Your Weekly Report on the Discord from Washington, D.C.

In Partnership with the Eris Group

Which Way is Out? – In a turbulent week of a turbulent year, no news is bigger than the UK’s vote last week to leave the European Union. More than 72% of eligible voters cast ballots, and 51.9% of those voted to leave, stunning policymakers and financial markets around the world. In the wake of the vote, Prime Minister David Cameron announced his resignation, with new general elections to happen sometime between now and October. The referendum is non-binding, and leaving the EU will be a process that takes the UK at least two years after it invokes Article 50 of the Lisbon Treaty. Scotland’s First Minister has already called for a new vote on Scottish independence, and the leaders of Ireland’s Sinn Fein party say it’s time to talk about Irish reunification. The Bank of England says it is “well prepared” for a “period of uncertainty,” while Morgan Stanley denies plans to immediately move 2,000 jobs from London to Dublin and Germany. The Federal Reserve announced that it is “carefully monitoring developments in global financial markets,” and stands ready to provide dollar liquidity where needed. 

House Recesses Early after Sit-In – The international turmoil two weeks ago was enough to make last week’s proceedings on the House floor look almost like regular order. Democratic members of Congress led by Reps. John Lewis (D-GA), James Clyburn (D-SC), and others, took over the House floor for 26 hours, calling for votes on gun control legislation and refusing to allow votes on other bills. Speaker of the House Paul Ryan (R-WI) ultimately called an early recess; the House has no business scheduled until July 6, when the sit-in leaders say they will continue their protest.

Veto Override Fails on Fiduciary Rule Rollback – In the midst of last Wednesday night’s chaos, Speaker Ryan called a vote to override President Obama’s veto of H.J. Res 88, the bill to negate the Department of Labor’s fiduciary rule. The override attempt failed, 239-180, well short of the 2/3rds required.

Hensarling Unveils Discussion Draft of Reform Legislation – House Financial Services Committee Chairman Jeb Hensarling (R-TX) released a discussion draft of his reform package, the Financial CHOICE Act, last week. In a speech to the Heritage Foundation, he said that “so-called ‘solutions’ like Dodd-Frank are precisely what rigs the economy to favor the big, the powerful and the well-connected.” Dodd-Frank’s “regulatory waterboarding of community banks and credit unions has created an uneven playing field that gives an undeniable, indisputable advantage to firms with the size and scale to absorb its incomprehensible and costly new mandates.”

House Terrorism Financing Panel Concludes Two Years of Work – The House Financial Services Task Force to Investigate Terrorism Financing held its eleventh and final hearing last week, with testimony from legal and security experts. Witnesses told the task force that the laws and regulations put in place to block terrorism financing after 9/11 have been effective, terrorists continually find new ways to move money around through the American financial system. The problem is not limited to the Middle East, as approximately a third of the countries on the Treasury’s global money laundering list are in Latin America. Better information sharing between and among government agencies and financial institutions is crucial to identifying and preventing terrorist financing activities, witnesses said.

Fed Will Continue “Cautious Approach,” Says Yellen – In testimony before the Senate Banking Committee and the House Financial Services Committee last week, Federal Reserve Board Chair Janet Yellen said that continued employment growth, a recent pickup in household spending and “underlying conditions that are favorable for growth” make her optimistic about the economy overall. “Considerable uncertainty” and “vulnerabilities in the global economy,” however, mean that the Fed will continue its cautious approach toward monetary policy. Chairman Hensarling criticized the “revolving door between the White House, the Treasury, and the Fed,” and said that our central banks could not be allowed to “become our central planners.” Senate Banking Committee Chairman Richard Shelby (R-AL) said that “the Fed’s regulatory conduct has become increasingly opaque and complicated,” and renewed calls for greater disclosure of monetary rules.

SEC Approves New National Trading Exchange – Two Fridays ago the Securities and Exchange Commission  approved Investors’ Exchange LLC’s (IEX) application to register as a national securities exchange. IEX must fulfill several requirements before opening for business nationwide, including joining the Intermarket Surveillance Group and a variety of national market system plans.

Merrill Lynch Agrees to $415 Million in SEC Penalties – Last week Merrill Lynch agreed to pay the SEC $415 million in disgorgement, interest and penalties for misusing customer cash that should have been deposited in a reserve account. The SEC found that Merrill Lynch had “engaged in complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account” between 2009 and 2012. Merrill Lynch also failed to hold fully-paid for customer securities in lien-free accounts and shield them from third-party claims between 2009 and 2015. The SEC also announced a new coordinated effort to find additional abuses of its Customer Protection Rule, which will include risk-based examinations of certain broker-dealers to assess compliance.

Aggregate Capital Would Withstand “Severely Adverse” Conditions, Fed Says – In timing more appropriate than expected, the Federal Reserve Board released the results of its latest round of supervisory stress tests on the nation’s largest bank holding companies last week. The good news is that even under the Fed’s “severely adverse” scenario, the aggregate tier 1 capital ratio of the 33 tested organizations would bottom out at 8.4%, from an actual level of 12.5% in the fourth quarter of 2014. At a Senate Banking Committee hearing on bank capital and liquidity regulation last week, Chairman Shelby called for the Fed to stress-test its own capital and liquidity rules.

Tech Failures and Process Breakdowns Mean Rules Violations for Mortgage Servicers – The Consumer Financial Protection Bureau released a report last Wednesday that focuses on how “failed technology” used by some companies breaks the agency’s new mortgage servicing rules. “While the servicing market has made some investments in compliance, those investments have not been sufficient across the marketplace,” the agency said. Additionally, several mortgage servicers are not adequately training and testing their personnel, or conducting proper audits of their internal systems and external service providers.

This Week in Washington (and elsewhere):

The Golden Apple’s taking next week off. We expect to return on July 8 unless there’s really nothing going on. And what are the odds of that?

June 29
Senate Judiciary Committee holds a hearing on “Protecting Older Americans from Financial Exploitation.” SD-226 Dirksen Senate Office Building, 10:00 a.m.

June 29
Senate Committee on Small Business and Entrepreneurship holds a hearing to examine the consequences of dwindling startup activity. SR-428A Russell Senate Office Building, 10:00 a.m.

The Ellis Insight. Jim Ellis reports on upcoming races:

> President

Republicans:  The move to potentially open the GOP convention is gaining some legs. The fact that Permanent Rules Committee chairman Bruce Ash, a supporter of keeping the convention rules consistent, was passed over to lead the convention rules committee suggests that the GOP hierarchy is, at the very least, not preventing the discussion and adoption of rule changes. In Ash’s place, RNC chairman Reince Preibus named former US Rep. Enid Greene Mickelsen (R-UT) and long time GOP Committeeman and White House aide Ron Kaufman (R-MA) as committee co-chairs. The change proponents want to free the attending delegates of their bound commitments on at least the first ballot. If they are freed, a good chance exists that Donald Trump will be denied the nomination. Thus, we could possibly be headed to a brokered convention after all.

The latest three national polls again show Hillary Clinton even or ahead of Mr. Trump in the presidential contest, with leads of varying degrees. Ipsos Reuters (6/18-22; 1,339 registered voters) finds the former Secretary of State holding a 44-34% advantage with 13% going to “other” candidates. Rasmussen Reports (6/20-21; 1,000 registered voters) comes in with its second consecutive 44-39% margin. In this poll, 11% were recorded as supporting an “other” candidate because RR only gave the respondents the choice between Clinton and Trump. Morning Consult (6/10-15; 3,891 registered voters) finds a much closer race with Clinton and Trump tied at 38% and Libertarian nominee Gary Johnson pulling 10% preference.

> Senate

Arizona:  The Behavior Research Center’s Rocky Mountain Poll (6/6-19; 448 AZ registered voters) surveyed the Arizona electorate and produces some good news for Sen. John McCain (R). Though his support total remains low, 40% in this poll, the margin between he and Rep. Ann Kirkpatrick (D-AZ-1) is growing. This latest independent data now posts McCain to a nine point edge (40-31%), but with a 29% undecided factor, thirteen points higher when compared to their last poll in April. In that study, both McCain and Kirkpatrick scored 42%. Between the two polls the new data projects that Kirkpatrick, in particular, has lost almost a quarter of her support.

Florida:  Sen. Marco Rubio (R) reversed course and announced that he will seek a second term in the Senate, after often stating that he would not run again. Party leaders put intense pressure upon him to get into the race, fearing slow-developing GOP campaigns could cost them the Florida seat and possibly the majority. Two weeks ago, Rep. David Jolly (R-FL-13) exited the Senate race and returned to seek re-election in his Tampa Bay House district.

Upon the Rubio decision becoming official, Lt. Gov. Carlos Lopez-Cantera (R) and Rep. Ron DeSantis (R-FL-6) both ended their Senate campaigns with the latter, like Jolly, returning to seek re-election to the House. Businessmen Carlos Beruff and Todd Wilcox, however, pledged to remain in the race and will battle Rubio for the nomination. Mr. Beruff, who calls himself “the Hispanic Donald Trump”, says he will spend as much as $20 million to call Rubio out on such issues as immigration, missing Senate votes, and whether he will serve full six-year term if re-elected.

Quinnipiac University released a new survey of Florida voters (6/8-19; 975 FL registered voters), and the result gave Sen. Rubio a 47-40% lead over Rep. Patrick Murphy (D-FL-18) and a 48-40% margin against Rep. Alan Grayson (D-FL-9) in hypothetical general election pairings.

Louisiana:  GBA Strategies for the Caroline Fayard (D) campaign released their early June poll on 6/15 (500 LA registered voters) and found, like all other early surveys of this race, that state Treasurer John Kennedy (R) claims first place in the jungle primary with 30% of the vote. Democratic Public Service Commissioner Foster Campbell is second with 15%. Ms. Fayard, a former White House aide was surprisingly third with 14%, and Reps. Charles Boustany (R-LA-3) and John Fleming (R-LA-4) follow with 11 and 9%, respectively. Louisiana runs its primary concurrently with the general election. If no candidate commands a majority of the vote, and very unlikely such will occur in this race, the top two finishers advance to a December 10th general election run-off.

North Carolina:  Raleigh-based Public Policy Polling, as the organization statisticians do every month, conducted another survey (6/20-21; 947 NC registered voters) of the Tar Heel State electorate. Again, they find the race between Sen. Richard Burr (R) and former state Rep. Deborah Ross (D) tightening. Their latest spread reveals a 40-37% margin in the Senator’s favor, with Libertarian Sean Haugh attracting 5% support. We can expect this contest to remain tight until Election Day, with Sen. Burr likely maintaining his small advantage throughout the summer and fall.

Ohio:  Quinnipiac University (6/8-19; 971 OH registered voters) again find Sen. Rob Portman (R) and former Gov. Ted Strickland (D) locked in a dead heat. The new numbers, virtually unchanged for months, find the two tied at 42%, apiece.

Pennsylvania:  Quinnipiac University also conducted one of their statewide surveys in the Keystone State (6/8-19; 950 PA registered voters) and see Sen. Pat Toomey (R) opening up a more substantial lead over Democratic nominee Katie McGinty. The new numbers find Toomey owning a 49-40% spread, much better than previous Q-Polls and other ballot test data have shown. This could be the result of heavy early advertising coming from Toomey and outside Super PACS, such as the one sponsored from the US Chamber of Commerce, attempting to create a negative image of Ms. McGinty.

> House

FL-6:  With Rep. Ron DeSantis (R) leaving the Senate race to return to the House campaign, three of the six GOP contenders immediately dropped out. State Rep. Fred Costello (R), however, was sending signals that he is considering continuing his quest and would oppose DeSantis. He began referring to the Congressman as a “carpetbagger”, but that is only because the mid-decade court redistricting plan drew DeSantis’ home into the 4th District. The remaining 70% of the territory that DeSantis currently represents remains within the new 6th CD. With the Congressman having a large $3+ million war chest left over from his now defunct Senate race, he is in good position to win re-nomination and re-election regardless of who he runs against.

FL-7:  The court-drawn redistricting plan made the Orlando-based 7th District about even between the two parties. At the close of filing, the Democrats finally fielded a candidate to challenge veteran Rep. John Mica (R-Winter Park). College professor and former US Defense Department official Stephanie Murphy (D) has declared her candidacy. Rep. Mica begins the race as the favorite, but the addition of the Democratic city of Sanford makes the 7th District much more politically marginal.

FL-19:  After saying repeatedly he would get into the congressional race, former state Rep. and congressional candidate Paige Kreegel (R) announced that he will not run for retiring Rep. Curt Clawson’s (R-Bonita Springs/Ft. Myers) open seat. Instead, he endorsed Sanibel Island City Councilman and former candidate Chauncey Goss (R), the son of former Representative and CIA Director Porter Goss (R). Also in the race is former US Ambassador to the Vatican Patrick Mooney (R) and former Maryland congressional nominee Dan Bongino (R), who recently moved to the district. The 19th CD is one of the safest Republican seats in Florida.

ME-2:  In a district that could become meaningful in the presidential election – Maine is one of two states (Nebraska is the other) that split their electoral votes and apportion by congressional district – Democratic challenger Emily Cain, a former state Senator and defeated 2014 congressional nominee, just released her internal Normington Petts poll (6/6-9; 400 ME-2 registered voters). The results project she and Rep. Bruce Poliquin (R-Oakland/Bangor) are tied at 45% apiece. In 2014, Poliquin scored a 45-40% victory with the Libertarian candidate drawing 10 percent. In this election, there is no independent or minor party candidate. At the end of May, Rep. Poliquin had just about $2 million in the bank while Ms. Cain held slightly under $1 million.

PA-2:  Rep. Chaka Fattah (D-Philadelphia) was convicted on 22 charges of federal corruption and resigned his seat after the verdict. A special election will likely be called to fill the balance of the current term, but Gov. Tom Wolf (D) may decide to schedule the special cycle concurrently with the regular election. Since state Rep. Dwight Evans (D-Philadelphia) defeated Fattah in the April 26th Democratic primary, he is the Congressman-in-waiting. PA-2 is a solidly Democratic district (Obama ’12: 90.4%).