BAN Reports

The BAN Report: Puerto Rico Bonds Plunge on Trump’s Comments / Post Equifax, Credit Bureau Reform? / Yellen Changes Tone / The West is the Best-10/5/17

Puerto Rico Bonds Plunge on Trump’s Comments

Earlier this week, President Trump said, “They owe a lot of money to your friends on Wall Street and we’re going to have to wipe that out.   You’re going to say goodbye to that, I don’t know if it’s Goldman Sachs, but whoever it is you can wave goodbye to that.”    These comments sent prices plunging on Puerto Rican bonds.

Puerto Rico’s general-obligation bonds due in 2035, the most frequently traded securities, fell to as little as 30 cents on the dollar — down from an average of 46 cents a day earlier — as investors and traders tried to parse whether the president wanted to, or even could, forgive what’s owed outright.

Those bonds ended the day around 38 cents, after the White House budget director said not to take Trump too literally. Still, some on Wall Street said his remarks could encourage Puerto Rico to push for deeper concessions in court.

“This strengthens their position to haircut this debt even further,” said Nicholos Venditti, a portfolio manager with Thornburg Investment Management, who was inundated with emails about Trump’s comments.

Municipal bankruptcies are extremely rare, so even initially it was difficult for investors to handicap what the outcome would be as various bondholders stake rival claims on the island’s cash. The hurricane has made such forecasting harder by leaving billions of dollars of damage and causing the economy there to grind to a halt.

Thornburg, which doesn’t own Puerto Rico bonds, reckons recovery rates will be “terrible,” less than even Wednesday’s rout suggests. Venditti said he thinks general-obligation bonds — which have the highest claim on the central government’s revenue — will be worth around 20 cents on the dollar.

The next day, the White House backed off from Trump’s earlier remarks.

“I wouldn’t take it word for word with that,” Mick Mulvaney, director of the Office of Management and Budget, said on CNN in reference to President Trump’s suggestion that the United States might clear Puerto Rico’s debt.

Mr. Mulvaney said that the administration would be focusing its efforts on helping Puerto Rico rebuild from storm damage but that the commonwealth would continue to proceed through the debt restructuring process it was undertaking before the storm.

“Puerto Rico is going to have to figure out how to fix the errors that it’s made for the last generation on its own finances,” Mr. Mulvaney said.

This is a tough problem to solve, as one wonders whether Puerto Rico could solve its problems without driving away its tax base to the mainland.   Already, its population has shrunk by 8.4% since 2010.

Post Equifax, Credit Bureau Reform?

Spurred by Equifax’s massive data breach, lawmakers this week opened the door for bipartisan credit bureau reform.

Speaking after the Senate Banking Committee hearing, Chairman Mike Crapo, R-Idaho, predicted the anger would soon take the form of legislation to revamp the industry.

“[The] interest you saw on a bipartisan basis here will generate further discussion and I would expect that legislation would be generated from” that, he said.

Exactly what he and other lawmakers have in mind is unclear. But several lawmakers, particularly Democrats, have taken aim at the credit bureau business model itself, which involves collecting information on consumers without their knowledge or consent and selling it to businesses looking to extend credit or offer other products.

During the hearing Tuesday, Sen. Elizabeth Warren, D-Mass., said it is consumers, as well as financial institutions, who pay the cost of a data breach like Equifax, while the credit bureaus may even make a profit.

Warren has already introduced two bills to reform the industry—one to force credit bureaus to allow consumers to freeze their credit reports for free and another that would prohibit employers from accessing the credit reports of prospective employees. But she signaled she wanted to go further than that.

“Equifax and this whole industry should be completely transformed,” she said.

Expect to see more power for consumers to opt-out of sharing their credit information without their consent.    Ironically, Equifax pushed for free credit locks this week, while Experian declined to participate.

After decades of maintaining high walls between the credit data that his company collects and the citizens like you and me who simply want to know what it says and means, he claimed that he and his former company now want to put us in control. We should have the ability to lock any new creditor out of our credit files, he said, and the forthcoming service that makes it possible will be free forever.

Then, he threw down a gauntlet of sorts. “I would encourage TransUnion and Experian to do the same,” he said, referring to Equifax’s primary competitors. “It’s time we change the paradigm and give the power back to the consumer to control who accesses his or her credit.”

Experian’s response came about six hours later: Go pound sand. “We are looking at broader solutions that can help consumers effectively and securely operate in the credit economy, but it shouldn’t be done based on crisis-mode responses from Equifax,” Michael Troncale, an Experian spokesman, said in an emailed statement.

Nevertheless, reform is coming as the bureaus will have trouble finding a friend in Washington.

Yellen Changes Tone

Just a few weeks after defending new banking regulations in Jackson Hole, Federal Reserve Chair this week changed her tone, supporting efforts to reduce the regulatory burden.    And, we thought the Fed was completely removed from politics?    Perhaps, a possible re-appointment by President Trump may have an influence.

“The Fed has been working hard to ensure that its regulation and supervision of banks are tailored appropriately to the size, complexity and role different institutions play in the financial system,” she said Wednesday at a community banking conference here.

“For community banks, which by and large avoided the risky business practices that contributed to the financial crisis, we have been focused on making sure that much-needed improvements to regulation and supervision since the crisis are appropriate and not unduly burdensome,” she said.

The Trump administration is spearheading an effort to roll back some of the financial regulation adopted after the financial crisis. Ms. Yellen has defended many of those measures, but her remarks Wednesday served as a reminder that she has expressed openness to adjusting some.

She called attention to recent steps by the Fed and other federal agencies to cut red tape by simplifying several regulatory requirements.

Ms. Yellen last week cast a key vote in favor of releasing American International Group Inc. from federal oversight. She said in a statement Monday that “since the financial crisis, AIG has largely sold off or wound down its capital markets businesses, and has become a smaller firm that poses less of a threat to financial stability.”

Predict It now lists Yellen as the third most likely Fed Chair, behind Kevin Warsh and Jerome Powell, but ahead of Neel Kashkari and Gary Cohn.    In fairness, Ms. Yellen has spoken out previously in favor of reducing the burden on community banks.

The West is the Best

Western states are leading the nation in national consumer spending growth, with Utah leading the way.

People in the Rocky Mountains and Far West ramped up their spending in 2016 by 5.2% and 4.8%, respectively, exceeding the U.S.’s overall 4.0% spending growth in the same year, according to a Commerce Department report that uses non-inflation adjusted figures. Utahns increased their purchases by 6.2% in 2016, far outpacing their region and the country overall.

For six years the two regions have consistently held top spots for the fastest spending growth, and Utah has also shown some of the strongest consumption growth in recent years, taking one of the top-five spots since 2012.

The U.S.’s blossoming tech industry, which is concentrated in several West Coast cities, is helping to drive the region’s economic growth. Utah, for example, is home to tech companies including Qualtrics and Adobe Systems and has seen an influx of new residents.

“[They] not only are creating jobs, but also pay higher wages. This is especially true for areas like Seattle, Silicon Valley and the Bay Area, Denver, Salt Lake City, and Boise,” said Gus Faucher, the chief economist at PNC Financial Services Group.

The West also has strong trade ties with expanding Asian economies, boosting regional jobs, income, and spending, Mr. Faucher said.

Every other region, except for the Southeast, was lagging the national average.

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