Wishes, Dreams and Dodd-Frank

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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GSE reform or whatever.

The basic fact of Donald Trump's presidential campaign was that it was a canvas for the projection of wishes. Some of this was Trump's doing -- he took every possible position on many issues, and explicitly told voters that he would "make every dream you ever dreamed of for your country come true" -- but a lot of it wasn't. Trump said, pretty consistently, that he will build a wall to keep out Mexican immigrants. And many of his supporters said: No, come on, he's not building a wall. Peter Thiel and others said that Trump should be taken "seriously but not literally." Taking Trump literally means believing that he'll do what he says. Taking him seriously means believing that he'll do what you want.

That's so strange! And yet this is not a story of low-information voters seduced by fake news in their Facebook feeds. It's a story of elite investors watching Trump talk about banning Muslims and deporting immigrants, nodding sagely, and saying, "yes, see, he is pro-business." My favorite is this guy -- to be fair, a Republican who voted for Hillary Clinton -- suggesting that Trump will govern as a pro-trade and pro-immigration president:

He may not negotiate new trade agreements as president, but it is highly unlikely that he will back out of existing agreements. He probably knows enough economic history to want to avoid the disastrous protectionism of the 1930s that prolonged the Great Depression and doomed the Republican Party to oblivion for two decades.

Yes! Yes! If we have learned anything from this election, it is that Donald Trump favors our existing trade agreements and is a careful student of economic history!

Anyway Bill Ackman spoke at yesterday's DealBook conference and predicted that Trump will re-privatize Fannie Mae and Freddie Mac, where he's a big shareholder. (Bloomberg News quotes him: "I think Fannie and Freddie are going to get resolved in the first 12  months of this new administration, and I'm looking forward to having my second meeting with Donald Trump and negotiating a deal.") Why not? There is no public indication that government-sponsored entity reform is a top priority for the Trump administration, or a priority, or a thing that they've thought about at all. But might it take a profitable government-owned business and hand it over to some hedge funds? Anything's possible!

We are very much in the honeymoon of the Trump presidency. He can't start a war or deport anyone or shut down the press yet. He can, however, promise goodies to investors. But he doesn't even have to. Investors can just hope for goodies, and tell themselves that he will provide them, and all the goodwill of their hope accrues to him without him even doing anything. I am beginning to believe Trump's claims that he is a master negotiator.

Dodd-Frank.

Elsewhere in wish projection, Elizabeth Warren is excited to work with Trump "to curtail Wall Street’s influence in politics, reinstate Glass-Steagall restrictions on banking activities and reform trade deals." Anything's possible! But:

President-elect Donald Trump is translating some of his populist campaign rhetoric into policy statements, including the contention that the Dodd-Frank Act should be scrapped because it has made Wall Street banks an even bigger threat to the nation’s economy and working families.

Now of course deregulating the big banks is not a literal translation of populist campaign rhetoric, but remember: seriously, not literally. (Here is Trump's web page outlining the plan to dismantle Dodd-Frank, which, yes, does sound vaguely populist while promising deregulation.)

One particular deregulatory target seems to be the Consumer Financial Protection Bureau, an agency beloved by Warren and hated by Republicans and bankers. The CFPB is maybe the only financial regulator to have done impressively populist work in the last decade or so. People distrust the Fed, the Treasury, the Securities and Exchange Commission, the Justice Department; they've never even heard of the Office of the Comptroller of the Currency. But the CFPB's case against Wells Fargo for creating millions of fake accounts -- a fairly minor scandal when measured in terms of the monetary harm that it did -- resonated with the public in a way that nothing else since the mortgage crisis has done. It would be ironic if the CFPB's work helped fuel the populism that got Trump elected, and if Trump's election will mean an end to the CFPB's work.

Elsewhere, "U.S. regulators are rushing to issue sweeping limits on Wall Street pay by January, said people familiar with the effort, before President-elect Donald Trump begins replacing officials installed by Barack Obama." Anything's possible! I am impressed by their dedication, but how much confidence can you have that controversial pay-restriction rules put in place in January won't be repealed by March? Rushing to finalize the current regime seems to me to place a lot of faith in stability. Waiting to see if the current regime goes away might be, for many people, a better option. As Dan Primack points out: "Trump's pledge to kill Dodd-Frank means Goldman Sachs will be rewarded for not yet following Volcker Rule on private fund stakes."

And then there is this, from former senator and current lobbyist Trent Lott:

“Trump has pledged to change things in Washington — about draining the swamp,” said Mr. Lott, who now works at Squire Patton Boggs, a law and lobbying firm. “He is going to need some people to help guide him through the swamp — how do you get in and how you get out? We are prepared to help do that.”

It's such a wonderful Washington metaphor. You arrive at the swamp, you wade in, you spend years rolling around in the swamp, covered in mud and swarmed by insects. Then you emerge, fetid and dripping, and stand at the entrance holding up a sign saying "SWAMP TOURS -- $1 MILLION." 

Jamie Dimon.

It is hard to know how seriously to take rumors that JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon is being considered as a possible Treasury Secretary in the Trump administration. Dimon has said before that he doesn't want the job, and Trump has indicated before that he wants to give it to Steven Mnuchin, his campaign finance chairman. (Jeb Hensarling is also a rumored possibility.) The Dimon-as-Treasury-Secretary rumor may be mostly wish projection. Certainly Goldman Sachs Group Inc.'s Lloyd Blankfein likes the idea:

“He would be a great Treasury secretary, and he has been a terrific competitor,” Blankfein said at a conference in New York on Thursday about his counterpart atop JPMorgan Chase & Co. “With that one move, you would kill two birds with one stone.”

But here we are on the internet, so let's just say two very obvious things:

  1. Dimon would be a great choice! He is a smart, knowledgeable, perceptive, sane, mainstream analyst of economic and financial conditions; he has a deep understanding of financial regulation; he's a famously effective manager and wise counsellor. Of course his preferences would probably be to roll back some existing bank regulation, but, you know, we are starting from a place of dismantling Dodd-Frank, so you can't really expect a much more pro-regulation Treasury Secretary. 
  2. If he's offered the job, Dimon really should accept it! He'd be good at it, he's interested in affecting public discourse, there's a lot of policy to be made, he cares about the country, and there are not a lot of indications that Trump has a deep bench of thoughtful talent to draw on if Dimon turns him down. Treasury Secretary is an important job, and someone good should do it, and if Dimon says no then the odds of that happening go down considerably.

Also, he's been running JPMorgan for over a decade. He has a lot of money. I'm sure it's fun, in its way, for him. And I certainly don't presume to know what motivates big bank CEOs. But at some point I imagine that even they get a bit bored with doing the same sort of thing for years on end. But then they're a bit stuck. What are they going to do next? Retire and play golf? Quit to run a blockchain startup? The challenges of running JPMorgan may grow stale, but it's not exactly easy to find bigger challenges. If Dimon is offered one, he should take it.

Oh, speaking of Trump jobs! There are thousands of them, and here's where you can apply for them. If you think you'd be good at something, go for it. "There's No Shame in Joining the Trump Administration," says my Bloomberg View colleague Megan McArdle. I have not applied myself, but I spent some time yesterday tweeting that I should be a Securities and Exchange Commission member, which seems almost as good as a formal application. I'd be a perfectly adequate SEC commissioner, and like it's high time that we had an SEC commissioner who was hired from Twitter. Elsewhere: "Trump’s election victory has been regarded as a defeat for pollsters and the liberal elite. But there’s another group who should worry about it – HR managers."

Chris.

Does anyone ever think about Chris, the guy who feared a Trump victory in the election so much that he sold all his stocks and put his money in Treasury Inflation-Protected Securities? The S&P 500 Index is up about 4 percent so far this week; the iShares TIPS ETF is down about 1.1 percent. And Trump will be president. Nothing worked out the way Chris wanted, and yet in a sense everything worked out the way he expected. The lessons are:

  1. Predicting the news and predicting investment returns are almost unrelated skills; and
  2. Decisions motivated by panic are probably not the best decisions.

Equality.

When you turn away from financial news, things get a lot darker. Shaun King, Insanul Ahmed, Sean O'Kane and many others have been collecting incidents of slurs, violence and intimidation against immigrants, Muslims and people of color since the election. Each item is heartbreaking individually, and their collective weight is staggering. There is a sense that a lot of Americans feel that they are less fully citizens today than they were on Monday, that their equality before the law and in the eyes of their fellow Americans has been called into question by the ugly tone of the campaign. And Trump's transition has not exactly brought much reassurance about any of these things. (The campaign staff briefly deleted and then restored Trump's proposal to ban Muslim immigration.)

On the other hand, the Trump administration may repeal the Department of Labor rule requiring brokers who give retirement advice to put the best interests of their customers first. Wait, I'm sorry, that was a pretty jarring transition! But remember, last month, Trump adviser Anthony Scaramucci said that the fiduciary rule was "about like the Dred Scott decision," the infamous 1857 Supreme Court decision concluding that African-Americans could not be citizens of the United States. "The left-leaning Department of Labor has made a decision to discriminate against a class of people," said Scaramucci. And now, he is confident, that discrimination will be remedied:

“The DoL thing, that’s going to be a big plank” of the administration’s economic plans, Mr Scaramucci said. It is “unnecessary” and simply an effort to help “file class-action suits”, he said.

The Trump administration would instead impose a “self-auditing process” for registered financial advisers, he said, which he argued would lead to “better client safety, less governmental oppression”.

I could think of a lot of better ways to fight against discrimination and governmental oppression than by letting brokers charge hidden commissions on retirement accounts. But it looks like that's the one we're going to get.

Fitbit.

Yeah, yeah, yeah:

Shares of Fitbit Inc jumped as much as 8 percent after a previously unknown entity calling itself ABM Capital Ltd said it had offered to buy the wearable device maker but gave up some of those gains after the company denied receiving any offer.

Fitbit said it had not received any communication from ABM Capital or any other firm regarding a reported offer, a spokesperson for the company said in an email.

Fitbit closed on Wednesday at $8.55, but jumped as high as $9.275 yesterday after the purported tender offer came out, before closing at $8.86.

Fake tender offers are kind of a thing now, and the usual assumption is that they are done for the purpose of manipulation and profit: You buy some Fitbit stock, announce a fake tender offer, then sell the stock when the price jumps. But there is also evidence that at least one such hoaxer -- the guy who allegedly made a fake offer to buy Avon Products Inc., among other companies -- never made any money doing it. Presumably he's an outlier, but you never know. Maybe the way to think about all these hoax tender offers is not as financial frauds but as art projects, as quasi-random injections of strangeness and unpredictability into the markets, driven not by greed but by sheer aesthetic brio. I mean, wouldn't it be cool if a real company -- or Fitbit, anyway -- was taken over by an imaginary one? 

Wells Fargo.

Here's new Wells Fargo & Co. Chief Executive Officer Timothy Sloan at a town hall meeting with employees:

“I want to be very clear in assuring you that you can have confidence in calling the ethics line, and your call will be handled appropriately,” Mr. Sloan said. “Retaliation is unacceptable. It’s against our policy...it will not be tolerated at Wells Fargo.”

At the same meeting he admitted "that the bank found 'some instances' where reports by employees of bad behavior to its ethics line weren’t handled appropriately." Umm? I feel like if you are going to set up an employee ethics line, it is very important not to retaliate against anyone who calls it ever, at all. If you promise not to retaliate against anyone who calls, fire a bunch of people who call, and then announce "sorry, sorry, now we won't fire anyone for calling, really this time," then you've kind of already ruined it. The people who trusted you the first time have been fired. Why would anyone trust you the second time? 

Leverage ratio.

Roughly speaking, the way bank capital regulation works is that there are two constraints on bank leverage. There are risk-weighted capital ratios, which require a certain amount of equity capital based on the amount and riskiness of the bank's assets, and there are leverage ratios, which require a certain amount of equity capital based purely on the amount of the assets. (I mean, sort of.) Both of these rules tend to constrain banks' borrowing: Without rules, it is widely assumed that banks would fund their assets more with short-term debt and less with equity. But the two constraints do have different effects. If risk-weighted capital is more binding, that will tend to push banks to invest in assets with lower risks. (Or, at least, with lower regulatory risk weights, which is not necessarily the same thing.) If the leverage ratio is more binding, that will tend to push banks to invest in assets with higher risks: The leverage ratio limits their sheer quantity of assets, so the only way to juice returns is by shifting the makeup of those assets toward higher-risk, higher-return stuff.

So here's a working paper from the Office of Financial Research finding that "following the 2012 introduction of the supplementary leverage ratio (SLR), broker-dealer affiliates of BHCs decreased their repo borrowing but increased their use of repo backed by more price-volatile collateral." Roughly speaking, the stricter leverage ratio pushed banks to borrow less to fund their assets, but also pushed them to fund riskier assets.

People are worried about unicorns.

Remember, like, two weeks ago, when Silicon Valley was going to change the world with hyperloops and space travel and sentient drones and meal-replacement shakes and laundry startups? The mood has darkened. Silicon Valley almost unanimously opposed Trump's candidacy, and now that he has won, the Enchanted Forest is a gloomy place. Everyone is going around asking unicorns, "why the long face?" "Sometimes I feel like we’re just a bunch of nerds who don’t know how to play the game," says a venture capitalist

Only almost unanimously, though. Venture capitalist Peter Thiel was a Trump supporter, and now: "Peter Thiel Is Poised to Become a National Villain." One assumes that a lot of people in Silicon Valley rank their dream jobs something like this:

  1. Superhero
  2. Supervillain
  3. Astronaut
  4. Venture capitalist

So he's probably fine with that.

People are worried about bond market liquidity.

I assume that the pending repeal of Dodd-Frank will open up all sorts of new fronts in bond market liquidity worrying. Will the Volcker Rule go away? Will banks get back to making markets in bonds? Will that create new liquidity worries? Probably. In the meantime: "BlackRock said the current lack of consistent trading volume data in Europe results in an incomplete picture of liquidity leading to problems in managing risk, transaction cost analysis, reporting and best execution."

Things happen.

From Immelt to Cook, Fresh Pledges for Diversity in Trump Era. Political Economy & Trump’s Trilemmas. Tesla’s Future in Trump’s World. Pitching Active Management with Mediocre Returns. Carlyle Hedge Fund’s $400 Million African-Refinery Investment Disappears. Firm Charged With Misleading Investors About Binary Options Profitability. Goldman Sachs Stops Protesters From Entering Its Madrid Offices. Law Firm Arnold & Porter to Merge With Rival Kaye Scholer. Factor Investing Explicitly Tries to Look Lousy on Active Share. Facebook, I'm Begging You, Please Make Yourself Better. SEC fraud trial of 'Diva of Distressed' Tilton wraps up. Judge tells Trump University litigants they would be wise to settle. Bald Eagles Trapped in Florida Sewer Drain Draw Comparisons to Current State of America. Rats Enjoy Being Tickled—When They’re in the Right Mood. Watch Adorable Tiger Cubs Playing Together. Farm simulator. There are at least eight promising business models for email newsletters

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net