When Good Ideas Go Bad on Wall Street
by Alexandra Starr
Thirty years after "Black Monday" — one of the worst days in Wall Street history — economists and historians are still analyzing the causes of the crash. One factor, a new, financial strategy that had become incredibly popular, “portfolio insurance.” As it turned out, traders, investors and regulators were ill-informed about how this shiny, new tool that was supposed to minimize risk would actually perform in a market downturn. “When you have new technology that is ill-understood, both by traders and regulators, it’s dangerous,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics. “It’s like giving a six year-old boy a Ferrari. It’s really not a good idea.”
Could online lending become the next systemic risk?
By Lalita Clozel
When banks resisted expanding credit in the years following the financial crisis and passage of the Dodd-Frank Act, online marketplace lending seized on what seemed like a niche opportunity: targeting the credit markets deserted by banks. But with issuance of marketplace securitizations now exploding — rising 300% cumulatively in the past two years — the idea of online lending as a niche is quickly deteriorating. …“We're fundamentally destroying financial intermediation, and we're only rebuilding parts of it back up again,” saidKaren Shaw Petrou, a managing partner at Federal Financial Analytics. …In other words, will banks no longer be the middleman for companies looking to borrow? “When you have disintermediation it means that your financial system ceases to rely on regulated financial institutions with" deposit insurance and access to the Federal Reserve's discount window, said Petrou. "That's fine in good times.” said Petrou.
Fed Nominee Quarles Seen Breaking Ice in Basel Rule Standoff
By Boris Groendahl, Silla Brush, and Alexander Weber
Bank regulators worn down after a year of butting heads over new global capital rules see a glimmer of hope emerging in Washington in the form of Randal Quarles, who’s awaiting confirmation as the U.S. Federal Reserve’s top bank overseer. With European countries led by France and Germany dug in on one side, and the U.S. on the other, efforts to complete the capital standards known as Basel III have been deadlocked since regulators got close to a deal in Santiago, Chile, late last year. The divisions only deepened after the election of President Donald Trump sowed doubts about the U.S. commitment to global agreements. “There is no U.S. support among the industry or regulators for a low floor, because the U.S. rules will remain gold-plated and any relaxed approach to model discretion exacerbates regulatory-arbitrage opportunities outside the U.S.,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics in Washington. “In sharp contrast to EU banks, U.S. ones must hold the higher of their standardized or advanced weightings, not the lowest one.”
MetLife May Be Next to Lose ‘Too Big to Fail’ Label
By John Heltman
After the Financial Stability Oversight Council voted to rescind its systemic designation for insurance giant American International Group, observers are wondering why the interagency council is continuing to appeal a ruling overturning MetLife’s designation. Some say there is little question that the council could simply ask the Department of Justice to drop its appeal of a District Court opinion from 2016 that found that the FSOC had overstepped its bounds in designating MetLife as a systemically important financial institution. Karen Shaw Petrou, managing partner at Federal Financial Analytics, said that Yellen’s vote for AIG dedesignation reflects a broader acknowledgment that the designation process, while cathartic in the wake of the financial crisis, was not a tenable long-term strategy. “The global regulatory consensus of people like chair Yellen has, I think rightly, moved away from the initial decision to designate SIFIs to a framework of activity and practice regulation,” Petrou said. “They have come to recognize that targeting one or another company leaves everybody else unscathed, even if they’re correct that a target is particularly systemic." That may not mean a “yes” vote from Yellen when it comes to dropping the MetLife appeal, she said, but the timing and process of rescinding the designations of Prudential and MetLife is less important than what comes next.
Cheat sheet: What tax reform would mean for lenders
By Ian McKendry
The Republican’s tax reform blueprint released Wednesday was largely welcomed by the financial services industry, which would like to see a lower corporate tax rate, but battles lie ahead as Congress looks to hammer out the details. ...Others say concerns about the impact on housing are overblown. “The mortgage deduction is most important the higher one goes in income,” said Karen Shaw Petrou, co-founder and managing partner at Federal Financial Analytics. She said 2014 tax data shows that low- and moderate-income taxpayers used the mortgage interest deduction roughly 55% of the time while higher income taxpayers used it 82% of the time. She added that the housing interest groups oppose the higher standard deduction because the mortgage interest deduction is a key incentive for buying a home. “What it does do is to some degree enhance what they portray as affordability so borrowers can get more house,” Petrou said.