JP Morgan Calls Out Larry Summers

Looking at a new Trump administration, and amazed at the “remarkable and unique” 72 hours that surrounded perhaps one of the most contentious inaugurations in history, JP Morgan Asset Management’s Michael Cembalest is pragmatic. Yes, there are glaring issues with the Trump administration. But his outlook on regulation alone could tip the scales, he says, as the Trump administration regulatory approach might be less hands on – but also less willing to bailout systemically failing institutions.

Cembalest calls out Summers for criticizing CEOs for cooperating with Trump even before he was in office

There are a number of market analysts who are having difficulty making sense of the Trump Rally. From Cembalest’s perspective, markets may be over-estimating the magnitude of some Trump initiatives, or under-estimating the time it will take to enact them (corporate and personal tax reform, infrastructure spending); under-estimating the risks of trade disputes and tariffs; but also underestimating the benefits of deregulation, the latter being the topic of this note,” Cembalest noted.

The overreaction he says is typified by former Treasury Secretary Larry Summers.

The JP Morgan report points to an opinion piece written by Summers chiding CEOs who have “embraced and enabled our new President and his policies.” Trump’s act of treason that should be objected to at every turn, Summers reasons, is “stepping away from underwriting an open global system.”

“I was not convinced,” Cembalest says of Summer’s appeal to shun the incoming president “even before the new administration took office for a single day.” He says the government is a system of checks and balances that will work and CEO’s are in fact accountable. But what President Trump might get very right is regulation.

The cost of regulations and the bargain on “rent-seeking”

Regulations have had a significant impact on business, costing nearly $100 million or more, the Government Accountability Office Estimates. The cost, efficiency and implications of regulations is not being properly studied, the report said, noting the leader of the regulatory pack is the US Securities and Exchange Commission, which is also at the top of the pack in regulatory

Not all regulations are bad, the big bank report opines. For instance, “many provisions were needed and made important contributions to systemic stability.” This list includes higher capital levels on banks, clearing certain over-the-counter derivative transactions, and improved living will “resolvability” of banks in case of failure, Cembalest notes.

Wall Street players should take responsibility for their actions

The deregulatory environment “is not a one-way street.” The “rent seeking” where private business is expecting bailouts must end. “In other words, the private sector has to succeed or fail on its own merits, and cannot rely on the government when things go wrong,” with members of the Trump transition team telling Cembalest to look at Puerto Rico for answers. It is the bondholders who invested in negative situations that should be held accountable.

When I asked how/where the gov’t could demonstrate a commitment to this approach, the Commonwealth of Puerto Rico came up. Given the perilous state of CPR finances in 2014 when it issued a high coupon bond, and given the subsequent lobbying and rent-seeking that followed when the CPR descended further into recession, I’m sympathetic to the principle that bondholders should bear the consequences of their decisions.

It is this approach – reducing regulation but also make sure players follow the law and don’t expect bailouts — is the regulatory goal that is being targeted.

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Source: valuewalk