Street Cred: Trump v Biden Showdown
Insight by Jaret Seiberg
Episode 8 is the relaunch of Tip of the Seiberg with Jaret Seiberg, financial services and housing policy analyst at Cowen Washington Research Group.
In this episode, Jaret looks back on Fannie Mae and Freddie Mac’s fee hike on refinancings and the ability of banks to continue paying dividends. He also looks forward to the presidential election and the impact of a Trump or Biden presidency on financials and housing. Lastly, he takes a look at phase 4 of the COVID-19 stimulus and actions the Fed can take to support the economy.
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Transcript
Speaker 1: Welcome to our new podcast series, Street Cred, powered by Cowen’s Washington Research Group. Our resident policy pirates are planning to release interesting, insightful episodes weekly, spanning key issue areas. We landed on the title Street Cred since Cowen’s Washington Research Group lives at, and you could argue lives [00:00:30] for, that all important intersection of Wall Street and K Street. In the coming weeks and months, you’ll hear regularly from Jaret Seiberg, hosting the aptly named Tip of the Seiberg, Rick Weissenstein, conducting your monthly check-up, and Chris Krueger, as the dashing leading man in Nightmare On K Street. Since we’re covering health and biotech, financial and housing, trade and tax, as well as political analysis, you could say that this new podcast series will keep you healthy, wealthy, and wise, [00:01:00] but only if you rate, subscribe, and tell a friend about Street Cred.
Jaret Seiberg: Welcome to the relaunch of Tip of the Seiberg, your monthly podcast looking at the latest and greatest in the world of financial and housing policy. I’m your host, Jaret Seiberg of Cowen’s Washington Research Group. Look for this podcast at the start of each month. We’ll follow the same basic [00:01:30] format in each episode. That means starting with what drove the policy conversation for financials and housing during the prior few weeks, and then we look forward to what to expect from Washington in the coming weeks.
Those who know me will realize that before we can get to the substance, we need to begin with a bonus Pyle Middle School corny joke of the week. So in honor of all of those kids returning to school, whether virtual or in person, who is the [00:02:00] king of school supplies? You’re going to have to wait til the end of this podcast to find out.
So, what are the big issues that drove policy in the last few weeks? I want to highlight two. The first is Fannie and Freddie’s 50 basis point fee hike. FHFA, the regulator, announced in early August that Fannie and Freddie had requested a 50 basis point adverse market fee on refinancing. This is a loan level pricing adjustment, [00:02:30] which means the borrower either pays the 50 basis points upfront or pays an extra eighth of a point on their mortgage for the life of the loan. Mortgage originators cried foul, because the FHFA said the fee would be effective September 1st. That matters, as it would have meant originators had to absorb the fee themselves on their pipeline of rate lock refinancing. That could have hit lenders with up to $250 million a month in losses. [00:03:00] FHFA reversed course last week and pushed the effective date to December 1st. That would be after existing rate locks expire, which is good news for originators, but still bad news for those refinancing their mortgages, as they still have to pay the fee.
More broadly, FHFA is forcing those refinancing their mortgages to subsidize everyone who’s using forbearance, which is one of the critical tools [00:03:30] during the COVID-19 economic crisis to try to reduce foreclosures and stabilize household financing. While cross-subsidization and mortgage lending certainly isn’t new, it’s unusual to see it expanded under Republican control, and as such it’s an issue that we’re going to start watching a lot more closely to see if its use gets expanded even further.
On the second front, more good news this month for the [00:04:00] ability of bigger banks to keep paying their common dividends. The FDIC released its quarterly bank profile looking at the industry’s profitability in the second quarter. While net income was down, banks performed better than expected. Equity capital rose 1.5% despite banks paying $14 billion in common dividends, and boosting loan loss reserves by $49 billion, and only nine banks, with a combined $1.4 billion of assets, [00:04:30] were below the well capitalized level. That means every regional and bigger bank was well capitalized.
The other good news came with the release earlier this month of the stress capital buffers, which is the amount of extra capital the biggest banks have to hold. The buffers were as expected, with banks with the biggest trading desks having to hold the most capital. The lack of surprise is what matters here, and why we see this as positive for the continuation [00:05:00] of big bank dividend.
All right, now that we know where we’ve been, let’s talk about where we are going. Two issues to discuss. The first is the election, and then we’ll get into options for stimulus. So let’s dig in.
Joe Biden would have won the election if it was held on August 31st. It was not, which is why this race is far from over. Ultimately, the election will come down to whether Democrats [00:05:30] show up to vote. If they turn out like 2018 for the midterms, then Joe Biden wins. If they stay home like they did in 2016 when Hilary Clinton was the Democratic candidate, then Trump gets a second term. It’s really that simple. It’s why you see such a focus from the Democrats on voter turnout and why you hear the President complain about mail-in voting and other ways of trying [00:06:00] to boost turnout.
All right. So with all that out of the way, what did we learn about the election for financials and housing from the conventions, which were the dominant event in August on the political calendar? I think the clear thing that we learned is that this is not going to be an election about policy proposals. We survived, and I emphasize survived, eight nights of programming with dozens of speeches and commentary, without any significant [00:06:30] discussion about policy. As for financials and housing, it was eerily silent at the conventions. Even senator Bernie Sanders refrained from his usual attacks on Wall Street. We didn’t hear the typical lines about protecting Main Street rather than Wall Street. Nothing about the banks. There was nothing about housing. The same was true when Elizabeth Warren took the stage a few nights later. That doesn’t mean a Biden administration will go [00:07:00] easy on financials and housing, however. There are plenty of Democratic priorities, from an interest rate cap to bankruptcy reforms, to regulatory changes that would boost big bank capital requirements.
Yet these priorities are clearly not going to be central to the campaign. It differs greatly from 2008, when we last had a presidential contest during an economic crisis. Given the nature of the financial crisis, [00:07:30] it was no surprise that there was a broad discussion about what to do to support housing and how to punish the banks for their role in the great recession. The lack of discussion during the 2020 campaign, however, means there isn’t that same popular mandate as in 2008 for the Democrats to pursue priorities for financial and housing. President Obama needed a financial reform bill in his first two years, because that is [00:08:00] what the 2008 campaign was about. Joe Biden doesn’t need financial legislation, because this campaign is not about a financial crisis, it’s about a health crisis.
It is why our view is even stronger today that big ticket legislative changes for financials and housing are unlikely to move, even if the Democrats sweep the White House and Capitol Hill. It’s hard to see going from arguing that combating COVID-19 [00:08:30] is all that matters to insisting that the big banks need to be broken up, that Glass-Steagall is required to separate trading desks from commercial banks, or that a financial transaction tax is the solution to the government’s need for more revenue.
Instead, Democrats are telling us that the laser focus on COVID-19 means we will have to advance COVID-19 legislation. To us, that mostly means more stimulus for the unemployed, [00:09:00] for the under-employed, for struggling small and mid-size businesses, and for local governments. The positive here is that more stimulus is generally a plus for financials and housing. It means individual and businesses are less likely to default on their loans, it means demand for new credit will be higher, it means more money for affordable housing projects and for rental support, and it reduces the risk that the already severe economic pullback will become permanent. [00:09:30] That is why we argue that a Biden victory is not all about risk to financials and housing. Yes, there will be more regulations and yes, there will be targeted legislation that is negative. But it also should mean more economic stimulus. Our point is that the downside risk of a Biden victory may not be as great as some fear.
All right. So let’s now turn to Donald Trump. The positive news if Donald Trump [00:10:00] wins is that it will lock in the corporate tax rate and the existing deregulation. We may not see further cuts to bank capital and liquidity requirements, but they are also not likely to go up. It also should ensure that Fannie and Freddie continue the path out of conservatorship because a Trump victory keeps Mark Calabria as the FHFA director. It also should ensure that Fannie Mae and Freddie Mac continue on the path out of conservatorship. [00:10:30] This is because a Trump victory keeps Mark Calabria as the FHFA director regardless of whether the Supreme Court concludes that the president can fire the director for any reason or only for malfeasance in office.
Yet the complete picture is not as positive. We expect the president will take a win as an endorsement of his approach to tariffs and trade. That means more aggressive use of tariffs over the next four years [00:11:00] and constant trade wars, including with our allies. That is not the type of environment that encourages businesses to thrive. It also will mean a doubling down of the president’s approach to Twitter and his aggressive use of executive power.
Related to this is a likely increase in social unrest. We saw protests when Trump first won office. The new protests are likely to be bigger and less peaceful. It also [00:11:30] brings risk on the monetary policy side, as the president, we expect, will put a loyalist in place to replace Jerome Powell as the Federal Reserve chairman. That transition would occur in February of 2022. We realize the Fed already is planning to stay low for a long time, but Trump may want the Fed to do more, including negative rates, which is something he has tweeted about in the past. That is unlikely with [00:12:00] the current Fed make-up, but it really becomes a possibility if a Trump loyalist is chairman.
Our overall point on the election, that this is a trade-off. With Trump, you get lots of positives on the micro level, but lots of risks at the macro level. Biden is the opposite. The macro environment is likely to be better, though the risk will rise at the micro level for financials and housing.
All right. We’ve only [00:12:30] got one more topic til we get to the punch line for our joke, so let’s get on to the second topic, which is the stimulus. Congress appears no closer this week than in late July to reaching a deal on the Phase 4 stimulus to help the economy recover from the COVID-19 economic crisis. While the September 30th spending bill provides an opportunity to enact stimulus, real action may fall to next year.
I believe this is putting increased [00:13:00] pressure on the Federal Reserve to find additional ways to keep the economy from stalling. While those options are limited, the Federal Reserve still has bullets to fire. Those bullets are primarily 13(3) facilities that can inject cash into the economy. For those unfamiliar, 13(3) is a section of the Federal Reserve Act that permits the Federal Reserve to create emergency lending programs during a time of crisis. [00:13:30] We believe the Federal Reserve can most easily use 13(3) facilities to replicate the benefits of the business lending programs that are included in most of the stimulus proposals. For instance, it could transform the Main Street program from an expensive source of credit to a source of cheap, long-term credit. Think of loans of 10 years to 20 years at 100 basis points. [00:14:00] State and local assistance also could come from the Federal Reserve if it cut the cost and reduced the hurdles to its existing Municipal Liquidity Facility. This also could be used to help school districts and universities.
That takes care of a big chunk of the stimulus. But of course, the Federal Reserve can’t solve all of these problems. Providing help to individuals similar to the cash payments or the enhanced unemployment benefits [00:14:30] included in most versions of the stimulus appear to be beyond what the Federal Reserve can offer through lending programs. Even on the housing front, there are steps the Fed can take, such as expanding liquidity available to servicers of single-family and multi-family mortgages, especially if that’s done as a way to encourage more forbearance of mortgages and rents. But this would be indirect, and may not keep more people in their homes or [00:15:00] apartments. It’s simply less effective than cash payments to landlords.
And still, while not a perfect solution, these Fed facilities could help. So the question is, why hasn’t it happened already? After all, PLOCs fell apart more than a month ago, so there has been time to act. We’re really unsure of the answer. We believe the Federal Reserve is likely open to more aggressive use of its lending powers, but these programs do require Treasury’s approval. [00:15:30] Secretary Mnuchin so far appears to have refused to give his okay. And this has nothing to do about whether there are resources available for these programs to work. Treasury has about $600 billion in equity capital that can be injected into 13(3) programs. At 10:1 leverage, that could be $6 trillion in lending coming out of the Federal Reserve. [00:16:00] That would equal the size of the stimulus bills passed to date plus leave some more wiggle room.
Regardless, it’s probably too late to make these changes in time for there to be an economic impact prior to the election. It’s why we believe the next window for overhauling the Fed’s loan programs will come after voters go to the polls. That means if Congress fails to pass a stimulus in the lame duck, [00:16:30] then that could be the triggering mechanism for the Fed to act. We also could see Team Biden take these steps in January if he wins the election.
All right, so that’s about it for this month’s edition of Tip of the Seiberg. We have just one final item to check off, which of course is the bonus corny joke. I know everyone has been listening through all this policy talk just to learn who is king of the school supplies. [00:17:00] So with a drum roll please, of course, it’s the ruler.
With that, this is Jaret Seiberg of Cowen Washington Research Group, signing off from this episode. We’ll catch up with everyone at the start of October. Enjoy.