We endured two days of Janet Yellen’s testimony on Capitol Hill. As part of my occupations – managing money and educator – it is important that I listen to this testimony, however painful it might be. Yellen has a thankless job as head of the US central bank. She gets berated and harassed by the left and right, the very people who have failed in fiscal economic management. Overall I thought she did a good job during the testimony; though there were times when the exchange got less than cordial.
I thought that the worst performance was by Pocahontas; I mean Sen. Elizabeth Warren. She spent her time babbling and droning on over two subjects. The first was what is referred to as the “Living Will” for banks. According to the Federal Reserve:
“Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires that bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) for supervision by the Federal Reserve periodically submit resolution plans to the Federal Reserve and the Federal Deposit Insurance Corporation.
Each plan, commonly known as a living will, must describe the company’s strategy for rapid and orderly resolution in the event of material financial distress or failure of the company, and include both public and confidential sections.
Currently, the largest, most complex banking organizations supervised by the Board are required to file resolution plans by July 1 of each year. All other companies supervised by the Board and subject to the resolution planning rule generally are required to file by December 31 of each year.”
Please understand that this is not the first time that Warren went after Janet Yellen on the subject of living wills. Nor will it be the last. Why? Because Warren is a political bureaucrat, the standard bearer for the Dodd-Frank Act and likely had a role in crafting the act.
Dodd-Frank may have been well meaning in intent, at a time of financial uncertainty, but is an unmitigated disaster in design. All it does is serve to increase bank costs and government regulation. The cost of all this is passed onto you, the consumer. Do you wonder why banks are rapidly closing branches; why they are increasing their fees to customers; or, why it is increasingly difficult to get customer service at banks? It all because of Dodd-Frank. Should any major bank’s living will not be approved by the regulators, then consumers will only get hurt more as there is little that the bureaucrats can do to protect them from the unintended consequences of a failed living will.
For certain, the argument by proponents of Dodd-Frank is that since the banking system had to be bailed out in 2008-09, more regulation was necessary to prevent a future financial crisis. Yes, to some extent it was, but not all banks wanted or needed a bailout. TARP was jammed down many banks’ throats while others turned it down. Do you know which organizations received the biggest bailouts? One clue – they were not Wall Street banks.
The top two were: Fannie Mae and Freddie Mac – governmental sponsored enterprises (GSE), pseudo-governmental companies, for which lending requirements were loosened by: Bill Clinton, Janet Reno and our friends Dodd & Frank. Yet, post Dodd-Frank, Fannie Mae and Freddie Mac now have more risk than before the financial crisis. I think the Mad Hatter wrote Dodd-Frank because we seem to be in Wonderland.
Next on the bailout hit parade was General Motors (GM). This was not a bank. It was an automobile manufacturer which sold every car it made at a loss because of its high cost structure, poor management and unappealing cars. GM provided zero rate loans to automobile buyers to induce them to buy cars when rates were 5 – 6%, via its GMAC unit. I would acknowledge this was a type of banking function, but in a non-traditional form and not on Wall Street.
Then the fourth on the bailout list was American International Group (AIG). AIG lost tens of billions of dollars by insuring companies using credit default swaps (CSDs). Maurice “Hank’ Greenberg headed up AIG for many decades through 2005. He was then forced out by, then NY Attorney General (and future Governor), Eliot Spitzer, in what many consider a political maneuver. Don’t get me started with Eliot Spitzer right now. Greenberg was dead set against getting into the CDS business as he was an insurance traditionalist. However, under his successor, Martin Sullivan, AIG became the biggest seller of CDSs. Time Magazine wrote about CDS in this May 2008 article.
Besides bank living wills, Sen. Warren focused on diversity hiring at the Federal Reserve. Not one question about interest rates, monetary policy, jobs, fiscal policy or other economic issues which are important to Americans. All she did was berate Yellen on living wills and diversity. Had Warren gone on to discuss student loans, another one of her pet populist topics – for which she clearly does not understand the concept of credit risk – my head would have exploded.
You can only try to blame banks or Wall Street or the Federal Reserve so long, and that argument is wearing thin on people who cannot get jobs or pay their bills. They could care less about diversity at the Federal Reserve as that won’t create jobs, reduce health care costs or spur economic growth. If you ask me what is the biggest risk to the US economy, excluding exogenous events, the answer would be, Sen. Elizabeth Warren.
So, we endured two days of the Yellen testimony with the markets trading in a tight range. With that behind us, we can now get ready for today’s Brexit Vote. On Monday, it became increasingly likely, but not certain, that the REMAIN vote would be victorious and global markets surged. While we won’t know the official outcome till Friday, exit polls will lead the markets by the hand today.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC held no positions in stocks mentioned; although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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