Wells Fargo Fails Living Will Test (Audio) (Correct)

Henserling are already working on that. Warning outgoing Securities and Exchange Commissioned Chair Mary Joe White not to issue any new rules during the lame duck period. I would strongly urge you to respect the results of last week's election and resist the temptation to finalize any regulations, including Dodd Frank Title seven regulations, in deference to the right of

the incoming administration to set its own priorities. But Democrats like New York Senator Chuck Schumer say there is no way Trump dismantle Dodd Frank when he's opposed to our values. We're going to go after on tooth and nail, for instance, We're not going to let him repeal Dodd Frank or the the the rules we put in place to limit Wall Street. They're gonna regret the day they tried to repeal the a c A. Wells Fargo says it's committed to bring its living will up to regulators expectations by

the next deadline on March thirty one. Our guests are David Cass, professor at the University of Maryland Law School, and Michael Criminger, partner at Cleary gottlieb In, a former General Counsel of the f D. I C David. Four other banks were given failing grades on their living wills in April. Does it surprise you that Wells Fargo, one of the strongest banks during the financial crisis, was the

only one not able to pass. Yes. I found out extremely surprising since Wales has the reputation for being one of the best managed banks in the country along with JP Morgan Chase, for example, And it's very surprising. I think it will be actually relatively easy, uh and doable for Wells to meet this requirement at the next deadline at the end of March seventeen. But it was a big surprise. Michael, what are the consequences of this finding

to to Wells Fargo. Well Wells Fargo did by having UH not past this step, if you will, for October one, does have a couple of limitations. But to the prior point, I mean, I think these are issues that they can address to their primarily analysis and providing additional rigor for

their analysis for their resolution plans. But the constraints on them really we're just not being able to acquire far banks or branches or non bank subsidiaries until they remedy these I think these are things that can be resolved, David. The living wills test is a key element of Dodd Frank. Will you explain it's importance. Um, Yes, The basically within UH Dodd Frank, UH, the living will was set up in effect UH two, UH set up a mechanism so banks will not need to be bailed out in the

next financial crisis or severe recession. UH US taxpayer money would not have to be used to bail out the banks. And the living will is to set up a procedure in which banks could UH systematically or individually unwind in a way that UH they if they had to go through bankruptcy, go through the proceeding in a way that they would not require any public funds at all. And Michael, is that law does this does what happened yesterday suggested that that law that system is working as intended. No,

I think it does. I mean, there's been a lot of progress over the last few years. And I think sometimes so things we hear UH about in the marketplace imply that these the living wheels are not particularly helpful, and that there have been some failures. But you know, there's any This is a new process. It was something that regulators had to learn how to do, and it's something the banks have had to learn how to do.

I mean, I helped put together the rules for the living wheels, and I'll say that one of the primary lessons coming out of the financial crisis was that there needed to be pre planning and that's really what they are. And the fact that most of these banks, the vast majority of the banks that they were looking at UH this time, were able to address their deficiencies and we're

able to move forward UH. And the fact that Wells Fargoes deficiencies themselves are really more of analytical and following up on some of the analytical steps that they've already taken. I think should give people a lot of comfort that there has been a lot of progress. This there's not an event. It's something that's a longer term process. And you're not gonna take these living wheels, pull them off the shelf and just implement them. They're gonna be things

that people are gonna learn from and develop Ongoing. During campaign, President elect Donald Trump promised to dismantle Dodd Frank and was highly critical of Federal Reserve Chair Janet Yellen. We have a Fed that's doing political things. This Janet Yellen does this put Trump on a collision course with Yellen, who has spoken and acted in supportive Dodd Frank. I certainly would not want to see all the improvements that

we have put in place. I wouldn't want to see the clock turned back on those because I do I do think they're important in diminishing the odds of another financial crisis. And today the Fed governor, is led by Yellen, voted five to nothing to lay down new requirements requiring the eight biggest US banks to build cushions against losses to reduce the chances of future taxpayer bailouts. We've been talking with David Cass, professor at the University of Maryland

Law School, and Michael Criminger, a partner at Cleary Gottlieb. Michael, is this vote by the Fed governors a sort of in your face to Trump and the Republicans. Well, I'm certainly not going to get into any of the political issues involved. I think what I would just say that the voting on the total lossit sorbing capacity, which is what they voted on today, is is definitely an additional step in trying to make the financial system more resolvable,

the large financial institution is more resolvable. It's really just kind of a progressive step that's been part of the process over many years since the financial crisis involving the US in many other countries. So the total asite or capacity is in fact an important element to try to get that right. So it's a strengthening of the system

that Dodd Frank supports. I think it's a strengthening of the system in terms of ensuring that the companies would be more likely to be resolvable if there ever a crisis in the future, because what it allows for would be the large financial companies if they got into trouble to be able to recapitalis themselves using UH debt that was already issued out to the market. So it's really making sure that the private sector market UH participants would

be funding any need to recapitalize rather than the public. David, I want to go back to something that Michael said a little while ago when when he suggested that that Wells Fargo wouldn't have too much difficulty dealing with these deficiencies. Wells Fargo stock took a bit of a hit immediately after the day after UH this announcement came out. Do you agree that it will be UH as simple as

Michael seems to suggested, is for Wells Fargo to fix this. Yes, the living will failing the living will test should be very easy for Wells Fargo to fix. And indeed, UH the initial reaction to Wells Fargo stock, as you mentioned, on the first day of the news, the stock went down roughly two but now it's covered pretty much that two over the next day of trading, so virtually an unchanged stock prime. So the market is largely discounting UH

any negative significance or major negative significance from this news. Michael, the Republicans have been talking for quite a while about dismantling Dodd Frank and there is movement there. What are the chances that they will be able to dismantle Dodd

Frank or sections of it. Well, I think there's certainly a lot of interest in the Republican caucus, both in the Senate and the House to make some changes, and need to be quite honest, Dodd Frank was a very large expansive law, and any large advantacy law typically would have some mid course corrections, as you see areas that could be improved or that might not be needed, and so I think some mid course corrections would be very important. I also think that there are some elements of Dodd

Frank and that are probably important to retain. There are certainly somels. I think you can probably find a consensus probably among a lot of Democrats as well, although I certainly can't speak for anybody and others out of the isl that would find some mid course corrections appropriate. Unfortunately, we've just not been able to do those up to this date. David, what's your take on that. Are we going to see uh some just a small adjustments to Dodd Frank or is there a real possibility we'll see

the whole thing thrown out. Well, I think um that there will be an effort made to make major changes to it. I don't believe the entire legislation itself will be thrown out. Uh, there aren't. There is. There is a consumer protection component in it along with Wall Street reform. But I think, um, the incoming administration with a Republican Congress, will probably make major changes to it. Uh. Deregulation is more of the main goals of this new administration. I

think Dodd Frank will be altered to a large extent. Michael, could de regulatory shift of the Trump administration be forgetting the lesson of the last crisis and be opening us up to something that we don't want to go through again. Well, I think there's a question that some of the provision of the provision of Dodd Frank was certainly designed to help address some of the issues in the last crisis.

There's also no question, as I mentioned, that there's there will be some corrections that would be appropriate to the law as well. I mean, I think we don't want to go back to the completely to the pre crisis era where you didn't have for example, UH, some of us some of the protections that are in place now there's been a lot of additional capital. The institutions are

wholly much greater capital, much greater liquidity resources. I think having the resolution playing process, having gone forward to stantiord degree has made them more resolvable. And I don't really think from what I've seen that there. I think there are a lot of areas uh like that that I think people in both sides of the probably would support continuing,

though certainly there would be adjustmice to them. And I don't don't disagree with the virus speaker at all or the professor that UH, there certainly would be intent to make some very substantial changes. It was that to see how they roll out. David how well has the banking industry adjusted to Dodd Frank is it? Uh? Are we now to the point that it's it's more or less taking it in course or would there be significant relief for the industry if if some of the burdens were

lifted under the Trump administration. Well, the banking industry has done fairly well. It certainly has survived the crisis, and one uh can just look at the behavior of the common stock of the leading bank companies, Wells, far Ago, Bank of America, City Group, um JP, Morgan Chase, uh SO a limb or at certainly twelve month highs or

multi year or all time highs. Part of the good health, you might say, looking forward for the banking stocks is the very likely upward path of interest rates, which has begun, and certainly with the Froll Reserve just yesterday announcing a quarter point increase in the fellow funds rate. The increase in interest rates over time produce a wider profit margin for the banks. This is being anticipated and will uh

make their investing in those companies more attractive. So the banks I think have pretty well adjusted h to the regulations. I think they're doing pretty well well. Of course, at the time of the crisis, it was a very uncertain outlook, but I think they've adjusted pretty well. And Michael, in just about a minute, we're talking about the seventy billion dollars short in building up this cushion of funds on the federals are of passing regulation today. Will the Wall

Street banks have a problem raising that? I think the market certainly, I think will be open for that type of debt raising I would just note in particular that is the calculated by the Federal Reserve and its announcement of the final rule. That seventy billion, of course, is much lower than the hundred and twenty billion aggregate shortfall that were estimated based upon the proposed rules. So there were some important positive developments in the final rule. We're still,

of course looking at it. It just was released a couple of hours ago and it comes to about two nine pages, so we're still looking at it, but I would have the aggregate shortfall is definitely a lot lower than it was. We'll give you a few more hours to look through those two hundred nine pages. Thank you. That's Michael Criman journey as a partner at Clearing Gottlieb and David Cass, professor at the University of Maryland Law School.

Thank you both for being on Bloomberg Law. Coming up, we're going to be talking about a judge being able to stop a newspaper from printing a confidential complaint in a child custody case. That's what's called a prior restraint and it's something the Supreme Court has ruled against time and time again. We'll be talking to constitutional law expert Eugene Vallick. That's coming up. I'm June Grasslo with Greg Store. This is Bloomberg