Category: Regulation

What You Can Do To Force Your State Pension To Be Transparent About Its Investments

Mary Pat Campbell

Link: https://pensionwarriorsdwardsiedle.substack.com/p/what-you-can-do-to-force-your-state

Excerpt:

So what can you do to force your state or local government pension to be more transparent? That’s a question I asked Marc Dann, an attorney in private practice in Ohio and the former Attorney General of Ohio. (Dann is currently litigating a public records request on my behalf against the State Teachers Retirement System of Ohio.)

Say attorney Dann: “Refer to your state’s public records laws in making a request. Be as detailed and specific in the request as you can possibly be. Remember public records are only those records that may actually exist. For example, instead of asking for a list of all hedge, private equity or venture capital fund investments, ask for a prospectus, offering documents or reports provided to the pension by each investment fund (and name the investment funds—which are generally named on the state or local pension’s website).  Most states allow legal fee-shifting in public records lawsuits. So if the pension or fund resists, you may wish to consider bringing in a lawyer who agrees to be paid his fee from any recovery from the pension. Don’t forget to reach out to allied members of your state legislature or city council who can put pressure on the pensions to properly respond to the requests.”

Author(s): Edward Siedle

Publication Date: 22 Mar 2023

Publication Site: Pension Warriors on substack

The Banking Sector Turmoil in Charts

Mary Pat Campbell

Link: https://www.wsj.com/articles/the-banking-sector-turmoil-in-charts-52bb6095?mod=e2twg

Graphic:

Excerpt:

It has been a wild ride for banks. Silicon Valley Bank, which catered to venture capitalists and startups, collapsed March 10 after a run on deposits that was preceded by a plunging share price and a money-losing bond sale as the bank tried to raise capital. Two days later, Signature Bank SBNY -22.87%decrease; red down pointing triangle was closed by federal regulators following a run. Then, First Republic Bank FRC 29.47%increase; green up pointing triangle, at risk of a run as its share price plummeted, was flooded with cash in an extraordinary action by some of the largest U.S. banks—but its shares resumed their plunge a day later. 

Here is how some banks ended up in the market’s crosshairs.

Author(s): Nate Rattner, Alana Pipe

Publication Date: 18 Mar 2023

Publication Site: WSJ

Illinois Bill Would Give State Treasurer Voting Control On Pension Assets – Wirepoints

Mary Pat Campbell

Link: https://wirepoints.org/illinois-bill-would-give-state-treasurer-voting-control-on-pension-assets-wirepoints/

Excerpt:

Count on the Illinois legislature to find a way to further maim its crippled pension system.

Senate Bill 2152 would strip pension trustees of control over how to vote shareholder matters and vest the power in the state treasurer, currently, Michael Frerichs.

Still worse, the treasurer would then be bound to comply with the Illinois Sustainable Investing Act on how he votes on behalf of stocks owned by the pensions. That law requires officials like the treasurer to include “sustainability” considerations in how public money is invested. It’s basically a progressive policy agenda also known as ESG (Environmental, Social, Governance). It’s often ridiculed as “woke capitalism,” and includes the goals of zero fossil fuels, “equity,” gender and identity politics, and pretty much any other social justice fad in vogue.

….

Shareholders, including pensions, usually have the right to vote on key corporate issues such as board of director elections, rights offerings, mergers and acquisitions. For interests in private investment partnerships, which pensions also hold, voting powers include other major matters. If the bill becomes law, Frerichs, or whoever is treasurer, would hold a proxy for all those votes and execute ballots, voting as he alone decides — a huge concentration of power in one individual.

The bill would eliminate any fiduciary obligation to vote shares in a way that maximizes their value, diluting that goal with progressive’s political agenda. Today, pension managers are fiduciaries for pensioners – a strict, legal standard — but the treasurer would not be if the bill becomes law.

Author(s): Mark Glennon

Publication Date: 17 Mar 2023

Publication Site: Wirepoints

Capital regulation and the Treasury market

Mary Pat Campbell

Link: https://www.brookings.edu/research/capital-regulation-and-the-treasury-market/

PDF: https://www.brookings.edu/wp-content/uploads/2023/03/Brookings-Tarullo-Capital-Regulation-and-Treasuries_3.17.23.pdf

Excerpt:

The dramatic, though short-lived, disruption of the market for U.S. Treasury debt in September 2019 and the more profound market dislocations at the onset of the COVID crisis in March 2020 have raised the issue of whether the treatment of central bank reserves and sovereign debt in bank capital requirements exacerbated the problems. Changes have been proposed to the Enhanced Supplementary Leverage Ratio (eSLR) and G-SIB (Global Systemically Important Bank) capital surcharge, both of which apply only to the eight U.S. banks designated as globally significant. Because these banks are some of the most important dealers in U.S. Treasuries, regulatory disincentives to hold and trade Treasuries can adversely affect the liquidity of the world’s most important debt market.

Disagreement over whether to adjust the eSLR, the surcharge or both is often just a version of the continuing debate over the right level of required capital. Some banking interests seize on episodes of Treasury market dysfunction to argue for reductions in the eSLR and surcharge. Some regulators, elected representatives, and commentators see any adjustments as weakening post-Global Financial Crisis (GFC) capital standards. Yet it is possible to reduce the current regulatory disincentive of banks, especially at the margin, to hold and trade Treasuries without diminishing the overall capital resiliency of large banks.

The concern with eSLR is that when it is effectively the binding regulatory capital constraint on a bank, that institution will limit its holding and trading of Treasuries. The eSLR can be modified to accommodate considerably more intermediation of Treasuries without significantly undercutting its regulatory rationale. As for the G-SIB surcharge, there are some unproblematic changes that could help.  But the chief complaints from banks about the G-SIB surcharge will be harder to satisfy without undermining the rationale of imposing higher capital requirements on systemically important banks.

Even with a change in the eSLR, banks’ holdings of Treasuries would continue to be subject to capital requirements for market risk. Moreover, as the failure of Silicon Valley Bank has demonstrated, the exclusion of unrealized gains and losses on banks’ available-for-sale portfolio of debt securities, including Treasuries, can give a misleading picture of a bank’s capital position. Following the Federal Reserve’s 2019 regulatory changes, only banks with more than $700 billion in assets or more than $75 billion in cross-jurisdictional activity are required to reflect unrecognized gains and losses in their capital calculations. The banking agencies should consider a significant reduction in these thresholds.

Far-reaching deregulatory changes would not remedy all that is worrisome in Treasury markets today. As the studies cited in the full paper emphasize, a multi-pronged program is needed. In any case, it would be misguided to seek greater bank capacity for Treasury intermediation at the cost of undermining the increased resiliency of the most important U.S. banking organizations or international bank regulatory arrangements. At the same time, it would be ill-advised not to recognize the changes in Treasury markets, beginning with their increased size because of fiscal policy. The modifications of capital regulation, especially the eSLR, outlined in the paper should ease (though not eliminate) constraints on banks holding and trading Treasuries without endangering the foundations of the post-GFC reforms.

Author(s): Daniel K. Tarullo

Publication Date: 17 Mar 2023

Publication Site: Brookings

Bond prices mean revert after all

Mary Pat Campbell

Link: https://allisonschrager.substack.com/p/bond-prices-mean-revert-after-all?utm_campaign=post&utm_medium=web

Excerpt:

On day one of Fixed Income School, you learn that bond prices mean-revert. While a stock or a house’s price can continue to increase as the company or land becomes more valuable, yields can only go so low. Nobody will pay to lend someone else money, or at least, they won’t pay much to do that. Bond prices can only climb so high before they fall. While some evidence shows that yields trended downward slightly as the world became less risky, they still tended to revert to a mean greater than zero.

It’s easy to blame Silicon Valley Bank for being blissfully ignorant of such details. They purchased long-term bonds and mortgage-backed securities when the Fed was doing QE on steroids! Did they expect that to last forever? Well, maybe that was a reasonable assumption, based on the last 15 years, but I digress.

Many of these smaller banks, particularly Silicon Valley, are in trouble because they were particularly exposed to rate risk since their depositors’ profit model relied on low rates. So, when rates increased, they needed their money—precisely when their asset values would also plummet. It’s terrible risk management. But, to be fair, even the Fed (the FED!) did not anticipate a significant rate rise. Stress tests didn’t even consider such a scenario, even as rates were already climbing. Why would we expect bankers in California to be smarter than all-knowing bank regulators?

According to the New York Times, Central Bankers still expect rates to fall back to 2.5%. Why? Because of inequality and an aging population. But how does that work, and what’s the mechanism behind it? No good answer, or not one that squares with data before 1985, but we can hope. Sometimes we just want something to be true and for it to be true for politically convenient reasons.

Author(s): Allison Schrager

Publication Date: 20 Mar 2023

Publication Site: Known Unknowns at Substack

Insurtech Regs, ‘Dark Pattern’ Spottting on NAIC’s To-Do List

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/12/16/insurtech-regs-dark-pattern-spottting-on-naics-to-do-list/

Excerpt:

In August [2022], Birny Birnbaum, the executive director of the Center for Economic Justice, asked the [NAIC] Market Regulation committee to train analysts to detect “dark patterns” and to define dark patterns as an unfair and deceptive trade practice.

The term “dark patterns” refers to techniques an online service can use to get consumers to do things they would otherwise not do, according to draft August meeting notes included in the committee’s fall national meeting packet.

Dark pattern techniques include nagging; efforts to keep users from understanding and comparing prices; obscuring important information; and the “roach motel” strategy, which makes signing up for an online service much easier than canceling it.

Author(s): Allison Bell

Publication Date: 16 Dec 2022

Publication Site: Think Advisor

Barney Frank blames crypto panic for his bank’s collapse. Elizabeth Warren blames Trump.

Mary Pat Campbell

Link: https://www.politico.com/news/2023/03/13/barney-frank-signature-bank-collapse-warren-trump-00086765

Excerpt:

From his front-row seat, [Barney Frank] blames Signature’s failure on a panic that began with last year’s cryptocurrency collapse — his bank was one of few that served the industry — compounded by a run triggered by the failure of tech-focused Silicon Valley Bank late last week. Frank disputes that a bipartisan regulatory rollback signed into law by former President Donald Trump in 2018 had anything to do with it, even if it was driven by a desire to ease regulation of mid-size and regional banks like his own.

“I don’t think that had any impact,” Frank said in an interview. “They hadn’t stopped examining banks.”

But Warren, a fellow Massachusetts Democrat who designed landmark consumer safeguards that ended up in Frank’s 2010 banking law, is placing the blame firmly on the Trump-era changes that relaxed oversight of some banks and says Signature is a prime example of the fallout. Warren argues that, had Congress and the Federal Reserve not rolled back stricter oversight, Silicon Valley Bank and Signature would have been better able to withstand financial shocks.

Author(s): ZACHARY WARMBRODT

Publication Date: 13 Mar 2023

Publication Site: Politico