Bloomberg tacks left on financial regulation. Should banks be worried?

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WASHINGTON — Financial industry observers seeing Michael Bloomberg as the counterweight to progressive stances of other Democratic presidential hopefuls may have been caught off guard Tuesday.

The former New York City mayor surprised many in the industry with a comprehensive financial policy plan that would reinstate post-crisis rules that have been weakened or eliminated in the Trump administration, but would also enact additional reforms that echo the platforms of Elizabeth Warren and even Bernie Sanders.

“I’d say the Bloomberg platform is Obama-plus with maybe one or two things that Elizabeth Warren has championed," said Brandon Barford, an analyst with Beacon Policy Advisors.

The comprehensive plan includes reforms to strengthen the Consumer Financial Protection Bureau, impose a financial transactions tax, merge Fannie Mae and Freddie Mac as part of a housing finance reform plan, reform anti-money-laundering rules and much more. A pro-regulation stance suggests a shift in thinking from Bloomberg, who made his career at first as a Wall Street investor and once referred to the Dodd-Frank Act and other Obama-era reforms as "stupid laws."

“This is more progressive than I would have expected and I think it is primarily intended to try to blunt attacks from the progressives on the debate stage,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading.

Others said the plan appeared to try and strike a balance between what the moderate wing of the party has supported in the past and more extreme ideas of Warren, a Massachusetts senator, and Sanders, a Vermont senator who leads most polls in the Democratic race. Warren wants to establish a 21st-century Glass-Steagall framework, while Sanders wants to cap all interest rates at 15%, among other things.

“The Trump administration has been eroding safeguards designed to make the financial system a source of strength, rather than an agent of contagion,” Democratic presidential candidate Michael Bloomberg’s nine-page financial reform outline says.
“The Trump administration has been eroding safeguards designed to make the financial system a source of strength, rather than an agent of contagion,” Democratic presidential candidate Michael Bloomberg’s nine-page financial reform outline says.

“This appears to be a mainstream Democratic plan for big banks and Wall Street,” said Jaret Seiberg, an analyst with Cowen Washington Research Group, in a note Tuesday. “It does not go as far as what Sens. Bernie Sanders and Elizabeth Warren are advocating, but it also is not as moderate as some in the market might expect from Bloomberg.”

Some observers said Bloomberg would likely maintain his support among many in the industry despite his call for tougher measures.

Barford noted that the plan includes proposals that were discussed in the latter years of the Obama presidency. "It’s the end of the Obama administration effectively, which was not that bad for financial services,” he said.

Still, Bloomberg is proposing to scrap many of the regulatory relief measures championed in the Trump White House.

After the Trump-appointed regulators finalized plans to simplify the Volcker Rule, a ban on proprietary trading, Bloomberg's proposal says he would “restore the Volcker Rule and make enforcement more effective, by focusing on the outcome of speculative trading — big gains and losses — rather than trying to discern traders’ intent.”

The plan would toughen stress tests for the largest banks by “reviving the [Federal Reserve’s] power to judge participants on ‘qualitative’ grounds and making the tests better reflect real crisis conditions.”

“The Trump administration has been eroding safeguards designed to make the financial system a source of strength, rather than an agent of contagion,” Bloomberg’s nine-page financial reform outline says. “It has allowed the largest U.S. banks to operate with less equity, the loss-absorbing capital that helps them keep lending in hard times. … Mike will work with regulatory agencies to ensure a more resilient financial system.”

In the wake of the Trump administration’s plans for Fannie Mae and Freddie Mac to exit government conservatorship, Bloomberg says he would gradually merge the mortgage giants into a fully government-owned mortgage guarantor to ensure that taxpayers are fully compensated for the risks they are assuming. The plan would have the guarantor transfer downside risk to private investors through specialized securities, retaining “just the catastrophic risk that only the government can bear.”

But as Congress has struggled for more than a decade to reform the country’s housing finance system, analysts say Bloomberg’s plan is unlikely to come to fruition.

“The reality is that won’t happen,” Boltansky said. “The concept gained no momentum whatsoever on Capitol Hill when it was proposed. There is no appetitive for legislative mortgage finance reform.”

The Democratic candidate would also "strengthen" the Financial Stability Oversight Council, whose influence has waned in the Trump era, with more "staff, funding and better tools to promote financial stability and ensure that other agencies address systemic risks.”

He would subject systemically important nonbanks, such as insurers that have been de-designated by the Financial Stability Oversight Council, to heightened scrutiny.

One of the cornerstones of the Dodd-Frank Act was the creation of the Consumer Financial Protection Bureau, which the Trump administration has worked to weaken under the leadership of former acting Director Mick Mulvaney and its current director, Kathy Kraninger. Bloomberg says he will appoint "a director who will put consumers’ interests first” and restore the ability-to-repay protections under the agency’s payday lending rule.

But the Bloomberg plan would also go further than reinstating Obama-era regulations, effectively touching all corners of current financial policy discussions and echoing ideas that have been promoted by more progressive candidates. His campaign is calling for more accountability for credit-rating firms, clear CFPB authority to oversee auto lending and credit reporting, and tougher debt collection and overdraft rules.

Bloomberg would reinstate the CFPB arbitration rule, which would ban financial firms from implementing mandatory arbitration clauses, although that rule would need to be reinstated through legislation because Congress overturned it in 2017 through the Congressional Review Act.

Bloomberg is also proposing new rules to rein in the credit bureaus, including requiring them to seek customer consent before disseminating personal information and empowering consumers to sue a credit reporting firm "for injunctive relief, allowing courts to compel companies to fix harmful practices, rather than merely paying damages."

"The big credit-reporting companies are supposed to make finance work more smoothly. But they lack an adequate incentive to take care of regular consumers, because their primary customers are the banks and other institutions that use the data," according to the plan released by the campaign. "As a result, they create innumerable problems for the people whose personal information they are supposed to manage."

The plan also calls for steps to keep racial and gender bias out of credit-scoring models, to offer a "curated selection of financial services through the U.S. Postal Service," to strengthen the Community Reinvestment Act "to cover all lenders" and to invest more resources in community development financial institutions.

Bloomberg's plan would also back a Securities and Exchange Commission rule to require firms to report on climate change risks, create a corporate crime group within the Justice Department and support "regulatory sandboxes" for financial startups.

On anti-money-laundering reforms, the campaign said Bloomberg supports a government registry of beneficial ownership data and higher transaction thresholds for banks reporting suspicious transactions.

Several Democratic candidates have also rolled out plans for a financial transactions tax. Bloomberg's plan endorses a 0.1% tax on all financial transactions.

A former senior Democratic Senate staffer said the financial transactions tax is “the thing that probably surprised me the most” in the Bloomberg plan.

But even as Bloomberg is proposing a more progressive plan for Wall Street than analysts have predicted, some observers say that he is still likely the more favorable candidate among the Democrats for banks.

“My guess is [banks] would still view Bloomberg as the friendliest,” the former staffer said. “I’m sure if you asked they would still have a preference for Bloomberg.”

The former staffer added that Bloomberg likely would not devote most of his political capital to financial reform if elected.

"I’m not sure this is going to be one of the first areas for Bloomberg,” the former staffer said. “You could imagine him spending a lot more political capital on climate change, gun safety, infrastructure development, expanding health care coverage.”

Barford said Wall Street would likely still support Bloomberg given the financial sector's comfort with how he ran New York City.

“I think for those people who are working in the finance community who are either Democrats or moderate Republicans, who are kind of anyone but Trump, I think Bloomberg will still be high on their list,” Barford said. “At the end of the day, they know how he’s governed as mayor of a large metropolis.”

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Election 2020 Elizabeth Warren Bernie Sanders FSOC CFPB Volcker Rule Regulatory reform