Big Banks Get a Big Win in Senate Rollback Bill

Nation’s largest banks would gain incentive to buy more municipal bonds in legislation targeting smaller banks

.. a section aimed at making it easier for them to buy state and local bonds.

The provision, championed by Citigroup Inc. and other large banks, would ease a new rule aimed at ensuring banks can raise enough cash during a financial-market meltdown to fund their operations for 30 days, requiring them to hold more cash or securities that are easily salable.

Under federal banking rules approved in 2014, those “high quality liquid assets” included cash, Treasury bonds and corporate debt—but not municipal debt. Banks historically like to hold municipal bonds because of their safety and tax advantages.

.. Sen. Elizabeth Warren and 31 other Democrats who opposed the procedural vote.

.. State and local officials have praised the move, saying their securities could suffer if banks begin to shun them.

.. Analysts have said changing the rule for municipal products would be a mistake because it would erode the core of a bank-safety rule put in place after the 2010 Dodd-Frank law. While municipal securities have relatively low default rates, they are traded thinly and shouldn’t count as liquid assets, critics say.

.. “It’s an outrageously bad idea,” said Phillip Swagel, a professor at the University of Maryland who served in the George W. Bush Treasury, characterizing the provision as an implicit federal guarantee of the municipal market. In the next crisis, banks will have trouble selling their municipal securities, freezing up the market for them and requiring the government to step in to backstop it, he predicted.

How Corruption and Cronyism in Banking Fueled Iran’s Protests

Before long though, Caspian stopped allowing withdrawals. After three months, it stopped paying interest. Finally, in May, it shut its doors for good — becoming one of the largest in a long series of failures of Iranian financial institutions in recent years.

.. The outpouring of anger was directed not only at President Hassan Rouhani, who won re-election promising to revitalize the economy, but also the country’s supreme leader, Ayatollah Ali Khamenei.

.. The cascade of defaults, economists say, was not just the result of risky banking practices, but also a case study in official corruption — a major reason Iranians found their losses so infuriating. Adding to their outrage, Iranian officials made a series of statements blaming the victims for not being more careful with their money.

.. Many of the institutions, including those that merged in 2016 to form Caspian, were allowed to gamble with deposits or run Ponzi schemes with impunity for years, in part because they were owned by well-connected elites:

in the Iranian state.

.. as many as hundreds of thousands of people lost money because of the collapsing financial institutions. Iranians have a term for the growing class of victims: “property losers,” or “mal-baakhtegan” in Persian.

.. regulators have quietly steered many of the companies into mergers with larger banks to try to absorb their losses, but that has created a worsening problem of bad loans and overvalued assets throughout the banking system.

.. Economists say that as many as 40 percent of the loans carried on the books of Iranian banks may be delinquent.

.. Even Iran’s supreme leader, Mr. Khamenei, has acknowledged responsibility for the growing number of victims of “problematic financial institutions.”

“These appeals must be dealt with and heard out,” he said this month. “I myself am responsible; all of us must follow this approach.”

.. The corruption underlying the bank failures has long been an open secret

.. The loans totaled $1.9 billion, and almost all appeared to be held by well-known insiders.

.. Among them was Hossein Hedayati, a business tycoon and former member of the Revolutionary Guards, whose swift rise was so conspicuous that websites speculated about the sources of his sudden wealth. The document released by the lawmaker showed that Mr. Hedayati owed $285 million, and in a television program discussing the loan, another lawmaker, Mohammad Hassannejad, accused Mr. Hedayati of using a series of front companies to swing the loans and hide his role.

Mr. Hedayati dialed in to the program, sputtering with rage; he denied borrowing from Sarmayeh and threated to “sue everyone,” but has yet to follow through on the threat.

.. Clerics controlled religious foundations, called bonyads, that acquired commercial businesses. The largest of these, under the supreme leader, now makes up “15 to 20 percent” of the Iranian economy

.. All the semiofficial holding companies have major advantages over private businesses in favorable access to capital, tax exemptions and political connections.

.. But under a conservative president, Mahmoud Ahmadinejad, who came to power in 2005, semiofficial bodies controlled by clerics, the Revolutionary Guards or their allies dominated the newly private financial sector.

.. the Revolutionary Guards controlled at least two, while the army, the police, the municipality of Tehran and a giant religious foundation close to the Guards controlled the others.

.. the largest were usually run by individuals close to the same ruling elite

.. They say that made it almost impossible for even the best-intentioned regulators to police the banks.

.. The outsize returns promised by the banks and financial institutions lured capital that might better have gone to more productive uses

.. leaks about the high salaries of executives at state-run companies

.. The government has since tried to block the use of Telegram in Iran

Banks Seek Government Help to Track Money Laundering

Industry, anticorruption groups support creating a Treasury-run database of corporations and their owners

Efforts to overhaul U.S. anti-money-laundering laws are gathering steam, as large banks, anticorruption groups and law-enforcement authorities coalesce around the idea of creating a national database of corporations and their true owners.

.. The financial industry’s support for the plan, which would require new and existing corporations to register with the Treasury Department’s Financial Crimes Enforcement Network, could be pivotal.

.. Treasury in 2016 issued a long-awaited rule mandating banks to identify the true owners of companies they take on as clients. It also urged Congress to create a national database of those owners, a step that proponents said would stymie the creation of shell companies by bad actors.

.. Instead of just applying to suspected money-laundering or terrorism-financing activity, the measure would include a long list of criminal activities, including food-stamp fraud, the smuggling of counterfeit goods and environmental crimes.

.. “What you don’t want is a situation where the [government] is able to get private and sensitive information without having to go through that normal process,” she added, citing requests for a warrant or court order.

A Hedge-Fund Titan Puts Away the Punch Bowl

Ray Dalio of Bridgewater sees Americans’ debt as a coming drag on growth and markets

.. While he doesn’t see another crisis in the offing, he does see the same underlying stresses at work: Americans have accumulated far more debt than they have assets and income to support.

.. Not only will this drag on growth and markets, it will leave the economy acutely vulnerable to higher interest rates. The relevant parallel, he says, is not the early 1930s, when the economy imploded, but the late 1930s when the Federal Reserve tightened monetary policy and inadvertently extended the Great Depression. Today, the central bank must balance the short-term need for higher interest rates to contain inflation against the long-term need for low rates to work off the debt overhang and sustain high asset prices.

.. “It may not be a problem in the next year or two, but the risk of not getting it right increases with time.”

.. “We ‘finance people’ see the world very differently from the way economists do,”

.. The views of finance people tend to be shaped more by trading experience than by formal economics. They assign much more weight to financial factors such as debt, asset prices and cash flow than do economists who emphasize “real economy” factors such as employment and investment

.. Finance people are wary of how macroeconomic data obscures crucial details of individual companies and households. Some economists do think like finance people, such as former Fed Chairman Alan Greenspan, but they are in the minority.

.. since the 1970s, inflation-adjusted interest rates have steadily declined while investors have accepted ever lower compensation for risks such as bankruptcy, recession and volatility (i.e. the “risk premium” has declined). This directly raises asset values and indirectly lifts growth by spurring borrowing.

.. His team estimates this has contributed three percentage points a year to stock returns since the 1970s while boosting private and government debt to 325% of gross domestic product.

.. In 2007, Mr. Dalio’s team concluded that the cost of servicing Americans’ debts was growing faster than their cash flows, creating the conditions for a crisis.

.. By slashing short-term interest rates to zero and buying bonds to push down long-term rates, it engineered the right combination of economic growth, debt write-offs and low interest rates necessary to start the painful process of “deleveraging,” or working off all that debt.

.. it can’t raise them much either, or debt servicing​would swamp cash flow and asset prices would sink. Thus Mr. Dalio foresees years of low interest rates, and while he thinks stocks are appropriately valued, he thinks returns to a typical stock-bond portfolio over the next decade will be around zero after inflation and taxes.

.. his biggest worry is that lower corporate taxes and higher stock prices do nothing for the bottom 60% of households who own almost no assets and whose stagnant wages are the mirror image of expanding profit margins, feeding resentment and political polarization. Says Mr. Dalio: “If we do have an economic downturn, I worry we will be at each other’s throats.”