More stories

  • in

    Money Market Funds Melted in Pandemic Panic. Now They’re Under Scrutiny.

    In March 2020, the Federal Reserve had to step in to save the mutual funds, which seem safe until there’s a crisis. Regulation may be coming.The Federal Reserve swooped in to save money market mutual funds for the second time in 12 years in March 2020, exposing regulatory shortfalls that persisted even after the 2008 financial crisis. Now, the savings vehicles could be headed for a more serious overhaul.The Securities and Exchange Commission in February requested comment on a government report that singled out money market funds as a financial vulnerability — an important first step toward revamping the investment vehicles, which households and corporations alike use to eke out higher returns on their cashlike savings.Treasury Secretary Janet L. Yellen has repeatedly suggested that the funds need to be fixed, and authorities in the United States and around the world have agreed that they were an important part of what went wrong when markets melted down a year ago.The reason: The funds, which contain a wide variety of holdings like short-term corporate debt and municipal debt, are deeply interlinked with the broader financial system. Consumers expect to get their cash back rapidly in times of trouble. In March last year, the funds helped push the financial system closer to a collapse as they dumped their holdings in an effort to return cash to nervous investors.“Last March, we saw evidence of how these vulnerabilities” in financial players that aren’t traditional banks “can take the existing stress in the financial system and amplify it,” Ms. Yellen said last month at her first Financial Stability Oversight Council meeting as Treasury secretary. “It is encouraging that regulators are considering substantive reform options for money market mutual funds, and I support the S.E.C.’s efforts to strengthen short-term funding markets.”But there are questions about whether the political will to overhaul the fragile investments will be up to the complicated task. Regulators were aware that efforts to fix vulnerabilities in money funds had fallen short after the 2008 financial crisis, but industry lobbying prevented more aggressive action. And this time, the push will not be riding on a wave of popular anger toward Wall Street. Much of the public may be unaware that the financial system tiptoed on the brink of disaster in 2020, because swift Fed actions averted protracted pain.Division lines are already forming, based on comments provided to the S.E.C. The industry used its submissions to dispute the depth of problems and warn against hasty action. At least one firm argued that the money market funds in question didn’t actually experience runs in March 2020. Those in favor of changes argued that something must be done to prevent an inevitable and costly repeat.“Short-term financing markets have been driven by a widespread perception that money funds are safe, making it almost inevitable the federal government provides rescue facilities when trouble hits,” said Paul Tucker, chair of the Systemic Risk Council, a group focused on global financial stability, in a statement accompanying the council’s comment letter this month. “Something has to change.”Ian Katz, an analyst at Capital Alpha, predicted that an S.E.C. rule proposal might be out by the end of the year but said, “There’s a real chance that this gets bogged down in debate.”While the potential scope for a regulatory overhaul is uncertain, there is bipartisan agreement that something needs to change. As the coronavirus pandemic began to cause panic, investors in money market funds that hold private-sector debt started trying to pull their cash out, even as funds that hold short-term government debt saw historic inflows of money.That March, $125 billion was taken out of U.S. prime money market funds — which invest in short-term company debt, called commercial paper, among other things — or 11 percent of their assets under management, according to the Financial Stability Board, which is led by the Fed’s vice chair for supervision, Randal K. Quarles.One type of fund in particular drove the retreat. Redemptions from publicly offered prime funds aimed at institutional investors (think hedge funds, insurance companies and pension funds) were huge, totaling 30 percent of managed assets.The reason seems to have its roots, paradoxically, in rules that were imposed after the 2008 financial crisis with the aim of preventing investors from withdrawing money from a struggling fund en masse. Regulators let funds impose restrictions, known as gates, which can temporarily prohibit redemptions once a fund’s easy-to-sell assets fall below a certain threshold.Investors, possibly hoping to get their money out before the gates clamped down, rushed to redeem shares.The fallout was immense, according to several regulatory body reviews. As money funds tried to free up cash to return to investors, they stopped lending the money that companies needed to keep up with payroll and pay their utility bills. According to a working group report completed under former Treasury Secretary Steven Mnuchin, money funds cut their commercial paper holdings by enough to account for 74 percent of the $48 billion decline in paper outstanding between March 10 and March 24, 2020.As the funds pulled back from various markets, short-term borrowing costs jumped across the board, both in America and abroad.“The disruptions reverberated globally, given that non-U.S. firms and banks rely heavily on these markets, contributing to a global shortage of U.S. dollar liquidity,” according to an assessment by the Bank for International Settlements.The Fed jumped in to fix things before they turned disastrous.It rolled out huge infusions of short-term funding for financial institutions, set up a program to buy up commercial paper and re-established a program to backstop money market funds. It tried out new backstops for municipal debt, and set up programs to funnel dollars to foreign central banks. Conditions calmed.A primary concern is that investors will expect the Federal Reserve to save money market funds in the future, as it has in the past.Stefani Reynolds for The New York TimesBut Ms. Yellen is among the many officials to voice dismay over money market funds’ role in the risky financial drama.“That was top of F.S.O.C.’s to-do list when it was formed in 2010,” Ms. Yellen said on a panel in June, referring to the Financial Stability Oversight Council, a cross-agency body that was set up to try to fill in regulatory cracks. But, she noted, “it was incredibly difficult” for the council to persuade the Securities and Exchange Commission “to address systemic risks in these funds.”Ms. Yellen, who is chair of the council as Treasury secretary, said the problem was that it did not have activity regulation powers of its own. She noted that many economists thought the gates would cause problems — just as they seem to have done.Of particular concern is whether investors and fund sponsors may become convinced that, since the government has saved floundering money market funds twice, it will do so again in the future.The Trump-era working group suggested a variety of fixes. Some would revise when gates and fees kicked in, while another would create a private-sector backstop. That would essentially admit that the funds might encounter problems, but try to ensure that government money wasn’t at stake.If history is any guide, pushing through changes is not likely to be an easy task.Back in 2012, the effort included a President’s Working Group report, a comment process, a round table and S.E.C. staff proposals. But those plans were scrapped after three of five S.E.C. commissioners signaled that they would not support them.“The issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away,” Mary Schapiro, then the chair of the S.E.C., said in August 2012, after her fellow commissioners made their opposition known.In 2014, rules that instituted fees, gates and floating values for institutional funds invested in corporate paper were approved in a narrow vote under a new S.E.C. head, Mary Jo White.Kara M. Stein, a commissioner who took issue with the final version, argued in 2014 that sophisticated investors would be able to sense trouble brewing and move to withdraw their money before the delays were imposed — exactly what seems to have happened in March 2020.“Those reforms were known to be insufficient,” Ben S. Bernanke, a former Fed chair, said at an event on Jan. 3.The question now is whether better changes are possible, or whether the industry will fight back again. While asking a question at a hearing this year, Senator Patrick J. Toomey, Republican from Pennsylvania and chair of the Banking Committee, volunteered a statement minimizing the funds’ role.“I would point out that money market funds have been remarkably stable and successful,” Mr. Toomey said.Alan Rappeport More

  • in

    Fed Lets Break for Banks Expire but Opens Door to Future Changes

    The central bank had exempted safe assets from a crucial regulatory requirement, in a bid to keep markets chugging last year.The Federal Reserve said on Friday that it would not extend a temporary exemption of a rule that dictates the amount of capital banks must keep in reserve, a loss for big banks and their lobbyists, who had been pushing to extend the relief beyond its March 31 expiration.At the same time, the Fed opened the door to future tweaks to the regulation if changes are deemed necessary to keeping essential markets functioning smoothly. Banks are required to keep easy-to-access money on hand based on the size of their assets, a requirement known as the supplementary leverage ratio, the design of which they have long opposed.The Fed introduced the regulatory change last year. It has allowed banks to exclude both their holdings of Treasury securities and their reserves — which are deposits at the Fed — when calculating the leverage ratio.The goal of the change was to make it easier for the financial institutions to absorb government bonds and reserves and still continue lending. Otherwise, banks might have stopped such activities to avoid increasing their assets and hitting the leverage cap, which would mean having to raise capital — a move that would be costly for them. But it also lowered bank capital requirements, which drew criticism.As a result, the debate over whether to extend the exemptions was a heated one.Bank lobbyists and some market analysts argued that the Fed needed to keep the exemption in place to prevent banks from pulling back from lending and their critical role as both buyers and sellers of government bonds. But lawmakers and researchers who favor stricter bank oversight argued that the exemption would chip away at the protective cash buffer that banks had built up in the wake of the financial crisis, leaving them less prepared to handle shocks.The Fed took a middle road: It ended the exemption but opened the door to future changes to how the leverage ratio is calibrated. The goal is to keep capital levels stable, but also to make sure that growth in government securities and reserves on bank balance sheets — a natural side effect of government spending and the Fed’s own policies — does not prod banks to pull back.“Because of recent growth in the supply of central bank reserves and the issuance of Treasury securities, the Board may need to address the current design and calibration of the S.L.R. over time,” the Fed said in its release. It added that the goal would be “to prevent strains from developing that could both constrain economic growth and undermine financial stability.”The Fed said it would “shortly seek comment” on measures to adjust the leverage ratio and would make sure that any changes “do not erode” bank capital requirements.“The devil’s going to be in the details,” said Jeremy Kress, a former Fed regulator who teaches at the University of Michigan. “I want to make sure any changes the Fed makes to the supplementary leverage ratio doesn’t undermine the overall strength of bank capital requirements.”The temporary exemption had cut banks’ required capital by an estimated $76 billion at the holding company level, although in practice other regulatory requirements lessened that impact. Critics had warned that lowering bank capital requirements could leave the financial system more vulnerable.That is why the Fed was adamant in April, when it introduced the exemption, that the change would not be permanent.“We gave some leverage ratio relief earlier by temporarily — it’s temporary relief — by eliminating, temporarily, Treasuries from the calculation of the leverage ratio,” Jerome H. Powell, the Fed chair, said during a July 2020 news conference. He noted that “many bank regulators around the world have given leverage ratio relief.”Other banking regulators, like the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, took longer to sign on to the Fed’s exemption, but eventually did.Even though the exemption had been a tough sell in the first place, persistent worries over Treasury market functioning had raised the possibility that the Fed might keep it in place.The government has been issuing huge amounts of debt to fund pandemic relief packages, pumping Treasury bonds into the market. At the same time, reserves are exploding as the Fed buys bonds and the Treasury Department spends down a cash pile it amassed last year. The combination risks filling up bank balance sheets. The fear is that banks will pull back as a result.That’s because the supplementary leverage ratio measures a bank’s capital — the money it can most easily tap to make through times of trouble — against what regulators call its “leverage exposure.” That measure counts both its on-balance sheet assets, like Treasurys, and exposures that do not appear on a bank’s balance sheet but may generate income.If banks fail to keep capital on hand that matches with their assets, they are restricted from making payouts to shareholders and handing executives optional bonuses.Banks desperately want to avoid crossing that line. So if there is any danger that they might breach it, they stop taking on assets to make sure that they stay within their boundaries — which can mean that they stop making loans or taking deposits, which count on their balance sheets as “assets.”Alternatively, banks can pay out less capital to make sure their ratio stays in line. That means smaller dividends or fewer share buybacks, both of which bolster bank stock prices and, in the process, pay for their executives.The Financial Services Forum, which represents the chief executives of the largest banks, has argued that the temporary exemption should be rolled off more slowly and not end abruptly on March 31. Representatives from the group have been lobbying lawmakers on the issue over the past year, based on federal disclosures. And the trade group — along with the American Bankers Association and the Securities Industry and Financial Markets Association — sent a letter to Fed officials asking for the exemptions to be extended.“Allowing the temporary modification to leverage requirements to expire all at once is problematic and risks undermining the goals that the temporary modification are intended to achieve,” Sean Campbell, head of policy research at the forum, wrote in a post this year.Some banks have themselves pushed for officials to extend the exemption.“This adjustment for cash and Treasury should either be made permanent or, at a minimum, be extended,” Jennifer A. Piepszak, JPMorgan Chase’s chief financial officer, said on the bank’s fourth-quarter earnings call.Ms. Piepszak added that if the exemption for reserves was not extended, the supplementary leverage ratio would become binding and “impact the pace of capital return.” She has separately warned that the bank might have to turn away deposits.Prominent Democrats have had little patience for such arguments.“To the extent there are concerns about banks’ ability to accept customer deposits and absorb reserves due to leverage requirements, regulators should suspend bank capital distributions,” Senators Elizabeth Warren and Sherrod Brown, both powerful Democrats on the Senate Banking Committee, wrote in a letter to Fed leadership.Banks and their lobbying groups had little to say about the Fed’s move to kill the exemption. The eight largest banks have enough capital to cover their leverage ratios.“A few weeks ago, it seemed like the consensus was that they would do an extension,” said Ian Katz, an analyst at Capital Alpha. He added that the Fed’s thinking might have been: “The banks were in solid enough shape to absorb this, they were going to have to end this some time, and this seemed like a good time to do it.”Stacy Cowley More

  • in

    The Financial Crisis the World Forgot

    #masthead-section-label, #masthead-bar-one { display: none }The Coronavirus OutbreakliveLatest UpdatesMaps and CasesRisk Near YouVaccine RolloutGuidelines After VaccinationCredit…Jasper RietmanSkip to contentSkip to site indexThe Financial Crisis the World ForgotThe Federal Reserve crossed red lines to rescue markets in March 2020. Is there enough momentum to fix the weaknesses the episode exposed?Credit…Jasper RietmanSupported byContinue reading the main storyMarch 16, 2021, 5:00 a.m. ETBy the middle of March 2020 a sense of anxiety pervaded the Federal Reserve. The fast-unfolding coronavirus pandemic was rippling through global markets in dangerous ways.Trading in Treasurys — the government securities that are considered among the safest assets in the world, and the bedrock of the entire bond market — had become disjointed as panicked investors tried to sell everything they owned to raise cash. Buyers were scarce. The Treasury market had never broken down so badly, even in the depths of the 2008 financial crisis.The Fed called an emergency meeting on March 15, a Sunday. Lorie Logan, who oversees the Federal Reserve Bank of New York’s asset portfolio, summarized the brewing crisis. She and her colleagues dialed into a conference from the fortresslike New York Fed headquarters, unable to travel to Washington given the meeting’s impromptu nature and the spreading virus. Regional bank presidents assembled across America stared back from the monitor. Washington-based governors were arrayed in a socially distanced ring around the Fed Board’s mahogany table.Ms. Logan delivered a blunt assessment: While the Fed had been buying government-backed bonds the week before to soothe the volatile Treasury market, market contacts said it hadn’t been enough. To fix things, the Fed might need to buy much more. And fast.Fed officials are an argumentative bunch, and they fiercely debated the other issue before them that day, whether to cut interest rates to near-zero.But, in a testament to the gravity of the breakdown in the government bond market, there was no dissent about whether the central bank needed to stem what was happening by stepping in as a buyer. That afternoon, the Fed announced an enormous purchase program, promising to make $500 billion in government bond purchases and to buy $200 billion in mortgage-backed debt.It wasn’t the central bank’s first effort to stop the unfolding disaster, nor would it be the last. But it was a clear signal that the 2020 meltdown echoed the 2008 crisis in seriousness and complexity. Where the housing crisis and ensuing crash took years to unfold, the coronavirus panic had struck in weeks.As March wore on, each hour incubating a new calamity, policymakers were forced to cross boundaries, break precedents and make new uses of the U.S. government’s vast powers to save domestic markets, keep cash flowing abroad and prevent a full-blown financial crisis from compounding a public health tragedy.The rescue worked, so it is easy to forget the peril America’s investors and businesses faced a year ago. But the systemwide weaknesses that were exposed last March remain, and are now under the microscope of Washington policymakers.How It StartedThe Fed began to roll out measure after measure in a bid to soothe markets.Credit…John Taggart for The New York TimesFinancial markets began to wobble on Feb. 21, 2020, when Italian authorities announced localized lockdowns.At first, the sell-off in risky investments was normal — a rational “flight to safety” while the global economic outlook was rapidly darkening. Stocks plummeted, demand for many corporate bonds disappeared, and people poured into super-secure investments, like U.S. Treasury bonds.On March 3, as market jitters intensified, the Fed cut interest rates to about 1 percent — its first emergency move since the 2008 financial crisis. Some analysts chided the Fed for overreacting, and others asked an obvious question: What could the Fed realistically do in the face of a public health threat?“We do recognize that a rate cut will not reduce the rate of infection, it won’t fix a broken supply chain,” Chair Jerome H. Powell said at a news conference, explaining that the Fed was doing what it could to keep credit cheap and available. But the health disaster was quickly metastasizing into a market crisis.Lockdowns in Italy deepened during the second week of March, and oil prices plummeted as a price war raged, sending tremors across stock, currency and commodity markets. Then, something weird started to happen: Instead of snapping up Treasury bonds, arguably the world’s safest investment, investors began trying to sell them.The yield on 10-year Treasury debt — which usually drops when investors seek safe harbor — started to rise on March 10, suggesting investors didn’t want safe assets. They wanted cold, hard cash, and they were trying to sell anything and everything to get it.How It WorsenedNearly every corner of the financial markets began breaking down, including the market for normally steadfast Treasury securities.Credit…Ashley Gilbertson for The New York TimesReligion works through churches. Democracy through congresses and parliaments. Capitalism is an idea made real through a series of relationships between debtors and creditors, risk and reward. And by last March 11, those equations were no longer adding up.The Coronavirus Outbreak More

  • in

    As Winter Sweeps the South, Fed Officials Focus on Climate Change

    AdvertisementContinue reading the main storySupported byContinue reading the main storyAs Winter Sweeps the South, Fed Officials Focus on Climate ChangeA top Federal Reserve official says climate scenario analysis could be valuable in making sure that banks mind their climate-tied weak spots.A family in Austin, Texas, kept warm by a fire outside their apartment on Wednesday. They lost power early Monday morning.Credit…Tamir Kalifa for The New York TimesFeb. 18, 2021Updated 2:28 p.m. ETA top Federal Reserve official issued a stark warning on Thursday morning: Banks and other lenders need to prepare themselves for the realities of a world racked by climate change, and regulators must play a key role in ensuring that they do.“Climate change is already imposing substantial economic costs and is projected to have a profound effect on the economy at home and abroad,” Lael Brainard, one of the central bank’s six Washington-based governors, said at an Institute of International Finance event.“Financial institutions that do not put in place frameworks to measure, monitor and manage climate-related risks could face outsized losses on climate-sensitive assets caused by environmental shifts, by a disorderly transition to a low-carbon economy or by a combination of both,” she continued.The grim backdrop to her comments is the abnormally cold weather walloping Texas — leaving millions without electricity and underlining the fact that state and local authorities in some places are underprepared for severe weather that is expected to become more frequent.Such disruptions also matter for the financial system. They pose risks to insurers, can disrupt the payment system and make otherwise reasonable financial bets dicey. That is why it is important for the Fed to understand and plan for them, central bank officials have increasingly said.Ms. Brainard pointed out Thursday that financial companies were addressing the risk by “responding to investors’ demands for climate-friendly portfolios,” among other changes. But she added that regulators like the Fed must also adapt. She raised the possibility that bank overseers might need new supervisory tools, given the challenges associated with climate oversight, which include long time horizons and limited data due to the lack of precedent.“Scenario analysis may be a helpful tool” to assess “implications of climate-related risks under a wide range of assumptions,” Ms. Brainard said, though she was careful to distinguish that such scenarios would be distinct from full-fledged stress tests.Weighing in on climate risks publicly is new territory for the Fed. Officials spent years tiptoeing around the topic, which is politically charged in the United States. The central bank only fully joined a global coalition dedicated to research on girding the financial system against climate risk late last year. The possibility of climate-tied stress tests has been especially contentious, and has recently drawn criticism from Republican lawmakers.“We have seen banks make politically motivated and public relations-focused decisions to limit credit availability to these industries,” more than 40 House Republican lawmakers said in a December letter, specifically referring to coal, oil and gas. They added that “climate change stress tests could perpetuate this trend, allowing regulated banks to cite negative impacts on their supervisory tests as an excuse to defund or divest from these crucial industries.”Jerome H. Powell, the Fed chair, and Randal K. Quarles, the vice chair for supervision — both named to their jobs by President Donald J. Trump — suggested in response that the Fed was in the early stages of researching its role in climate oversight.“We would note that it has long been the policy of the Federal Reserve to not dictate to banks what lawful industries they can and cannot serve, as those business decisions should be made solely by each institution,” they wrote last month.Mr. Powell and Mr. Quarles echoed the lawmakers’ assertion that the Fed’s bank stress tests measured bank capital needs over a much shorter time frame than climate change, though they said the Fed was working to help banks manage their risks, including those related to climate.The central bank is quickly moving toward greater activism on the topic. Its Supervision Climate Committee, announced last month, will work “to develop an appropriate program” to supervise banks’s climate-related risks, Ms. Brainard said Thursday. The Fed is also co-chair of a task force on climate-related financial risks at the Basel Committee on Banking Supervision, a global regulatory group.Though the central bank is politically independent, President Biden has placed climate at the center of his administration’s economic priorities. Treasury Secretary Janet L. Yellen has pledged to “fight the climate crisis.”Ms. Brainard, the Fed’s last remaining governor appointed by President Barack Obama, has been a leading voice in pushing for greater attention to climate issues, speaking on the matter at a conference in 2019. So has Mary C. Daly, president of the Federal Reserve Bank of San Francisco, who held that conference.“It is a fact that severe weather events are increasing,” Ms. Daly said during a webcast event this week, noting that “half the country is in a winter storm, and then in the summer they’ll be in a heat wave.”She said the Fed needed to figure out how to deal with potentially disruptive risks as they emerged given that it is responsible for the nation’s economic health, works with other regulators to protect the safety of the financial system and is the steward of the payments system — the guts of the financial system in which money is transferred and checks are processed.“We have to understand what the risks are, and think about how those risks can be mitigated,” Ms. Daly said. “Our responsibility is to look forward, and ask not just what is happening today, but what are the risks.”AdvertisementContinue reading the main story More

  • in

    Why Tackling Gamestop's Wild Stock Rise Will be a Challenge for Gensler

    #masthead-section-label, #masthead-bar-one { display: none }GameStop vs. Wall StreetCharting the Wild Stock SwingsWhat’s GameStop Really Worth?Your TaxesReader’s GuideAdvertisementContinue reading the main storySupported byContinue reading the main storyGensler Faces Big Challenge in Tackling GameStop’s Wild RideThere is broad agreement that the capital markets have been distorted but less consensus on what, if anything, the S.E.C. should do about it.Unlike the fraud or manipulation that regulators like Gary Gensler are used to pursuing, the GameStop frenzy involves investors who have publicly acknowledged the risks they are taking.Credit…Kayana Szymczak for The New York TimesFeb. 1, 2021Updated 4:13 p.m. ETWASHINGTON — During his last regulatory stint in Washington, Gary Gensler focused on reining in big Wall Street players that he believed were manipulating markets and assuming huge financial positions to the detriment of other investors.If confirmed to lead the Securities and Exchange Commission, Mr. Gensler will have to confront an entirely new spin on that same game: Thousands of small investors who have banded together to amass giant stakes in GameStop and other companies with the aim of toppling big Wall Street players.The frenzy around GameStop, whose stock has soared 1,700 percent in the last month, presents a huge challenge for Mr. Gensler and the S.E.C., which will have to reckon with a fundamental shift in the capital markets as a new breed of investor begins trading stocks in unconventional ways and for unconventional reasons.Rather than snapping up a company’s shares because of a belief in that firm’s growth potential, the investors who piled into GameStop, AMC, BlackBerry and others did so largely to see how far they could drive up the price. Their motivation in many cases had less to do with making money than with causing steep financial losses for big hedge funds that were on the other side of that trade and had bet that the price of GameStop and other firms would fall.Their ability to cause such wild market volatility was enabled by new financial apps — like Robinhood — that encourage investors to trade frequently and allow them to buy risky financial products like options as easily as they purchase a latte. Options — which are essentially contracts that give the investor the option to buy a stock at a certain price in the future — were what helped put the “short squeeze” on the hedge funds that had shorted the company’s stock.“What’s going on with GameStop has almost nothing to do with GameStop as a company,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “When you see the markets essentially turned into a video game or turned into a casino, that actually has some pretty serious repercussions for the way we use the markets to fund our economy.”The question for Mr. Gensler and the S.E.C. will be what they can — or should — do about it.In a statement on Friday, the S.E.C. said that it was “closely monitoring” the situation and that it would “act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.”But unlike the typical type of fraud or manipulation that regulators like Mr. Gensler are used to pursuing, the current frenzy involves investors who have publicly acknowledged the risks they are taking and even boasted about losses. Forums like Reddit’s WallStreetBets have entire threads devoted to “loss porn,” where traders post screenshots showing their portfolios in the red, to applause from other investors. (“I’m proud of you” and “Respect” are among the typical responses.)That dynamic poses a challenge for an agency whose primary mission is to protect investors by ensuring they have enough information when deciding whether to trade and to enforce securities laws that were written before many of the GameStop investors were even born.“The S.E.C. has for years worried about hedge funds coordinating their positions and coordinating bear raids and otherwise engaging in activities to move around a stock,” said Tyler Gellasch, a former S.E.C. lawyer who heads the Healthy Markets Association, an investor group. “There are reporting requirements around that. But we’ve never really thought about that being done en masse and in public. The S.E.C.’s rules haven’t thought about what happens when it’s 100,000 people coordinating via Reddit versus three people coordinating via email.”Those who know Mr. Gensler say his first move will probably be determining what actually caused the momentum and who benefited. While many big hedge funds got crushed by the trades, there is speculation among market participants and securities lawyers that other big funds may have been fueling — and making money off — some of the volatility.“First of all, the S.E.C. has got to figure out what the hell was going on,” said James Cox, a securities professor at Duke University School of Law. “The first question is going to be an empirical one — how much of this momentum was created by the hedge funds having to cover their short position and how much of the rest was the impact of the options trading — either buying the options or just executing on the options.”A bigger issue for Mr. Gensler will be figuring out corrective actions. While the stock market has always been something of a game, Mr. Cox and others say the recent events have perverted their original purpose, which is to provide a place for companies to raise capital by giving investors the information they need to determine where to put their money.“When you see what’s happening with GameStop, you ask yourself, is this manipulation, is this mass psychosis or is there something wrong in our market structure that is causing this to happen,” said James Angel, a finance professor at Georgetown University’s McDonough School of Business. “This does illustrate some of the imperfections in our market structure and the real question is what, if anything, should be done about it.”Mr. Gensler has spent the past several years teaching at the Massachusetts Institute of Technology, focusing on financial technology, cryptocurrencies and blockchain technology. His classes have addressed some of the knotty issues he will have to face if confirmed to the S.E.C., including the rise of new financial technology companies like Robinhood and the so-called roboadviser Betterment.In a 2019 discussion at M.I.T., Mr. Gensler said it would be “best to show some flexibility” when considering whether to regulate fintech companies since heavy-handed rules could snuff out innovation. Mr. Gensler declined to be interviewed for this article.If confirmed to the job, Mr. Gensler will have to tread carefully. The motivation behind the GameStop squeeze has been embraced by lawmakers and others, who see the trades as a welcome rebellion against the power of big Wall Street players and persistent inequities in the economy. Last week, Representative Alexandria Ocasio-Cortez of New York, a progressive Democrat, and Senator Ted Cruz, a conservative Texas Republican, both condemned efforts by Robinhood to restrict trading in GameStop and other companies, saying the firm was putting the interests of hedge funds above small investors.Other lawmakers are warning against overreacting with more regulation. “When examining this episode, regulators and Congress should tread with extreme caution and avoid needlessly inserting themselves into equity markets,” Senator Patrick J. Toomey, Republican of Pennsylvania, said in a statement.Representative Ro Khanna, a California Democrat, said in an interview that simply blocking retail investors from certain stocks was the wrong decision and that Mr. Gensler should look to the bigger fish — namely lightly regulated hedge funds — when looking for areas to regulate.“We probably need to increase the capital requirements on short-selling for hedge funds, to make it more difficult,” Mr. Khanna said.That is an area that will be more familiar to Mr. Gensler, who spent his tenure as chairman of the Commodity Futures Trading Commission trying to stop big Wall Street firms from manipulating markets. That included bringing dozens of enforcement cases against big banks, which were accused of manipulating key rates that help determine certain prices across the financial system, including benchmark interest rates and foreign exchange rates.Dan Berkovitz, a C.F.T.C. commissioner who served as general counsel under Mr. Gensler, said breaking up “the old boy network” was a major focus during their time at the agency.“He wanted to break that whole culture up and introduce a culture of competition instead of a cozy coexistence,” Mr. Berkovitz said. “That was his philosophy, and coming from Goldman he saw from the inside how that worked.”Mr. Gensler, whose confirmation hearing has not yet been scheduled, will face pressure to bring a similar focus to the S.E.C. On Sunday, Senator Elizabeth Warren, Democrat of Massachusetts, said the GameStop episode underlined that S.E.C. regulators needed to “get off their duffs” and work to make the market more transparent. Among other things, she said new regulations should halt company stock buybacks for the purpose of pushing up share prices.“In the long run, if we have a market that is transparent, that’s level, that helps individual investors come into that market and, frankly, helps make that market more efficient,” she said on CNN’s State of the Union. “The hedge funds, many of the giant corporations, they love the fact that the markets are not efficient.”“GameStop is just the latest ringing of the bell that we have a real problem on Wall Street,” Ms. Warren said. “It’s time to fix it.”Jeanna Smialek contributed reporting.AdvertisementContinue reading the main story More

  • in

    Gensler Faces Big Challenge in Tackling GameStop’s Wild Ride

    #masthead-section-label, #masthead-bar-one { display: none }GameStop vs. Wall StreetCharting the Wild Stock SwingsThe Man Behind the Frenzy4 Things to KnowYour TaxesAdvertisementContinue reading the main storySupported byContinue reading the main storyGensler Faces Big Challenge in Tackling GameStop’s Wild RideThere is broad agreement that the capital markets have been distorted but less consensus on what, if anything, the S.E.C. should do about it.Unlike the fraud or manipulation that regulators like Gary Gensler are used to pursuing, the GameStop frenzy involves investors who have publicly acknowledged the risks they are taking.Credit…Kayana Szymczak for The New York TimesFeb. 1, 2021, 3:00 a.m. ETWASHINGTON — During his last regulatory stint in Washington, Gary Gensler focused on reining in big Wall Street players that he believed were manipulating markets and assuming huge financial positions to the detriment of other investors.If confirmed to lead the Securities and Exchange Commission, Mr. Gensler will have to confront an entirely new spin on that same game: Thousands of small investors who have banded together to amass giant stakes in GameStop and other companies with the aim of toppling big Wall Street players.The frenzy around GameStop, whose stock has soared 1,700 percent in the last month, presents a huge challenge for Mr. Gensler and the S.E.C., which will have to reckon with a fundamental shift in the capital markets as a new breed of investor begins trading stocks in unconventional ways and for unconventional reasons.Rather than snapping up a company’s shares because of a belief in that firm’s growth potential, the investors who piled into GameStop, AMC, BlackBerry and others did so largely to see how far they could drive up the price. Their motivation in many cases had less to do with making money than with causing steep financial losses for big hedge funds that were on the other side of that trade and had bet that the price of GameStop and other firms would fall.Their ability to cause such wild market volatility was enabled by new financial apps — like Robinhood — that encourage investors to trade frequently and allow them to buy risky financial products like options as easily as they purchase a latte. Options — which are essentially contracts that give the investor the option to buy a stock at a certain price in the future — were what helped put the “short squeeze” on the hedge funds that had shorted the company’s stock.“What’s going on with GameStop has almost nothing to do with GameStop as a company,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “When you see the markets essentially turned into a video game or turned into a casino, that actually has some pretty serious repercussions for the way we use the markets to fund our economy.”The question for Mr. Gensler and the S.E.C. will be what they can — or should — do about it.In a statement on Friday, the S.E.C. said that it was “closely monitoring” the situation and that it would “act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.”But unlike the typical type of fraud or manipulation that regulators like Mr. Gensler are used to pursuing, the current frenzy involves investors who have publicly acknowledged the risks they are taking and even boasted about losses. Forums like Reddit’s WallStreetBets have entire threads devoted to “loss porn,” where traders post screenshots showing their portfolios in the red, to applause from other investors. (“I’m proud of you” and “Respect” are among the typical responses.)That dynamic poses a challenge for an agency whose primary mission is to protect investors by ensuring they have enough information when deciding whether to trade and to enforce securities laws that were written before many of the GameStop investors were even born.“The S.E.C. has for years worried about hedge funds coordinating their positions and coordinating bear raids and otherwise engaging in activities to move around a stock,” said Tyler Gellasch, a former S.E.C. lawyer who heads the Healthy Markets Association, an investor group. “There are reporting requirements around that. But we’ve never really thought about that being done en masse and in public. The S.E.C.’s rules haven’t thought about what happens when it’s 100,000 people coordinating via Reddit versus three people coordinating via email.”Those who know Mr. Gensler say his first move will probably be determining what actually caused the momentum and who benefited. While many big hedge funds got crushed by the trades, there is speculation among market participants and securities lawyers that other big funds may have been fueling — and making money off — some of the volatility.“First of all, the S.E.C. has got to figure out what the hell was going on,” said James Cox, a securities professor at Duke University School of Law. “The first question is going to be an empirical one — how much of this momentum was created by the hedge funds having to cover their short position and how much of the rest was the impact of the options trading — either buying the options or just executing on the options.”A bigger issue for Mr. Gensler will be figuring out corrective actions. While the stock market has always been something of a game, Mr. Cox and others say the recent events have perverted their original purpose, which is to provide a place for companies to raise capital by giving investors the information they need to determine where to put their money.“When you see what’s happening with GameStop, you ask yourself, is this manipulation, is this mass psychosis or is there something wrong in our market structure that is causing this to happen,” said James Angel, a finance professor at Georgetown University’s McDonough School of Business. “This does illustrate some of the imperfections in our market structure and the real question is what, if anything, should be done about it.”Mr. Gensler has spent the past several years teaching at the Massachusetts Institute of Technology, focusing on financial technology, cryptocurrencies and blockchain technology. His classes have addressed some of the knotty issues he will have to face if confirmed to the S.E.C., including the rise of new financial technology companies like Robinhood and the so-called roboadviser Betterment.In a 2019 discussion at M.I.T., Mr. Gensler said it would be “best to show some flexibility” when considering whether to regulate fintech companies since heavy-handed rules could snuff out innovation. Mr. Gensler declined to be interviewed for this article.If confirmed to the job, Mr. Gensler will have to tread carefully. The motivation behind the GameStop squeeze has been embraced by lawmakers and others, who see the trades as a welcome rebellion against the power of big Wall Street players and persistent inequities in the economy. Last week, Representative Alexandria Ocasio-Cortez of New York, a progressive Democrat, and Senator Ted Cruz, a conservative Texas Republican, both condemned efforts by Robinhood to restrict trading in GameStop and other companies, saying the firm was putting the interests of hedge funds above small investors.Other lawmakers are warning against overreacting with more regulation. “When examining this episode, regulators and Congress should tread with extreme caution and avoid needlessly inserting themselves into equity markets,” Senator Patrick J. Toomey, Republican of Pennsylvania, said in a statement.Representative Ro Khanna, a California Democrat, said in an interview that simply blocking retail investors from certain stocks was the wrong decision and that Mr. Gensler should look to the bigger fish — namely lightly regulated hedge funds — when looking for areas to regulate.“We probably need to increase the capital requirements on short-selling for hedge funds, to make it more difficult,” Mr. Khanna said.That is an area that will be more familiar to Mr. Gensler, who spent his tenure as chairman of the Commodity Futures Trading Commission trying to stop big Wall Street firms from manipulating markets. That included bringing dozens of enforcement cases against big banks, which were accused of manipulating key rates that help determine certain prices across the financial system, including benchmark interest rates and foreign exchange rates.Dan Berkovitz, a C.F.T.C. commissioner who served as general counsel under Mr. Gensler, said breaking up “the old boy network” was a major focus during their time at the agency.“He wanted to break that whole culture up and introduce a culture of competition instead of a cozy coexistence,” Mr. Berkovitz said. “That was his philosophy, and coming from Goldman he saw from the inside how that worked.”Mr. Gensler, whose confirmation hearing has not yet been scheduled, will face pressure to bring a similar focus to the S.E.C. On Sunday, Senator Elizabeth Warren, Democrat of Massachusetts, said the GameStop episode underlined that S.E.C. regulators needed to “get off their duffs” and work to make the market more transparent. Among other things, she said new regulations should halt company stock buybacks for the purpose of pushing up share prices.“In the long run, if we have a market that is transparent, that’s level, that helps individual investors come into that market and, frankly, helps make that market more efficient,” she said on CNN’s State of the Union. “The hedge funds, many of the giant corporations, they love the fact that the markets are not efficient.”“GameStop is just the latest ringing of the bell that we have a real problem on Wall Street,” Ms. Warren said. “It’s time to fix it.”Jeanna Smialek contributed reporting.AdvertisementContinue reading the main story More

  • in

    Biden Tells OSHA to Issue New Covid-19 Guidance to Employers

    #masthead-section-label, #masthead-bar-one { display: none }The Biden AdministrationliveLatest UpdatesBiden Takes OfficePandemic Response17 Executive Orders SignedAdvertisementContinue reading the main storySupported byContinue reading the main storyBiden Tells OSHA to Issue New Covid-19 Guidance to EmployersUnions, which largely support the new president, had complained that the Trump administration did little to protect workers from the coronavirus.Carolina Sanchez, left, whose husband died after contracting Covid-19 while working at a meatpacking plant, is comforted at a protest outside the Occupational Safety and Health Administration office in Denver last September.Credit…David Zalubowski/Associated PressJan. 21, 2021Updated 6:37 p.m. ETPresident Biden directed the Occupational Safety and Health Administration on Thursday to release new guidance to employers on protecting workers from Covid-19.In one of 10 executive orders that he signed Thursday, the president asked the agency to step up enforcement of existing rules to help stop the spread of the coronavirus in the workplace and to explore issuing a new rule requiring employers to take additional precautions.The other executive orders also relate to the pandemic, including orders directing federal agencies to issue guidance for the reopening of schools and to use their powers to accelerate the production of protective equipment and expand access to testing.Critics accused OSHA, which is part of the Labor Department, of weak oversight under former President Donald J. Trump, especially in the last year, when it relaxed record-keeping and reporting requirements related to Covid-19 cases.Under Mr. Trump, the agency also announced that it would mostly refrain from inspecting workplaces outside of a few high-risk industries like health care and emergency response. And critics complained that its appetite for fining employers was limited. Mr. Biden’s executive order urges the agency to target “the worst violators,” according to a White House fact sheet.Union officials and labor advocacy groups have long pleaded with the agency to issue a rule, known as an emergency temporary standard, laying out steps that employers must take to protect workers from the coronavirus. The agency declined to do so under Mr. Trump, but Mr. Biden supported the approach during the campaign.“We talked about a national standardized strategy for working men and women in this country to function under this cloud of the pandemic,” Rory Gamble, the president of the United Automobile Workers union, said after a meeting with Mr. Biden in mid-November. “He indicated he would do whatever it took.”OSHA’s oversight of the meatpacking industry under Mr. Trump attracted particular scrutiny from labor groups and scholars. A study published in the fall in the Proceedings of the National Academy of Sciences connected between 236,000 and 310,000 Covid-19 cases to livestock processing plants through late July, or between 6 percent and 8 percent of the national total at that point.That figure is roughly 50 times the 0.15 percent of the U.S. population that works in meatpacking plants, according to the study, suggesting that the industry played an outsized role in spreading the illness.The study found that a majority of the Covid-19 cases linked to meatpacking plants had likely originated in the plants and then spread through surrounding communities.The Biden AdministrationLive UpdatesUpdated Jan. 21, 2021, 7:22 p.m. ETFauci offers reassurances on vaccines, but warns that virus variants pose a risk.Biden is invoking the Defense Production Act. Here’s what that means.The No. 2 official at the F.B.I. is departing.Despite the problems identified by the study, the Trump administration did not include meatpacking plants in the category of workplaces that OSHA should regularly inspect. Only a small fraction of the roughly $4 million in coronavirus-related penalties that the agency proposed under Mr. Trump targeted the industry. Fines for any given plant were generally below $30,000.The Labor Department under Mr. Trump said it had assessed the maximum fines allowed under the law. But former OSHA officials have said that the agency can impose bigger fines by citing facilities for multiple violations, which could raise proposed penalties to over $100,000.Even when it did inspect meatpacking plants and propose fines, OSHA rarely required these employers to place workers six feet apart, the distance recommended by its own guidance.During a court case involving a plant in Pennsylvania whose workers complained last year that they were in imminent danger because of the risk of infection, OSHA wrote in a letter on Jan. 12 that it was OK with spacing at the plant, even though some workers were spaced less than six feet apart. Separately, union officials at two other plants where OSHA issued citations said workers continued to stand close to one another after the citations.Debbie Berkowitz, a senior OSHA official during the Obama administration who is now at the National Employment Law Project, a worker advocacy group, said she expected the Biden administration to issue a rule requiring meatpacking facilities to space workers six feet apart and mandating other safety measures, such as providing high-quality masks and improving ventilation and sanitation at their facilities.“OSHA had been sidelined under Trump,” said Ms. Berkowitz. “This is a signal they’re going to play a significant role in mitigating the spread of Covid-19,” she added, alluding to Mr. Biden’s executive order.The Biden administration is likely to revisit a wide variety of labor and employment issues from the Trump era, including a rule that would make it harder for employees of franchises and contractors to recover wages that were improperly withheld from them, and another rule that would likely classify Uber drivers and other gig workers as contractors rather than employees.On Wednesday, the new administration fired the general counsel of the National Labor Relations Board, a Senate-confirmed official who has wide latitude over which labor law violations the board pursues. The official, Peter B. Robb, was appointed by Mr. Trump and clashed frequently with unions.AdvertisementContinue reading the main story More

  • in

    The Business Rules the Trump Administration Is Racing to Finish

    #masthead-section-label, #masthead-bar-one { display: none }The Presidential TransitionLatest UpdatesHouse Moves to Remove TrumpHow Impeachment Might WorkBiden Focuses on CrisesCabinet PicksAdvertisementContinue reading the main storySupported byContinue reading the main storyThe Business Rules the Trump Administration Is Racing to FinishFrom tariffs and trade to the status of Uber drivers, regulators are trying to install new rules or reduce regulations before President-elect Joe Biden takes over.President Trump is rushing to put into effect new economic regulations and executive orders before his term comes to a close.Credit…Erin Schaff/The New York TimesJan. 11, 2021, 3:00 a.m. ETIn the remaining days of his administration, President Trump is rushing to put into effect a raft of new regulations and executive orders that are intended to put his stamp on business, trade and the economy.Previous presidents in their final term have used the period between the election and the inauguration to take last-minute actions to extend and seal their agendas. Some of the changes are clearly aimed at making it harder, at least for a time, for the next administration to pursue its goals.Of course, President-elect Joseph R. Biden Jr. could issue new executive orders to overturn Mr. Trump’s. And Democrats in Congress, who will control the House and the Senate, could use the Congressional Review Act to quickly reverse regulatory actions from as far back as late August.Here are some of the things that Mr. Trump and his appointees have done or are trying to do before Mr. Biden’s inauguration on Jan. 20. — Peter EavisProhibiting Chinese apps and other products. Mr. Trump signed an executive order on Tuesday banning transactions with eight Chinese software applications, including Alipay. It was the latest escalation of the president’s economic war with China. Details and the start of the ban will fall to Mr. Biden, who could decide not to follow through on the idea. Separately, the Trump administration has also banned the import of some cotton from the Xinjiang region, where China has detained vast numbers of people who are members of ethnic minorities and forced them to work in fields and factories. In another move, the administration prohibited several Chinese companies, including the chip maker SMIC and the drone maker DJI, from buying American products. The administration is weighing further restrictions on China in its final days, including adding Alibaba and Tencent to a list of companies with ties to the Chinese military, a designation that would prevent Americans from investing in those businesses. — Ana SwansonDefining gig workers as contractors. The Labor Department on Wednesday released the final version of a rule that could classify millions of workers in industries like construction, cleaning and the gig economy as contractors rather than employees, another step toward endorsing the business practices of companies like Uber and Lyft. — Noam ScheiberTrimming social media’s legal shield. The Trump administration recently filed a petition asking the Federal Communications Commission to narrow its interpretation of a powerful legal shield for social media platforms like Facebook and YouTube. If the commission doesn’t act before Inauguration Day, the matter will land in the desk of whomever Mr. Biden picks to lead the agency. — David McCabeTaking the tech giants to court. The Federal Trade Commission filed an antitrust suit against Facebook in December, two months after the Justice Department sued Google. Mr. Biden’s appointees will have to decide how best to move forward with the cases. — David McCabeAdding new cryptocurrency disclosure requirements. The Treasury Department late last month proposed new reporting requirements that it said were intended to prevent money laundering for certain cryptocurrency transactions. It gave only 15 days — over the holidays — for public comment. Lawmakers and digital currency enthusiasts wrote to the Treasury secretary, Steven Mnuchin, to protest and won a short extension. But opponents of the proposed rule say the process and substance are flawed, arguing that the requirement would hinder innovation, and are likely to challenge it in court. — Ephrat LivniLimiting banks on social and environmental issues. The Office of the Comptroller of the Currency is rushing a proposed rule that would ban banks from not lending to certain kinds of businesses, like those in the fossil fuel industry, on environmental or social grounds. The regulator unveiled the proposal on Nov. 20 and limited the time it would accept comments to six weeks despite the interruptions of the holidays. — Emily FlitterOverhauling rules on banks and underserved communities. The Office of the Comptroller of the Currency is also proposing new guidelines on how banks can measure their activities to get credit for fulfilling their obligations under the Community Reinvestment Act, an anti-redlining law that forces them to do business in poor and minority communities. The agency rewrote some of the rules in May, but other regulators — the Federal Reserve and the Federal Deposit Insurance Corporation — did not sign on. — Emily FlitterInsuring “hot money” deposits. On Dec. 15, the F.D.I.C. expanded the eligibility of brokered deposits for insurance coverage. These deposits are infusions of cash into a bank in exchange for a high interest rate, but are known as “hot money” because the clients can move the deposits from bank to bank for higher returns. Critics say the change could put the insurance fund at risk. F.D.I.C. officials said the new rule was needed to “modernize” the brokered deposits system. — Emily FlitterNarrowing regulatory authority over airlines. The Department of Transportation in December authorized a rule, sought by airlines and travel agents, that limits the department’s authority over the industry by defining what constitutes an unfair and deceptive practice. Consumer groups widely opposed the rule. Airlines argued that the rule would limit regulatory overreach. And the department said the definitions it used were in line with its past practice. — Niraj ChokshiRolling back a light bulb rule. The Department of Energy has moved to block a rule that would phase out incandescent light bulbs, which people and businesses have increasingly been replacing with much more efficient LED and compact fluorescent bulbs. The energy secretary, Dan Brouillette, a former auto industry lobbyist, said in December that the Trump administration did not want to limit consumer choice. The rule had been slated to go into effect on Jan. 1 and was required by a law passed in 2007. — Ivan PennAdvertisementContinue reading the main story More