The Trump administration is not prepared for a foreign policy crisis.
But the administration has not faced an actual national security crisis that tests it and us in a profound way. There is no shortage of possible candidates — a major terrorist attack; a debilitating cyberattack; an infectious disease outbreak; an incident with North Korea, Iran, China or Russia that escalates into a broader conflict. Yet no administration in modern memory has been less prepared to deal with a true crisis than this one.
I spent nearly 25 years in government, and almost as much time studying it. When it comes to the effective stewardship of our nation’s security — especially during crises — the most successful administrations had three things in common:
- process and
People with the experience, temperament and intellectual honesty to give a president good ideas and to dissuade him from pursuing bad ones. An effective process that brings key stakeholders together to question one another’s assumptions, stress test options and consider second-order effects. And all of this in the service of developing clear policies that provide marching orders to everyone in an administration, while putting allies at ease and adversaries on notice about our intentions.
The George H.W. Bush administration’s handling of the end of the Cold War powerfully illustrates these principles. Mr. Bush, Secretary of State James Baker, the national security adviser Brent Scowcroft and a remarkable team of senior officials proved to be the right people in the right place at the right time. Mr. Scowcroft’s interagency process became a model for every successive administration until this one. The policies they pursued were clear, sustained and comprehensive. The Obama administration’s successes in bringing Osama bin Laden to justice and handling the Ebola epidemic were the results of similar strengths.
When it comes to people, process and policy, Mr. Trump’s administration has gone from bad to disastrous.
For two years, cooler heads like Defense Secretary Jim Mattis and the national security adviser H.R. McMaster served as something of a check on Mr. Trump’s worst instincts: invade Venezuela, withdraw from NATO, evacuate every American from the Korean Peninsula.Now, their successors — Secretary of State Mike Pompeo and John Bolton as national security adviser — are as likely to encourage Mr. Trump’s follies as to oppose them.
Equally important, the Partnership for Public Service has found that almost 40 percent of leadership positions requiring Senate confirmation remain unfilled across the administration — at last count 275 out of 705 jobs. About a third of the State Department’s 198 key posts are vacant. One-quarter of the administration’s departments are led by “acting” secretaries.
Under Mr. Bolton, the National Security Council headed by the president, the Principals’ Committee headed by Mr. Bolton and the Deputies Committee, which I once led and which coordinates policy deliberations, have gone into deep hibernation.
Some combination of these committees typically met multiple times a day. Now, it is reportedly once or twice a week at most. The result is greater control of the policy process for Mr. Bolton and fewer messy meetings in which someone might challenge his wisdom. Mr. Mattis, who once complained about death by meetings, protested to Mr. Bolton about the lack of them.
.. The absence of process has consequences. There were minimal efforts to prepare Mr. Trump for his summit with Kim Jong-un, the North Korean dictator, in which he unilaterally ended military exercises on the Korean Peninsula and mused about withdrawing all American forces. Nor was there a process to game out Mr. Trump’s recent decision to pull out of Syria — instead, the relevant committees scrambled after the fact to bring some order to Mr. Trump’s impulses. Even the welcome progress toward ending the 17-year war in Afghanistan has been hobbled by Mr. Trump’s arbitrary and then partly rescinded announcement that he was cutting forces in Afghanistan by half, thereby undercutting our leverage in negotiations with the Taliban.
As for policy, it’s the lifeblood of any administration. Secretaries, other senior officials, ambassadors and envoys all need to know what the policy is to explain it to others and bring predictability to our nation’s foreign engagements. Mr. Trump’s failure to develop policies — and his tendency to countermand them by tweet — have caused major confusion worldwide about where we stand on issue after issue. In a crisis, having clear policy principles is even more important. Take the meltdown in Venezuela. The administration deserves credit for leading the international isolation of the country’s illegitimate president, Nicolás Maduro. But there is no evidence it has a comprehensive strategy to advance a peaceful transition — or a Plan B if Mr. Maduro digs in or lashes out.
Axios reported that Mr. Trump likes to express his disdain for policy by citing the boxer Mike Tyson: Everybody has a plan until he gets punched in the mouth. It’s true that no policy fully survives first contact. But if you don’t spend time anticipating the shots you are likely to take, you wind up flailing about wildly. Which sounds a lot like Mr. Trump.
These past two years, most of our foreign policy setbacks have been modest, and mostly of Mr. Trump’s own making. These next two, we may not be so lucky.
Federal Reserve officials told Goldman Sachs Group Inc. GS -0.72% and Morgan StanleyMS -0.56% that they were about to flunk a portion of the annual stress tests but offered them a deal to avoid an outright fail and continue paying billions to shareholders.
.. regulators told them that to fully pass the test, they would have to cut almost in half the combined $16 billion they had hoped to pay out to shareholders
.. Fed officials gave the banks an unprecedented option: If they agreed to freeze their payouts at recent levels, they would get a “conditional non-objection” grade and avoid the black eye of failure. That meant the banks could pay out a combined $13 billion, or about $5 billion more than what they would have given back to investors if they had decided to retake the test and get a passing grade.
It also will boost a profitability measure that helps determine how much Goldman Chief Executive Lloyd Blankfein and Morgan Stanley CEO James Gorman are paid.
.. The arrangement is the first of its kind in the eight years of the Fed’s annual tests, and one of the clearest signs to date of a significant shift in the regulatory environment for banks, which have been expecting a gentler approach from Washington ever since the election of President Donald Trump.
“New refs, new rules,” consulting firm PricewaterhouseCoopers LLP wrote in a note.
This round of tests was the first graded by Trump appointee Randal Quarles, a former Wall Street lawyer and private-equity executive who last year became the Fed’s regulatory czar.
.. “This year’s stress test followed the same notification process as in past years—all firms were notified of the results and given the fixed option to reduce their capital payout plans with no negotiations,” a Fed spokesman said.
.. Fed officials said their leniency toward Goldman and Morgan Stanley was due in part to the impact of the 2017 tax law, which reduced the value of certain tax assets held by the banks and meant they entered the crisis scenario with diminished capital reserves
.. The stress tests, arguably the most visible sign of the postcrisis crackdown on Wall Street, are being changed in ways that benefit the industry. The Fed exempted three firms with less than $100 billion of assets from the test this year under the new banking law. Its treatment of Morgan Stanley and Goldman—as well as State Street Corp. , which got a pass although it also failed to clear capital requirements under the stress scenario—showed the Fed taking a more flexible approach to what had been a binary exercise.
“The Fed was very kind,” said Arthur Angulo, a managing director at Promontory Financial Group and a former Fed official. He added the Fed’s exercise of discretion on the quantitative portion of the test was “a potential slippery slope.”
.. The interim director at the Consumer Financial Protection Bureau, Mick Mulvaney, has largely stopped initiating new investigations and wants the consumer-finance regulator to be less antagonistic to the businesses it regulates.
.. If Goldman had been required to rejigger its plan until its capital ratios exceeded the Fed’s minimum, the bank would have been able to seek just over $1 billion in buybacks, instead of the $5 billion that was approved
The average net charge-off rate for large U.S. card issuers—the percentage of outstanding debt that issuers write off as a loss—increased to 3.29% in the second quarter, its highest level in four years, according to Fitch Ratings.
.. If consumers’ budgets get more stretched, a pullback in spending could pressure both growth and corporate profits.
.. While losses are rising, they remain low compared with historical levels and the 10% net charge-off rate they hit in early 2010.
.. starting around 2014 many lenders loosened underwriting standards substantially, turning to subprime borrowers with lower credit scores that brought in higher yields.
.. That contributed to a new boom in credit-card spending. Card balances nationwide rose 6% over the last 12 months through May, a growth rate that is up from about 1% four years ago
.. The rising losses are occurring during a time of near record-low U.S. unemployment, which suggests that credit performance could quickly weaken should the jobs situation turn.
.. Credit cards also moved to the top of the list of concerns about potential losses in the Fed’s annual stress test of banks in June.
it has yet to pay for its other significant outstanding legal case, relating to “mirror trades” in Russia, in which around ten billion dollars were spirited out of Russia between 2011 and 2015, using simultaneous stock transactions in Moscow and London.
.. If it emerged that, Deutsche Bank had in fact executed mirror trades with parties on the U.S. Sanctions list relating to Russia’s actions in Ukraine, then the fine could be large. (BNP Paribas was fined nearly nine billion dollars for breaking sanctions in 2014.) This outcome, Schenck told investors, would be “nicht lustig”: not funny.
.. If, after a Brobdingnagian fine for mortgage-backed securities, Deutsche Bank also faces a huge settlement for mirror trades, the bank may need to recapitalize with German government money. As I wrote in August, this prospect should frighten even those who derive pleasure from seeing the bank, and its freewheeling culture, effectively policed:
.. Deutsche Bank, it said, was not only “one of the most important net contributors to systemic risks in the global banking system”; it was also a contagious agent, because of heavy financial “spillover” between Deutsche Bank and other lenders and insurers. Any kind of failure at Deutsche Bank, the I.M.F. suggested, would be extremely bad news for everybody.
.. Deutsche Bank shares were down seven per cent on the London Stock Exchange, to 12.16 euros, slightly more than the bank’s all-time low, which occurred after the Brexit vote. That left Deutsche Bank’s market capitalization at 16.77 billion euros, or about $18.6 billion—$4.6 billion more than the proposed R.M.B.S. fine.
Next week, they will all have to pass another type of test from the Federal Reserve that is a more subjective measure of the banks’ planning and management processes. In the past, these so-called qualitative reviews have tripped up banks including Citigroup, which failed in 2014 even after demonstrating it had adequate capital.
.. On top of that, several Fed officials have recently said that for the nation’s biggest banks, future tests will become even more difficult, with stricter capital requirements.
.. “We need to have those eight most systemically important institutions more resilient than other banks in the economy,” he said.
.. Investors have worried that weakening employment could bring about an end to a period of low defaults, particularly in automobile lending and credit cards — which have been two areas of growth for the banks.