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The Wrongologist

Geopolitics, Power and Political Economy

Congress Greases the Skids for Exxon

(See below for the Daily Escape)

While America’s focus has been on the Orange Overlord’s blizzard of executive orders, and his public love-making with Putin, we were distracted from some of the actions by the GOP’s Congressional worms who are intent on chewing through our regulatory protections.

Did you feel burdened by a Security and Exchange Commission (SEC) rule requiring that American corporations doing business overseas reveal how much money they’re spending in foreign countries? This is called the Resource Extraction Rule, and apparently, it has been a terrible burden for Exxon and other oil firms.

VOX reported that, on the same day the Senate confirmed Rex Tillerson as Secretary of State, the House voted to kill a transparency rule for oil companies that Tillerson once lobbied against while CEO of Exxon Mobil. Now it’s on to the Senate and the Orange Leader for action:

Using the little-known Congressional Review Act, the House GOP voted on Wednesday to kill an Obama-era regulation that would require publicly traded oil, gas, and mining companies to disclose any payments that they made to foreign governments, including taxes and royalties.

The Resource Extraction Rule is part of the 2010 Dodd-Frank Act. Back then, senators from both parties included a provision requiring greater disclosure from mining and drilling companies’ activities abroad. The hope was to cut down on corruption in resource-rich developing countries by increasing transparency.

Over the past six years, the SEC tried to craft a rule that would give the legislation teeth. But the SEC’s first attempt at regulation was struck down by the courts in 2012. The rule didn’t actually get finished until June 27, 2016. As Charlie Pierce says: (emphasis by the Wrongologist)

In other countries, resource extraction is a polite way of describing corruption and bribery on a grand scale, and it’s also a dead serious matter for local activists who are trying to take on international corporations and their native plunderers in local government.

Remember the Congressional Review Act (CRA). It is the mechanism the GOP will use to undo much of what the Obama administration did in the areas of corporate responsibility and environmental justice.

At its core, the CRA states that any “recent” regulation (the Act’s definition of recent means it only applies to those passed by the Obama administration after June, 2016) can be repealed by a majority vote of both houses of Congress. Any repeal vote taken by the Senate cannot be filibustered, and the list includes more than 50 Obama-era regulations.

So far, the Stream Protection rule that restricted coal companies from dumping debris and waste into nearby waterways has been revoked, along with the Social Security gun rule that prevented mentally impaired persons from buying guns.

Now, they’ve gutted the Resource Extraction rule.

Under the CRA, the SEC is barred from crafting a new rule that has “substantially the same form” as the repealed regulation. So, Congress has thrown a rose to the oil and gas and mining industries that will be difficult to reverse.

Despite GOP concerns, similar rules are in place in the European Union. Reporting by the United Kingdom, France, Norway and Canada shows $150 billion in payments to governments in more than 100 countries.

Sounds like something citizens should know about.

The GOP’s argument is that American oil and gas companies need to make these under-the-table payments, in order to compete in third world countries.

This is America under the GOP: We can’t afford to provide the world’s best education to our kids. We can’t afford to take care of our elderly, but we absolutely must have policies that allow Exxon and friends to bribe foreign governments.

 

The Daily Escape: The National Library of China, in Beijing’s educational district.

(Image by Tian-yu Xiong for the National Geographic)

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All Aboard The Bailout Train

In February 2014, Wrongo alerted that hedge funds and other Wall Street firms had been buying up single family homes, many of which had been foreclosed on during the housing crisis between 2007 and 2010:

Most rental houses in the US are owned by individuals…but a new breed has emerged: Wall Street-backed investment companies with billions of dollars at their disposal. In just the last two years, large investors have bought as many as 200,000 single-family houses and are now renting them out.

Tim G, a Wrongologist reader who is an expert in mortgage finance, commented at the time that he hoped that:

Fitch/Moody’s and any other rating agencies learned their lesson from 2007, and won’t (as you suggested) just slap AAA ratings on these. By definition these rental properties carry much more risk, since if they are vacant for any period, the incentive to keep paying drops quickly.

Well, slap they did. You know the drill from 2008; the new game was just like the old game: The new bundled securities were AAA rated by the same rating agencies. The bonds were sold to those seeking high yield without commensurately high risk.

Now we have a new wrinkle. Wolf Richter is reporting that Invitation Homes (owned by private equity giant, Blackstone) today owns 48,431 single-family homes. This makes Invitation Homes the largest landlord of single-family homes in the US. They just obtained government guarantees for $1 billion in rental-home mortgage backed securities. From Richter:

The disclosure came in an amended S-11 filing with the SEC on Monday in preparation for Invitation Homes’ IPO. Invitation Homes bought these properties out of foreclosure and turned them into rental properties, concentrated in 12 urban areas. The IPO filing lists $9.7 billion in single-family properties and $7.7 billion in debt.

The plan is to have a successful IPO, and then refinance some of the debt with the sale of $1 billion of government-guaranteed rental-home mortgage-backed securities.

Fannie Mae, a government-sponsored entity (GSE) that was bailed out, and then taken over by the US government during the 2008 financial crisis, is providing the guarantee of bond principal and interest, and the offering documents call them “Guaranteed Certificates”. More from Wolf: (emphasis by the Wrongologist)

This is the first time ever that a government-sponsored enterprise has guaranteed single-family rental-home mortgage-backed securities, issued by a huge corporate landlord. It’s an essential step forward in financializing rents: taxpayer backing for funding the biggest landlords.

These government guarantees allow Invitation Homes to pay lower interest rates. The bottom line is that Invitation will have cheap financing for future home purchases, and thus lower costs and greater profits.

It’s a sweet deal: low-cost funding made possible by government guarantees, is a special gift that was agreed to by the Obama administration. Other corporate landlords will want to follow in Blackstone’s footsteps, and it is difficult to see how Fannie Mae will choose not to guarantee the other firms.

Bloomberg reported on a Dodd-Frank mandated stress test conducted by the Federal Housing Finance Agency. It showed that during the next severe economic downturn, Fannie Mae and its sister Freddie Mac would need between $49 billion and $126 billion in taxpayer bailout money.

Socialize the losses, Part Infinity.

The Blackstone deal looks like new policy: The government subsidizes the largest landlords, helping increase their profits from renting out the same single-family homes that individual homeowners lost to the same financial thugs during the housing foreclosure crisis. The mission of Fannie Mae is to promote home ownership, not to give real estate entrepreneurs a way to limit their losses.

This guarantee was worked out under Obama’s watch, but Blackstone did not make it public until it updated its filing with the SEC this week. The timing is curious. The public disclosure comes after the Trump team is in charge, meaning Obama wouldn’t face criticism, and the Trump Administration will certainly let the deal stand.

This is worse than the government’s gift of TARP to Wall Street. That at least had optics that said it protected Main Street. But, this securitized mortgage market doesn’t involve Main Street, and the market isn’t even in big trouble.

This isn’t a bailout. It’s a grift. The Kleptocracy is now more entrenched than in 2008.

How ironic. Big business gets a sweetheart government deal, while the GOP moves to cut social programs.

Will this add new jobs to the Trump economy?

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Audit The Federal Reserve?

Well, it should be no surprise that the Federal Reserve is already audited, but Rep. Thomas Massie (R-KY) re-introduced an “Audit the Fed” bill in the House on Wednesday, and Sen. Rand Paul (R-KY) introduced companion legislation in the US Senate. This has been a pet idea of Republicans for years. The GOP’s reasoning was summed up by Rep. Massie:

Behind closed doors, the Fed crafts monetary policy that will continue to devalue our currency, slow economic growth, and make life harder for the poor and middle class…

Mr. Massie apparently does not know that the US dollar is among the strongest currencies in international markets. Otherwise, he wouldn’t say that the Fed is debasing our currency. This guy is the exact reason why Congress’ role in directing the Fed should not be enlarged. Some suggest the bill is inaccurately named, but as the WSJ says:

Fed officials meet several times a year to decide what to do with short-term interest rates and how to influence them—actions that affect the borrowing costs of households, businesses and investors across the country. The “Audit the Fed” measures would require the Government Accountability Office (GAO) to examine those decisions.

And then report their findings to various Congressional committees. The GAO already has some Fed oversight, but the bill would repeal restrictions on their oversight. The most important restriction blocks the GAO from reviewing:

Deliberations, decisions, or actions on monetary policy matters, [as well as] discussion or communication among or between members of the Board and officers and employees related to such deliberations.

The repeal of these existing restrictions would allow the GAO to view all materials and transcripts related to meetings of the Fed’s Federal Open Market Committee (FOMC), the entity that sets US interest rates. It would require the GAO, at the request of Congress, to provide recommendations on monetary policy, including the FOMC’s interest-rate decisions, to Congress.

This would make meeting-by-meeting monetary policy decisions subject to Congressional review and, potentially, Congressional pressure. Judging by Mr. Massie’s level of knowledge about central banking, it would be highly likely that political pressure and rabble-rousing would be unavoidable.

The Fed’s financial statements are already audited in the usual sense by the government’s Inspector General (IG) and by Deloitte, a world-class independent accounting firm. The resulting financial reports are available to the public online. Every security owned by the Fed, including its unique identifying CUSIP number, is also available online.

The GAO reviews the Fed’s activities at the request of Congress, and has wide latitude to review Fed operations. For example, the Dodd-Frank Act required the GAO to conduct reviews of the Fed’s emergency lending programs during the 2008 crisis, along with the Fed’s governance structure.  Since the financial crisis, the GAO has done some 70 reviews of aspects of Fed operations. That’s about 10 reviews a year since the end of the crisis.

Sen. Ted Cruz (R-TX), who joined with Sen. Paul to introduce the “Audit the Fed” legislation in the Senate, speaks for many of the Right Wing political class when he says, “the Fed is a group of unaccountable, unelected philosopher kings making decisions that affect every American”.

The bill’s proponents argue that “transparency” is lacking, and this will be cured with more Congressional oversight. Or, by more finger-pointing by certain gerrymandered GOP lifers talking about how the FOMC decisions are based on incorrect assumptions and broken models. There will probably be about as much value-added oversight as the various Benghazi committees exercised over the State Department.

In 2017 we’re having the same debates about the role of the Federal Reserve Bank that America had in the early 1900s prior to the Federal Reserve Act’s passage in 1913. We still hear voices calling for either more or less restrictive monetary policy, for more or less regulation, and even for the Fed to be abolished.

These are the same issues that Sen. Nelson Aldrich, banker Paul Warburg and their colleagues debated a hundred years ago. Back then, the debate was highly politicized, since there was widespread populist mistrust of Wall Street and of the concept of a centralized federal banking authority. Sound familiar?

So, time to let the GOP politicize the Fed. Time to let the Congress get its hands on monetary policy, even though they have proven to have zero ability to handle fiscal policy. Consider Congress’s failure to pass budgets, and their willingness to let the US government default on its debt.

Shouldn’t we keep the Fed’s deliberations free from grandstanding politicians playing to a conspiracy hungry constituency?

Isn’t this supposed to be the Congress that believed in less government?

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GOP Plans To Gut Dodd-Frank

Do you trust the banks and brokerage houses to govern themselves? Do you think that reducing banking regulations will help the economy, or your personal financial situation? Before you answer:

  • Remember that the economic meltdown of 2008 was caused by overreach by the financial industry.
  • Remember that it took the next eight years to climb out of the Great Recession and return to pre-2008 employment levels.

Dave Dayen in the Fiscal Times points out that there will be a vote this week in the Congress that will say a lot about how willing the Democrats in Congress will be to fight the deregulation avalanche that’s about to come crashing down on We the People. From Dayen: (brackets and emphasis by the Wrongologist)

As early as Wednesday, the House will take up H.R. 6392, the Systemic Risk Designation Improvement Act. This bill would lift mandatory Dodd-Frank regulatory supervision for all banks with more than $50 billion in assets, meaning those financial giants would no longer be subject to blanket requirements regarding capital and leverage, public disclosures and the production of “living wills” to map out how to unwind [the bank] during a crisis.

The intent of the new regulation authored by Blaine Leutkemeyer (R-MO), isn’t about helping the biggest banks, but the relatively smaller regional players, firms like PNC Bank, Capital One and SunTrust. An estimated 28 institutions would be affected. The eight “global systemically important banks” would remain subject to the standards: Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs, Wells Fargo, Bank of New York Mellon, Morgan Stanley and State Street Bank.

But the so-called regional banks are not small operations. These 28 regionals have combined assets of about $4.5 trillion. It is useful to remember that in the 2008 crisis, regional banks like Washington Mutual and Wachovia also came crashing down.

The American Banker says that the Financial Stability Oversight Council (FSOC), the new super-regulator charged with monitoring systemic risk, will be gutted by the Trump administration: (brackets and emphasis by the Wrongologist)

Because the FSOC is headed by the Treasury secretary…[a cabinet post selected]…by the White House, a Trump administration is unlikely to continue any of the council’s…priorities, including the designation of nonbanks or continued regulation of those firms already designated.

It is obvious that if this bill passes and is signed by President Trump, financial regulation will be relaxed, not by repeal, but through atrophy. Republicans want to replace any mandatory rules for regulation with discretionary ones. That way they can claim that they’re merely improving the system by putting the decisions in the hands of the experts instead of members of Congress.

A next step will be to hire regulators dedicated to turning a blind eye to what the financial industry does. The chair of FSOC is the Treasury Secretary. Trump’s candidates for Treasury Secretary include Steven Mnuchin, Trump’s national finance chair and the most likely choice for Treasury, who sits on the board of directors of CIT, a financial services company with more than $50 billion in assets. The Treasury Secretary will ensure that the rest of the FSOC board is made up of regulators and presidential appointees who share Trump’s laissez-faire philosophy.

President Obama will veto this bill if it passes the Senate before January 20th. But the Republicans plan to roll it out this week, instead of waiting for Trump to enter the Oval Office. They want to gauge just how much backbone Democrats have after their thumping in the election. More from Dayen:

This is really a moment of truth for those Democrats. If Republicans put up a big bipartisan vote in the House for this, the Senate will be more inclined to try to pass it down the road. And it will serve as a test case for Democratic resolve more generally.

Wall Street-friendly Dems have already endorsed tailoring Dodd-Frank rules to eliminate smaller regionals from the rules. This bill is a big change, and the question is whether Democrats play ball with Trump’s deregulation agenda, or will they recognize the harm it will cause?

This is an early test for those Dems whose seats are at-risk in 2018 and 2020.

Financial deregulation has rarely been a partisan political matter. Democrats and Republicans have typically worked together to roll back rules and loosen up the Wall Street casino.

HR 6392 could represent a return to those times, or it could be the moment when Democrats join together and say “no”, forcing Republicans to support the banking industry agenda on their own.

Party line resistance by Democrats could be in their longer-term best interest.

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