Mulvaney to launch hedge fund; how will banks make money?

Wall Street Journal

Under review

RER Solutions, a small consulting firm based in Herndon, Va., has “earned nearly $800 million in fees” from the Small Business Administration’s Economic Injury Disaster Loan program “to process loans and grants for small businesses affected by the coronavirus pandemic.” But “the bulk of that loan-processing work was then subcontracted to Rocket Loans, a unit of lending giant Rocket Cos., which also owns Quicken Loans, according to both Rocket and federal officials, though its name doesn’t appear in any of the publicly available documents on the federal contracts awarding the work to RER.”

“The work being done by both companies has attracted congressional scrutiny. The House Select Subcommittee on the Coronavirus Crisis, along with the House small business panel, have been reviewing the RER contract.”

Too much money, not enough profit

“The normally unexciting quarterly industry report from the Federal Deposit Insurance Corp. released last week showed in stark detail how the pandemic is ensnaring banks big and small. Profits tumbled as the banks put aside billions for loan losses. Margins hit an all-time low. Fee income hit a record high. Customers flooded banks with more deposits than they had ever seen, so much so that the nation’s safety net for bank failures fell below a legal limit.”

“The turmoil has made it hard to see how banks will grow profits, one reason shares have failed to rally along with the market.”

Financial Times

Space savers

“Several of the U.K.’s biggest banks are converting underused parts of their high street branches into office space as an alternative to bringing staff back to larger buildings and high-rise headquarters during the pandemic. Virgin Money and Metro Bank have already drawn up plans to add new facilities for flexible working in branches. Lloyds Banking Group, which has the U.K.’s largest branch network, will start testing a similar policy from October.”

“The moves are part of efforts by banks to adapt to the long-term impact of Covid-19, as it becomes clear that large central offices are unlikely to be able to accommodate the same numbers as they did pre-pandemic for some time. Trade unions are encouraging other banks to follow suit in the hope that making better use of existing space will reduce pressure to close branches.”

Big stakes

“As a climate crisis looms, the most important action today’s regulators can take is to require financial institutions to measure and disclose the carbon emissions of their financial portfolios,” an FT op-ed says. “The scope, size, likelihood and duration of climate change creates unprecedented systemic risk to the financial system. Here’s what’s at stake: loan losses, devalued assets and the inability to recover financially. When businesses are interrupted, or fail, due to wildfires, droughts, severe storms and flooding, the bank bears the brunt of unpaid loans. We’re facing huge economic upheaval. But there is also opportunity.”

The ultimate test

“While banks have made commendable efforts to hire and retain more women, the number of senior black executives on Wall Street has remained flat at under 3% for the past decade,” another op-ed says. “If banks are serious about supporting black employees, they should empower their diversity officers to speak up; remove bosses who are resistant to change; and tie their remuneration to hiring and retention targets — the ultimate test of accountability for a banker.”

New York Times

Transformer

The $2.2 trillion coronavirus government rescue package “was a crucial victory” for President Trump. “It also was a much-needed win for the program’s chief architect, Treasury Secretary Steven Mnuchin. When the pandemic hit, the task of saving the economy was an opportunity for Mr. Mnuchin to transform himself from an unremarkable Treasury secretary into a national hero.”

Elsewhere

Hedging his bets

Mick Mulvaney, the former acting head of both the Consumer Financial Protection Bureau and the Office of Management and Budget and the former White House chief of staff, “is launching a hedge fund named Exegis Capital that aims to bet on financial services stocks,” The Hill website reports. “Mulvaney noted that holding these positions will help him in his new endeavor.”

“How the CFPB works has huge impact on lenders if you can understand things in advance, and understand how the system works,” Mulvaney said in a podcast interview with S&P Global Market Intelligence released Friday. “Politics is going to be a very turbulent thing for the near future, and I think it creates opportunities for those who understand how Washington works to provide an advantage over everybody else.” He said “the project will kick off on Jan. 1, regardless of who wins the presidential election.”

Quotable

“The banks have been flooded by cash and it’s hard to know what to do with it. That narrative is not an attractive investment story.” — Brian Foran, an analyst at Autonomous Research, commenting on the challenges banks face as a result of the coronavirus pandemic.