Speaker 1:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Scott Smith:
Hi. And welcome to the second edition of the TD 2 Cents Podcast Series. We are back with Jaret Seiberg. Again, Jaret, I have to say 28 days, 19 business days since we last recorded, and I counted 48 research notes from you since that period of time, so you're obviously exceptionally busy. Probably way more than we could cover in one short session. But I think maybe we'd start with question of regulator consolidation and what may be going on with the CFPB. There was some new news there yesterday. When we last did this, we still had the old CFPB director. We've now got temporary, and it seems like new coming in, so what's going on on the consolidation front?
Jaret Seiberg:
Yeah, Scott, I think that's one of the underappreciated developments. There's really two things that team Trump is trying to do. The first is they're trying to change the whole approach to deregulation. What we normally see, particularly with a Republican administration, is they'll spend the first two to three years trying to rewrite all the rules. It's a very laborious process. There's lots of litigation. It just takes time, and that's why you typically need two terms, two consecutive terms to get a lot of deregulation done. And so what the Trump administration is doing is they're saying, "Forget all of that. Let's try to do this faster, and we're going to do this faster, not by trying to change the rules, but by trying to get rid of people at the agencies." Because if you have fewer examiners and you have fewer senior regulators, then their ability to broadly bring enforcement actions and broadly interfere with how banks and Fintechs are managing themselves is going to be a lot less.
And there's no agency that epitomizes this more than what we're seeing at the CFPB where the agency essentially has been shut down really for three weeks now. We do expect that it is going to slowly start ramping back up. It's going to be with far fewer people. They're letting go a lot of the staff. They're going to retain most of the rule writers, and with this smaller staff with less enforcement because fewer people, what they're going to then start is the longer process of trying to change these rules. And so it's a really fascinating way to try to do it. You get your upfront benefit with fewer people, and then you try to cement that legacy with the rule changes.
Scott Smith:
It was interesting at financial conferences last week, we heard from broker managers about the M&A environment being a little slower, and I think particularly as it pertains to the financials, we seem to be hearing stories about people trying to get in touch with their regulator and not getting responses because everyone's been shut. But when things reopen, is it going to be slower or not?
Jaret Seiberg:
Right. I mean, isn't that the problem here? The problem is that it's one thing if we lived in an economy where government approvals weren't required to do a lot of things. If you want to buy another bank, you need government approval. If you want permits to build a new power plant or new electrical lines, anything, there are so many government permitting processes. All the government loan programs, the small business administration, the flood insurance program, the FHA, VA, rural housing, these are all programs where at some point people are needed to give approvals and to review paperwork. And I think one of the dangers of cutting so many people out of the agency so quickly is we're not sure what it's going to look like when these programs reopen, and approvals that now might be routine and might take days or weeks, could end up taking months simply because there's nobody there to give the okay.
Scott Smith:
There were some headlines yesterday about Mr. Calabria and the CFPB position, not somebody I've had a ton of experience with, but it seems like a pretty reasonable individual. Any thoughts on where he might or what he might do at CFPB?
Jaret Seiberg:
Yeah. Mark has been a figure in Washington for a long time. For those who don't know him, Mark Calabria was on the Senate Banking as one of the top economists for a number of years. He went to the Cato Institute. He was the FHFA director during the second half of Trump's first term, and he is definitely a leading voice in a lot of Republican circles on financial policy. And so what appears to be happening is he is going to take some sort of temporary job within the White House within the Office of Management and Budget, and he's going to be detailed to the financial regulators to try to get them all on the same page, particularly the CFPB, and to try to get them to move towards deregulation. I think this move is a clear positive for financials. It does suggest that all these agencies are going to survive. They are going to reopen. We can get approval, start moving again. We can get rules rewritten. And so to me, I think there's a lot of good news in all of this for most of our financial universe.
Scott Smith:
And since you brought up FHFA, why don't we take a minute to talk about what's different in the last 28 days with respect to Fannie and Freddie?
Jaret Seiberg:
Yeah. So I think that a couple of things have happened, right? We've had the nomination of an FHFA director in Bill Pulte, famous last name. He is the grandson of the founder of Pulte. He is going to get his confirmation hearing next week, and therefore I think we're going to learn a lot more about him at this hearing. The other big developments is we've gotten a little bit more clarity on the budget scoring for what would happen if Fannie and Freddie are included in reconciliation. And I think the news there is not good for those who believe in a rapid recap and release of Fannie and Freddie. I think that general consensus now in Washington is that because the CBO already views Fannie and Freddie as part of the government, that you don't get any one time big benefit through recap and release because you're just transferring assets.
So you're just taking an asset that is now the ownership and you're trading it for a new asset that is now the cash, but that doesn't actually change the government's position, and as a result, you're not going to be able to use that to offset the Tax Bill. I think this probably pushes getting to recap and release of Fannie and Freddie if we get there to 2027 rather than 2026. And I think, to me, the two biggest things to be watching is what does Bill Pulte as the FHFA director, what does he do and say to try to make this happen? And how big is the push to try to get some sort of explicit guarantee on the agency, MBS?
Because I still think that the biggest barrier to recap and release is high mortgage interest rates that could result if this doesn't work exactly as planned. It's why another good indicator that this is politically more feasible is going to be where are mortgage rates in late 26 or early 27. If they're still at six, six and a half, 7%, then I think the path forward is much more challenging. If they're back in the four, four and a half percent range, then I think there's more room to take the risk and move forward with recap and release.
Scott Smith:
You left two doors open there for me. So let me walk through the first one on scoring, and that would bring me to student lending. What do you think is happening now versus maybe a couple of weeks ago with regards to the student lending initiatives?
Jaret Seiberg:
Yeah. So I think we have long known that Republicans have student loan reform in the crosshairs. I think where it gets very complicated is understanding the budget scoring of how these different moves work. And so if we get back in the way back machine and go back in history to the financial crisis and the lead-up to what was the elimination of the FFEL Program, which was how banks participated in the student loan program. The reason the FFEL Program was eliminated was because of the way we score student lending. It meant that loans originated by banks cost the government money, whereas loans originated by the federal government generally scored as making money for the government. Well, we have the same problem today when you look at reform of the system, because right now a lot of the budget scoring has been turned on its head, and a lot of this program's score is losing money for the government because the Biden administration aggressively expanded income-based repayment plans. And income-based repayment plans cost the government an enormous amount of money and really offset any budget scoring gains from all of the student loan programs.
And so the tricky part is that you can save maybe close to $150 billion over 10 years if you eliminate the Biden income-based repayment programs and just go back to a more standardized system that was in place prior to Biden's presidency. If you do that, that's going to impact the budget scoring for the PLUS Programs, and the PLUS Programs is where I think most of the market is focused. These are loans to parents and additional loans to graduate students. They tend to be higher interest loans. And so if you take away the cost of income-based repayment, these programs will score as making money for the government. And so while I do think we're going to get rid of the SAVE, Biden's income-based repayment plan, I think at the end of the day there are a lot more barriers to getting rid of the PLUS Programs because of the way the budget scoring works.
And Scott, if you'll just give me 10 more seconds on this. Just remember, I know this drives folks on Wall Street and in the asset management community nuts, but budget scoring is not reality, right? It is merely the rules that the government is required to follow when trying to figure out how much something costs, and it's meant to have a consistent approach across all of government. The reality is that we lose money on all student loans. And so if we were just in a practical standpoint and we say, "Okay, let's have some Wall Street firm run the numbers, and let's figure out what we really lose." all these programs are going to score as losers, and therefore eliminating them should make money. But that logic doesn't matter because all that matters is the budget score.
Scott Smith:
And you mentioned bringing mortgage rates down, and that probably means you've got to bring 10-year rates down. And so the question then comes, and we were hearing some of this in the last day or two about Stablecoin being a buyer of treasuries, and that being potentially behind some of the crypto legislations. What's going on there?
Jaret Seiberg:
Yeah. I think the simple fact is we're around 35 trillion in debt right now. We're adding one to 2 trillion of debt per year, and then we have the cost of extending the expiring Trump tax cuts as well as his plans for additional tax reforms. All of that is putting us on a path to 50 trillion in debt by the time Trump finishes his second term, and so we need people to buy that debt. And I think certainly formalizing a regulatory regime for Stablecoins that includes liquidity requirements that pretty much restrict them to investing in cash and US treasuries is a way to increase the number of buyers for US treasuries. The other two things I think you're going to see on that front will benefit the banks, and that would be reform of the supplemental leverage ratio so that banks are less constrained in their ability to intervene in the treasury repo market when there are disruptions.
Right now, the existence of the enhanced supplemental leverage ratio makes this potentially capital prohibitive for a lot of the big banks. And then the second big change, I think you really need to see a recalibration of the G-SIB surcharge so that way if banks do increase the number of treasuries that they hold in portfolio, that that's not going to boost them up into a higher G-SIB category and result in an increase in their capital levels. I think all three of these things are likely to happen, and the just voracious appetite of the US to put debt out there really leaves the regulators with no choice and Congress with no choice but to get these things done.
Scott Smith:
I assume that probably also means they'd like to have Wells Fargo without an asset cap and buying treasury securities.
Jaret Seiberg:
Yeah. I'm a little surprised that the asset cap is still in place at this point. I do think we are close. Scott, you've heard me say this so many times. I think folks at the Fed really regret the asset cap because, one, it's a hotel California type problem where you can just never leave. Getting rid of it is really hard. And two, all it did is make the other G-SIB banks even bigger and more systemically important. And so I do think there's a strong desire to get that off, and I think it's, at this point, more a legal procedural matter than a need for really more reforms at Wells Fargo.
Scott Smith:
Great. Jaret, I'm going to take you probably further down a rabbit hole than you want to go, but maybe I was sleeping on the way into this, but the Sovereign Wealth Fund idea for the US was not something that was on my 2025 bingo card. What do you think is happening here?
Jaret Seiberg:
Yeah. I think that this is a great example of how Trump's thinking is not the same as the rest of the Republican Party that we traditionally think of when it comes to approaches to the economy, and it's this example, it's interest rate caps, right? Two things that you just never thought you would hear Republicans talk about. I mean, what a sovereign wealth fund is, is essentially the US is going to borrow even more money or divert resources that could be used to prevent us from borrowing money, so same thing, and we're going to have people decide where to invest that in the US economy.
Now, Democrats have called for this for years. They've often talked about it as infrastructure bank. Let's divert resources and have the federal government invest in critical industries or the like. It's just unusual to hear this from a Republican. I don't see how we even have a serious conversation about this until the debt ceiling is raised because anything that is done now is just going to accelerate when we hit the X-State and the US ends up in technical default. But once we raise the debt ceiling at some point later this year, probably summer, I think that the door's going to be open for them to start getting more creative with the US balance sheet. And again, the problem here is we may be comfortable with Republicans deciding how to do this, but once you establish the precedent, what's good for the Republicans is going to be good for the Democrats. And so whether it's President Josh Shapiro or President AOC, are you going to be comfortable with them being in charge of a sovereign wealth fund?
Scott Smith:
Yeah, fair enough. Fair enough. You mentioned the credit card interest rate cap when we did the last one of these. The Holly Sanders combined effort here was pretty fresh. It seems like at the 10% level, that didn't really go anywhere. Is it just lying below the surface to come back at a higher level, or is this gone?
Jaret Seiberg:
Oh, no. I mean, it's not gone. I mean, we're going to hear a lot more about it. The issue is going to be when Congress actually starts considering legislation, and right now, particularly the Senate. It's been nothing but confirmations, and it's probably going to stay that way for another couple of months, and so we're not going to get into real consideration of a lot of other issues until late spring or even summer. That's when I think we're going to start to hear more about interest rate caps.
I just don't think we can do anything at 10%. I think that frankly, if Republicans on Capitol Hill had their way, we wouldn't be doing anything. But given the President's support, given concerns about inflation coming back, and team Trump wanting to do something to try to help consumer balance sheets, I do think we're going to be talking a lot more about this, probably something in the 18 to 24% range rather than at the 10% range. And some key questions will be, will it be an APR? Will it be a straight interest rate? Does it apply only to new debt? Is it retroactive? A lot of details and a lot of risk there, and something that I do think the market needs to watch.
Scott Smith:
So maybe an interesting topic to end on, and a little bit of tongue in cheek here, but is the penny dead?
Jaret Seiberg:
Yeah. I mean, talk about a shot out of nowhere. I mean, you were talking about your bingo card before. If you had elimination of the penny on your bingo card, then kudos to you. It should be, right? What I just don't want to see is unilateral action by treasury to simply stop minting them because if that happens, then there's going to be an enormous rush to get pennies because absent legislation to protect merchants, merchants either are going to have to round everything down. So if your bill is $1.99, you're going to end up paying $1.95, and so there's going to be a hit to every merchant. Or if they do what they do in Canada where 91 and 92 get rolled down, 93 and 94, we get rolled up, then you're going to have class action litigation, and it's going to be all about how these people are getting scammed. It's a super simple fix. It just requires Capitol Hill to act, and betting on Capitol Hill is always dangerous.
Scott Smith:
Great. Jaret, thanks very much. I hope in the ensuing timeframe, you're not doing two to three notes a day forever, and we look forward to seeing you again too.
Jaret Seiberg:
Yeah, I had a lot more hair when we started January than I do as we're moving through February. It's been a marathon definitely.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.
