Speaker 1>crisis in the future, because what it allows for would

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<v Speaker 1>be the large financial companies if they got into trouble

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<v Speaker 1>to be able to recapitalis themselves using UH debt that

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<v Speaker 1>was already issued out to the market. So it's really

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<v Speaker 1>making sure that the private sector market UH participants would

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<v Speaker 1>be funding any need to recapitalize rather than the public. David,

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<v Speaker 1>I want to go back to something that Michael said

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<v Speaker 1>a little while ago when when he suggested that that

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

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<v Speaker 1>Wells Fargo stock took a bit of a hit immediately

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<v Speaker 1>after the day after UH this announcement came out. Do

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<v Speaker 1>you agree that it will be UH as simple as

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<v Speaker 1>Michael seems to suggested, is for Wells Fargo to fix this. Yes,

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<v Speaker 1>the living will failing the living will test should be

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<v Speaker 1>very easy for Wells Fargo to fix. And indeed, UH

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<v Speaker 1>the initial reaction to Wells Fargo stock, as you mentioned,

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<v Speaker 1>on the first day of the news, the stock went

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<v Speaker 1>down roughly two but now it's covered pretty much that

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<v Speaker 1>two over the next day of trading, so virtually an

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<v Speaker 1>unchanged stock prime. So the market is largely discounting UH

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<v Speaker 1>any negative significance or major negative significance from this news. Michael,

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<v Speaker 1>the Republicans have been talking for quite a while about

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<v Speaker 1>dismantling Dodd Frank and there is movement there. What are

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<v Speaker 1>the chances that they will be able to dismantle Dodd

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

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<v Speaker 1>a lot of interest in the Republican caucus, both in

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<v Speaker 1>the Senate and the House to make some changes, and

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<v Speaker 1>need to be quite honest, Dodd Frank was a very

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<v Speaker 1>large expansive law, and any large advantacy law typically would

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<v Speaker 1>have some mid course corrections, as you see areas that

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<v Speaker 1>could be improved or that might not be needed, and

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<v Speaker 1>so I think some mid course corrections would be very important.

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<v Speaker 1>I also think that there are some elements of Dodd

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<v Speaker 1>Frank and that are probably important to retain. There are

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<v Speaker 1>certainly somels. I think you can probably find a consensus

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<v Speaker 1>probably among a lot of Democrats as well, although I

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<v Speaker 1>certainly can't speak for anybody and others out of the

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<v Speaker 1>isl that would find some mid course corrections appropriate. Unfortunately,

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<v Speaker 1>we've just not been able to do those up to

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

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<v Speaker 1>going to see uh some just a small adjustments to

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<v Speaker 1>Dodd Frank or is there a real possibility we'll see

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<v Speaker 1>the whole thing thrown out. Well, I think um that

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<v Speaker 1>there will be an effort made to make major changes

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<v Speaker 1>to it. I don't believe the entire legislation itself will

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<v Speaker 1>be thrown out. Uh, there aren't. There is. There is

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<v Speaker 1>a consumer protection component in it along with Wall Street reform.

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<v Speaker 1>But I think, um, the incoming administration with a Republican Congress,

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<v Speaker 1>will probably make major changes to it. Uh. Deregulation is

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<v Speaker 1>more of the main goals of this new administration. I

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<v Speaker 1>think Dodd Frank will be altered to a large extent. Michael,

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<v Speaker 1>could de regulatory shift of the Trump administration be forgetting

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<v Speaker 1>the lesson of the last crisis and be opening us

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

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<v Speaker 1>I think there's a question that some of the provision

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<v Speaker 1>of the provision of Dodd Frank was certainly designed to

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<v Speaker 1>help address some of the issues in the last crisis.

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<v Speaker 1>There's also no question, as I mentioned, that there's there

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<v Speaker 1>will be some corrections that would be appropriate to the

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<v Speaker 1>law as well. I mean, I think we don't want

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<v Speaker 1>to go back to the completely to the pre crisis

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<v Speaker 1>era where you didn't have for example, UH, some of

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<v Speaker 1>us some of the protections that are in place now

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<v Speaker 1>there's been a lot of additional capital. The institutions are

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<v Speaker 1>wholly much greater capital, much greater liquidity resources. I think

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<v Speaker 1>having the resolution playing process, having gone forward to stantiord

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<v Speaker 1>degree has made them more resolvable. And I don't really

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<v Speaker 1>think from what I've seen that there. I think there

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<v Speaker 1>are a lot of areas uh like that that I

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<v Speaker 1>think people in both sides of the probably would support continuing,

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<v Speaker 1>though certainly there would be adjustmice to them. And I

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<v Speaker 1>don't don't disagree with the virus speaker at all or

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<v Speaker 1>the professor that UH, there certainly would be intent to

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<v Speaker 1>make some very substantial changes. It was that to see

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<v Speaker 1>how they roll out. David how well has the banking

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<v Speaker 1>industry adjusted to Dodd Frank is it? Uh? Are we

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<v Speaker 1>now to the point that it's it's more or less

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<v Speaker 1>taking it in course or would there be significant relief

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<v Speaker 1>for the industry if if some of the burdens were

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<v Speaker 1>lifted under the Trump administration. Well, the banking industry has

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<v Speaker 1>done fairly well. It certainly has survived the crisis, and

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<v Speaker 1>one uh can just look at the behavior of the

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<v Speaker 1>common stock of the leading bank companies, Wells, far Ago,

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<v Speaker 1>Bank of America, City Group, um JP, Morgan Chase, uh

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<v Speaker 1>SO a limb or at certainly twelve month highs or

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<v Speaker 1>multi year or all time highs. Part of the good health,

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<v Speaker 1>you might say, looking forward for the banking stocks is

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<v Speaker 1>the very likely upward path of interest rates, which has begun,

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<v Speaker 1>and certainly with the Froll Reserve just yesterday announcing a

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<v Speaker 1>quarter point increase in the fellow funds rate. The increase

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<v Speaker 1>in interest rates over time produce a wider profit margin

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<v Speaker 1>for the banks. This is being anticipated and will uh

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<v Speaker 1>make their investing in those companies more attractive. So the

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<v Speaker 1>banks I think have pretty well adjusted h to the regulations.

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<v Speaker 1>I think they're doing pretty well well. Of course, at

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<v Speaker 1>the time of the crisis, it was a very uncertain outlook,

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

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<v Speaker 1>just about a minute, we're talking about the seventy billion

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<v Speaker 1>dollars short in building up this cushion of funds on

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<v Speaker 1>the federals are of passing regulation today. Will the Wall

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<v Speaker 1>Street banks have a problem raising that? I think the

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<v Speaker 1>market certainly, I think will be open for that type

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<v Speaker 1>of debt raising I would just note in particular that

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<v Speaker 1>is the calculated by the Federal Reserve and its announcement

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<v Speaker 1>of the final rule. That seventy billion, of course, is

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<v Speaker 1>much lower than the hundred and twenty billion aggregate shortfall

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<v Speaker 1>that were estimated based upon the proposed rules. So there

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

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<v Speaker 1>of course looking at it. It just was released a

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<v Speaker 1>couple of hours ago and it comes to about two

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<v Speaker 1>nine pages, so we're still looking at it, but I

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<v Speaker 1>would have the aggregate shortfall is definitely a lot lower

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<v Speaker 1>than it was. We'll give you a few more hours

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<v Speaker 1>to look through those two hundred nine pages. Thank you.

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<v Speaker 1>That's Michael Criman journey as a partner at Clearing Gottlieb

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<v Speaker 1>and David Cass, professor at the University of Maryland Law School.

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<v Speaker 1>Thank you both for being on Bloomberg Law. Coming up,

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<v Speaker 1>we're going to be talking about a judge being able

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<v Speaker 1>to stop a newspaper from printing a confidential complaint in

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<v Speaker 1>a child custody case. That's what's called a prior restraint

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<v Speaker 1>and it's something the Supreme Court has ruled against time

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<v Speaker 1>and time again. We'll be talking to constitutional law expert

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

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<v Speaker 1>This is Bloomberg