WHY WALL STREET SHOULD BE WORRIED ? POLITICO?s Ben White and MJ Lee in a piece that popped overnight: ?Talk to anyone on Wall Street and they will tell you they really don?t care about the brewing fiscal storm in Washington. Possible government shutdown? Whatever. Debt ceiling crisis? Meh. The prevailing view: When Congress returns in September, sabers will be rattled and threats will be hurled. But then, as usual, Washington will grind out a crummy deal that keeps the federal lights on and avoids a disastrous default. ?D.C. always gets very close to the edge and then in the end finds an 11th hour solution,? said Jan Hatzius, chief economist at Goldman Sachs. ?It seems hard to believe that we are going to have a really big problem?
?But this time ? wait for it ? could be different. Really, seriously different. Here is just a sampling of why Wall Street may be wrong: The House GOP is hopelessly fractured on spending strategy. Senate Republicans who might otherwise broker a deal face primary challenges that make compromise potentially deadly. Other Senate Republicans are jockeying for 2016. And Congressional Democrats have no appetite for any bargain ? grand or otherwise ? that cuts entitlement spending. ?
?And it is not just a government shutdown or debt ceiling crisis that could cause a Beltway shakeup of markets this fall. There is also the possibility of a nasty confirmation fight for the next chairman of the Federal Reserve just as the central bank starts to wind down its program of buying hundreds of billions in bonds to support the economy
MORE LIKE 2011 THAN 2012? ? ?Wrap all this potential dysfunction together and there is a real chance that the fall of 2013 will be more like the summer of 2011, when a near miss on the debt ceiling led to a ratings agency downgrade, a huge sell off in the stock market and yet another hit to an economy that might otherwise be heating up nicely. ?There?s going to be some pain that isn?t being priced into market expectations,? said Compass Point Research & Trading analyst Isaac Boltansky. ?Right now the markets are doing well, but I don?t think it?s pricing in this impending battle.?
?Or battles. Leadership in both parties seems to want a continuing resolution in September that would fund the government through the end of the year. They may get it. But it?s not obvious how. And even if they do, raising the debt ceiling is a much bigger and potentially more damaging hurdle
WHAT WE COULD LOSE ? ?Should Washington grind to a halt this fall, it would come once again as the economy is on the cusp of a period of stronger growth. Many forecasters believe that once the drag from the sequester spending cuts and tax increases fades later this year the economy is capable of growing at 3 percent or faster and creating 300,000 jobs a month or more rather than its current pace of under 200,000.
Housing prices and equity markets have been rising, small businesses are showing more inclination to hire and spend, and threats from Europe are receding, leaving D.C. dysfunction as among the top remaining risks ?
?[T]hings could get especially heated if Obama nominates former Treasury Secretary Larry Summers, who is beloved inside the White House but draws ire from many liberal Democrats who would rather see the president pick Fed Vice Chair Janet Yellen. A messy fight over Bernanke?s successor could turn into the worst of the Washington battles because it would generate uncertainty at a critical moment for the central bank. That could in turn drive interest rates higher and choke off economic growth. ?If it?s noisy enough to make it seem as though the president might not get his nominee through, that could cause quite a large reaction in the market because the direction of Fed policy is so important right now,? said Hatzius.? http://politi.co/11YxmBl
OBAMA REWIND ? In case you were not glued to the TV on Friday afternoon, here is what Obama said about the Fed chairman debate: ?It is definitely one of the most important economic decisions that I'll make in the remainder of my presidency ? [A]long with Supreme Court appointments, is probably as important a decision as I make as president.
"I have a range of outstanding candidates. You've mentioned two of them ? Mr. Summers and Mr. Yellen ? Ms. Yellen. And they're both terrific people.
?I think the perception that Mr. Summers might have an inside track simply had to do with a bunch of attacks that I was hearing on Mr. Summers preemptively, which is sort of a standard Washington exercise, that I don't like. Because when somebody has worked hard for me and worked hard on behalf of the American people, and I know the quality of those people, and I see them getting slapped around in the press for no reason ? before they've even been nominated for anything ? then I want to make sure that somebody is standing up for them. I felt the same way when people were attacking Susan Rice before she was nominated for anything.?
GOOD FOR SUMMERS OR BAD FOR SUMMERS? ? The comparison to Susan Rice was not the greatest for Summers supporters given that Obama backed off Rice?s possible nomination to be secretary of State. But in the next breath, Obama cited his fear of inflation ?shooting up? when the Fed ?is not paying attention.? Some read that as Obama leaning towards Summers and being somewhat skeptical of Yellen?s possibly more dovish tendencies.
Then of course Obama shifted to say that inflation is not the biggest challenge right now (because it doesn?t exist) but that unemployment is, which might tend to tip the scales back to Yellen. The upshot from the presser: no change to the standings. 1.) Summers 2.) Yellen 3.) Dark Horse (Geithner? Someone we are not talking about at all?)
NOT BAD FOR SUMMERS ? The NYT had a big front pager on Sunday on Summers?s private sector work in the financial industry. The paper, which has run a number of articles and op-eds sharply criticizing Summers, decided to call this work a ?moneymaking spree,? which sounds ominous but is, in fact, not. The story ran through Summers work as a consultant for Citigroup, an online company called ?Lending Club? and other firms but did not include anything that will change the odds of his nomination. The story raised no red flags inside the White House as far as MM could tell on Sunday. http://nyti.ms/1cEBKLz
LENDING CLUB PUSHBACK ? The NYT?s Summers story described ?Lending Club? as falling into a ?regulatory gap that consumer advocates say may lead to risky borrowing.? Lending Club CEO Renaud Laplanche, who was quoted in the story, did not agree with that assessment or with other contentions in the piece, including that Lending Club?s income verification process is somehow beneath industry standard. The story quotes Sarah Ludwig, co-director of the New Economy Project saying: ?This should be another red flag. ? What is he doing on the board of this company? What is a potential Fed chairman doing on the board of a company that doesn?t check if people can afford loans??
In an interview Sunday night, Laplanche told MM: ?On the investor side we are regulated by the SEC. ? On the borrowing side it really falls squarely within the purview of the CFPB.? He added that Utah-based WebBank, which issues loans for Lending Club, is regulated both by the FDIC and Utah Department of Financial Institutions, as the Times also mentioned. ?We are subject to all of the regulations that apply to consumer lending including the Fair Collections Act,? he said.
Regarding income verification, Laplanche noted that Lending Club issues small consumer loans, not big mortgages, which are typically subject to income verification. Smaller consumer loans such as those made by credit card companies are typically made without income verification but instead based on credit scores and credit reports (how many times has a credit card company verified your income?). ?The industry standard for small personal loans is self-reported income. And we do more than the industry standard. ? And we only serve high-credit-quality consumers. Our minimum FICO score is 660 and the average is 720. These are prime consumers,? Laplanche said. Most of those consumers, 80 percent according to Laplanche, use Lending Club to swap a higher interest rate credit card for a lower interest rate loan.
On Sarah Ludwig, the consumer advocate quoted by the NYT, Laplanche said: ?This is someone I?ve never talked to and who doesn?t know our company but had a reporter at The New York Times describe to her what we do without any context. ? I plan to call [Ludwig] up and tell her what we do and brief her, and she will find that we have a very consumer-friendly business. ? It?s not very good practice for a reporter to call someone up and when they say they don?t know a company to give them a few facts and then get a reaction.?
Bottom line: Portraying Lending Club as some shady sub-prime lender that offers big no-doc loans and is subject to minimal regulation is what MM likes to call ?wrong.?
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JAPAN GROWS SLOWER THAN EXPECTED ? Reuters? Leika Kihara and Stanley White: ?Japan's?economy grew an annualized 2.6 percent in April-June, a third straight quarter of expansion but slower than expected, which may heighten calls to delay a planned sales tax hike to ensure the country makes a sustained escape from deflation.
The expansion was smaller than a downwardly revised 3.8 percent increase in the first quarter, when the launch of Prime Minister Shinzo Abe's stimulus policies drove up share prices and led to exceptionally strong personal consumption. ? The reading compared with a median market forecast for a 3.6 percent increase.? http://reut.rs/11XG5nk
THIS MORNING ON POLITICO PRO FINANCE ? Items on Fannie and Freddie and multifamily properties, regulators proposing changes to a mortgage appraisal rule and Obama on Larry Summers and fellow Fed chairman contenders ? To learn more about Pro's subscriber-only coverage ? and to get Morning Money every day before 6 a.m. ? please contact Pro Services at (703) 341-4600 or info@politicopro.com.
GOOD MONDAY MORNING ? Congrats to Jason Dufner, who held off Jim Furyk and the rest of the field to take home is first major at the PGA Championship. http://es.pn/11XHF8B Follow @morningmoneypro for alerts as well as other financial news from POLITICO Pro Financial Services, as well as @POLITICOPro.
PHRASES OF THE DAY ? ?Hello, Carol.? ? ?Tread lightly.? #BreakingBad
DRIVING THE WEEK ? Should be very quiet in D.C. this week with Congress and Obama gone. On the data front, retail sales at 8:30 a.m. on Tuesday expected to grow 0.3 percent ? Initial jobless claims on Thursday expected to be largely unchanged at 335K ? Consumer prices at 8:30 a.m. on Thursday expected to rise a tame 0.2 percent ? Housing starts at 8:30 a.m. Friday expected to rise to 905K from 836K ? University of Michigan consumer sentiment at 9:55 a.m. Friday expected to rise slightly to 85.3 from 85.1 ?
PROGRAMMING NOTE ? Your regular MM host heads out on a two-week break starting on Friday. A guest writer takes the helm next week, and the column goes dark the week of?Aug. 26-30 and on Labor Day. Publication will resume with yours truly in the saddle on Sept. 3.
QUOTE OF THE DAY ? FT columnist Philip Stephens on the Fed fight: ?The brouhaha about?Barack Obama?s choice?for the next?chair of the US Federal Reserve?is in inverse proportion to the significance of the contest. It really does not matter whether it is?Lawrence Summers?or?Janet Yellen. The world ? and the American economy ? will continue to spin.?
McCONNELL: HOLD THE LINE ON SPENDING ? POLITICO?s Burgess Everett: ?Senate Minority Leader Mitch McConnell is clamping down on Republicans with a firm message to stick with him on spending. With the nearly unanimous GOP?rejection?last week of Senate Democrats? transportation funding bill, McConnell senses an opportunity to dig in on an issue that highlights the most elemental difference between the two parties: the size of government. The GOP leader sees a winning political message heading into the fall before the 2014 midterms. Showing himself as the leader of a conference bent on spending cuts as he runs for?reelection?in conservative Kentucky won?t hurt either ...
?But GOP unanimity while staring down a government shutdown won?t be easy. A small group of Senate Republicans are participating in open-ended budget talks with the White House. A number of Republicans in both chambers, including House Appropriations Chairman Hal Rogers (R-Ky.), want to replace the sequester before further cuts hit in January. And voting records show that Senate Republicans are more fractured than Democrats. ? The strategy of presenting a united front on spending smells of desperation given months of division, Democratic Senate aides say. They believe six to 10 Republicans can be wooed to support levels higher than the $967 billion in discretionary spending that GOP leadership prefers.? http://bit.ly/13czTun
DOLLAR STUMBLES ? WSJ?s Nicole Hong: ?The dollar is stumbling as investors begin to question the relative strength of the U.S. economic recovery, which had powered a rally in the greenback in the first half of 2013. The WSJ Dollar Index ? is down 4 percent in the past month and hit a seven-week low on Friday. Before the selloff, which began after the dollar hit a three-year high in early July, the U.S. currency had been up 8.3 percent for the year. Driving the reversal: a shift in views on when the Federal Reserve might start reining in some easy-money policies ? many fund managers say.
?Many investors had piled into the dollar earlier this year on the belief that robust growth in the U.S. would lead the Fed to scale back its bond-purchase program, which has been pumping $85 billion into the economy each month, in the fall. Not only would a receding flood of dollars raise the greenback's value against other currencies, the positive signal it would send about the U.S. economy would give the dollar additional fuel by attracting money flows from outside the U.S.? http://on.wsj.com/16EAySu
SUMMERS WOULD FACE TOUGHER HILL FIGHT ? FT?s James Politi: ?Lawrence Summers is expected to face a more fraught confirmation battle if picked to be the next chairman of the Federal Reserve than Janet Yellen, his chief rival for the job.
Mr Summers would face resistance from the Democratic left and from Republicans unhappy with his role in crafting ? Obama?s 2009 stimulus package. ? Mr Summers? candidacy has triggered a backlash within the left flank of the Democratic party worried about the deregulation policies he championed in the 1990s. ? But Republicans also have conflicting feelings about the Fed race. Mr Summers? big advantage over Ms Yellen, a vice-chair of the central bank, is that he is not associated with its?quantitative easing?policies that are also viewed with scepticism, and at times even reviled, in conservative circles ?
??The lead-up to and the hearing itself will be different if it?s Summers versus Yellen, there?s no doubt,? said the financial services executive, who ultimately expects a favourable outcome for both and noted that both Mr Summers and Ms Yellen would be welcomed on Wall Street. ?There are more relationships with Larry. More of them know him than her but I don?t think anybody would be pulling their hair out if it?s her. There?s comfort with the choice, neither is offensive. No one has raised any red flags over either that I?ve been exposed to.? http://on.ft.com/16EAMZQ
PROSECUTORS SEEK WAYS TO PUNISH JPM ? NYT?s Ben Protess and Jessica Silver-Greenberg: ?As federal authorities prepare to charge criminally two former?JPMorgan Chase?employees suspected of misrepresenting a multibillion-dollar trading loss last year, prosecutors in Manhattan are separately exploring ways to penalize the bank. ? The investigation, according to people briefed on the matter, could yield a fine and a reprimand of the bank for allowing the suspected wrongdoing to occur. Prosecutors at the United States attorney?s office in Manhattan could also force the bank to bolster internal controls that failed to thwart the trading loss. The action would come in addition to civil charges from the?[SEC which could announce a settlement with the bank as soon as this fall.? http://nyti.ms/141j8Ns
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Source: http://www.politico.com/morningmoney/0813/morningmoney11393.html
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