Securities Attorney Briefing 21 August 2019

FDIC approves Volcker revamp, in latest move to roll back bank rules

The Federal Deposit Insurance Corp. board voted 3-1 Tuesday to give big banks more leeway to make risky short-term bets in financial markets by loosening a landmark but highly contentious regulation known as the Volcker rule. The FDIC and four other independent agencies have dropped their proposal to tie the rule to a strict accounting standard — a move that banks argued would have made it more burdensome by subjecting additional trades to heightened supervision. Instead, regulators will give banks the benefit of the doubt on a much wider range of trades, according to the text of the final rule. Democrats immediately slammed the Trump administration for loosening the rule, which was mandated by the 2010 Dodd-Frank Act in an effort to protect depositors’ money from being used by banks to turn a quick profit on short-term price changes in stocks, bonds and other financial assets. The rewrite “will not only put the U.S. economy at risk of another devastating financial crisis, but it could potentially leave taxpayers at risk of having to once again foot the bill for unnecessary and burdensome bank bailouts,” House Financial Services Chairwoman Maxine Waters (D-Calif.) said in an email. “The final rule published today would curtail prohibitions in a manner that Congress never intended and allow Wall Street megabanks to

gamble with the same types of risky loan securitizations that turned toxic in 2008, at a time when these risky products are once again on the rise,” Waters added. The Volcker rule — a 2013 regulation named after former Federal Reserve Board Chairman Paul Volcker, who came up with the concept — bars banks from making risky trades on their own behalf and restricts them from owning hedge funds or private equity funds. It has long come under fire for its complexity and has been a source of dissatisfaction for the regulators themselves. More:

Securities Attorney Briefing 16 August 2019

General Electric shares plunge after report alleges it’s a ‘bigger fraud than Enron’

General Electric shares sank Thursday after a Madoff whistleblower accused the conglomerate of using accounting tricks to mask the extent of its financial problems and called it “a bigger fraud than Enron.” Harry Markopolos, who alerted regulators about Bernie Madoff, published a report Thursday that said GE’s accounting irregularities added up to $38 billion. The investigator, who is collaborating with a hedge fund that wasn’t named, says GE understated its costs and liabilities and misled investors in its financial statements. The research, first reported by the Wall Street Journal, alleges the problems are focused on GE’s insurance business, asserting the company is short on cash. “GE will always take any allegation of financial misconduct seriously. But this is market manipulation — pure and simple,” chief executive Lawrence Culp said in a statement. “The fact that he wrote a 170-page paper but never talked to company officials goes to show that he is not interested in accurate financial analysis, but solely in generating downward volatility in GE stock so that he and his undisclosed hedge fund partner can personally profit.” GE shares fell 11 percent, to $8.01, on Thursday. The stock traded near $12 a year ago and $30 at the start of 2017. Researchers who reviewed GE’s financial statements from 2002 to 2018 alleged that the company does not have enough cash to cover claims on long-term care policies, which help people pay for nursing homes and assisted living. The report contends GE reported earnings when policyholders were young and not filing insurance claims, but then miscalculated how much it would have to spend to issue those benefits. GE does not have “adequate reserves” to cover the liabilities on its long-term care business, even though it boosted those reserves by $15 billion last year, according to the research. Markopolos, who declined to comment for this article, says GE is understating potential its losses on insurance claims, adding they will climb “at an exponential rate” and put the company at risk of bankruptcy unless it finds a way to cover the costs. More:

Securities Attorney Briefing 15 August 2019

WARNING SIGNS FLASH — Wall Street Journal’s Josh Mitchell and Jon Hilsenrath: “Warning signs pointing to a deepening global economic slowdown—and the risk of recession—are flashing more brightly. Many of the biggest troubles are showing up overseas. But stock and bond markets are signaling that the threat of a downturn is spreading to the U.S., the world’s largest economy, now in its longest expansion on record.

“Economic output in Germany, the world’s fourth-largest economy, contracted in the second quarter, according to a report Wednesday, while a report on factory output in China, the second-largest economy, came in lower than expected. … The good news is that the U.S. isn’t confronted with severe excesses to unwind, as it was in the mid-2000s with the housing boom or the late 1990s with tech-stock gains. Because of that, some economists said any downturn might be mild.”

Securities Attorney Briefing 13 August 2019

Wall Street sees risk of recession rising

Wall Street is getting seriously gloomy about the economy, with recession warnings mounting and stocks tumbling just as President Donald Trump prepares to fire up his reelection campaign machine. Over just the last few days, economists at Goldman Sachs, Morgan Stanley and Bank of America all warned that Trump’s bitter trade war with China is taking a bigger bite out of economic growth than expected.

The warnings came as stocks suffered another big dip on Monday with the Dow closing off nearly 400 points, or 1.5 percent. The blue-chip index closed at 25,897, over 700 points lower than it was in January of 2018 before Trump’s trade fights began in earnest. The collective wisdom now spreading across Wall Street is that no trade deal will be struck with China before the 2020 election; business investment will continue to sag; and a series of interest-rate cuts from the Federal Reserve won’t be enough to juice more growth out of an economy now in its tenth year of expansion — the longest stretch in American history. “It makes sense for everyone to be downgrading, because everyone assumed we’d have some kind of trade deal with China by now and we don’t,” said Megan Greene, an economist and senior fellow at Harvard’s Kennedy School of Government. “And now we have the risk of the trade war turning into a currency war,” she said. “The consumer is still pretty strong, but business investment looks really bad and if it was going to pick up again it would have by now.” The president has transitioned from boasting about stock market gains to blaming the Fed for recent declines and softness in the economy. Overall economic growth cooled to a 2.1 percent pace in the second quarter after nearly hitting Trump’s goal of 3 percent last year following a round of tax cuts and higher federal spending. And he’s promised that he will win the fight with China. “The Fed’s high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers,” Trump tweeted last week. Economists, however, note that interest rates adjusted for inflation remain very low by historic standards. And few businesses report having any trouble getting credit. The central bank last month reversed course and cut rates by a quarter point, citing uncertainty from the trade war. Wall Street analysts expect at least one more rate cut this year and possibly two or three. Instead of blaming the Fed, Wall Street economists are citing Trump himself as the biggest anchor on markets and the economy. “Fears that the trade war will trigger a recession are growing,” Goldman Sachs economists led by Jan Hatzius wrote in a note to clients over the weekend. “We expect tariffs targeting the remaining $300 billion of U.S. imports from China to go into effect and no longer expect a trade deal before the 2020 election.” Goldman increased its estimate of the potential economic hit from the trade war to 0.6 percent of gross domestic product, both through the direct channel of higher costs due to tariffs and reduced investment by businesses afraid of what might happen next. Goldman now expects the economy to grow at just 1.8 percent in the fourth quarter of the year. Bank of America analysts led by Michelle Meyer in a note out on Friday increased their warning of a recession by 2020. “We are worried,” the analysts wrote. “We now have a number of early indicators starting to signal heightened risk of recession. Our official model has the probability of a recession over the next 12 months only pegged at about 20 percent, but our subjective call based on the slew of data and events leads us to believe it is closer to a 1-in-3 chance.” Those indicators include the fact that investors are now demanding higher interest rates on short-term debt than they are longer term debt, a phenomena known as an “inverted yield curve” that tends to precede recessions. The inverted curve generally means investors expect economic conditions to get worse rather than better in the future.