Is Trump a systemic risk?
This should be a quiet end of the year for banks.
The system is arguably safer than it’s ever been. Consumer lending is up, capital and liquidity are high, and while there are a few worrying signs on the horizon, none appear to be an imminent threat.
Or at least that was true until this weekend.
In the past few days, the Trump administration has made a series of unforced errors that are threatening to create a systemic problem where one did not exist before.
The most recent was Treasury Secretary Steven Mnuchin’s bizarre press release on Sunday saying that he’d talked to the CEOS of JPMorgan Chase, Citigroup, Bank of America and three other large institutions and determined there was no credit crunch.
“The CEOs confirmed that they have ample liquidity available for lending to consumer, business markets, and all other market operations,” Treasury said in a press release on Sunday. “He also confirmed that they have not experienced any clearance or margin issues and that the markets continue to function properly.”
The problem was that nobody thought the banking system was in danger. It raises the question of whether Mnuchin knows something the rest of us don’t.
For the record, there’s no reason to think that’s the case. It appears probable that President Trump —anxious about the stock market declines of the past week — wanted Mnuchin to give a statement of support in the hopes of quelling a nervous market. But if that’s what happened, the move is backfiring. In the first 25 minutes of trading Monday, the Nasdaq and the S&P 500 were already down by 1.7% and the Dow was off 2%. Bank stocks were getting pummeled, with Citigroup shares down 3.4% and Bank of America’s shares off 2.7%.
“This is the type of announcement that raises the question of whether Treasury sees problems that the rest of the market is missing,” wrote Jaret Seiberg, an analyst with Guggenheim Associates, in a note to clients on Monday. “Not only did he consult with the biggest banks, but he is talking to all of the financial regulators on Christmas Eve. We do not see this type of announcement as constructive and worry that it can trigger the vary panic that Treasury wants to avoid.”
The reaction from many in the industry who survived the actual crisis of 2008 was stunned disbelief. It’s relatively easy to start a financial panic, and they quickly feed on themselves. Panic is far harder to stop.
Making it worse is ongoing questions about whether Trump may still try to fire Federal Reserve Board Chairman Jerome Powell.
Trump has been privately fuming about Powell in recent days, according to multiple media reports, blaming the Fed chair for the stock market decline. He’s asked aides whether he has the power to fire him.
Mnuchin tried to address this, too, over the weekend, tweeting that he’d talked to the president about it.
“I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so,” Mnuchin said, claiming to be speaking for Trump. (Trump himself never said anything publicly about it.)
If true, that would help reassure nervous investors. But the problem again is that few are reassured by Mnuchin’s word. Trump has a way of abruptly changing course despite previous statements. (He earlier said, for example, that he would take responsibility for a shutdown over a border wall — and then shortly thereafter blamed Democrats for the standoff.)
And from all accounts, Trump is fixated on Powell in the same way he was about other perceived enemies in his own administration, including former Attorney General Jeff Sessions. Trump’s tweets certainly suggest this is the case.
That raises the question of whether Trump may eventually act regardless of his aides’ wishes, particularly if doing so disrupts other media narratives about the president’s abrupt decision to pull troops out of Syria, the partial government shutdown or ongoing questions about the investigation by Special Counsel Bob Mueller. Firing Powell would be incredibly destabilizing, almost certainly precipitating a crisis, as many aides have privately told Trump.
Just days ago, the administration’s top regulators concluded in the Financial Stability Oversight Council’s annual report that “risks to U.S. financial stability remain moderate.”
That may be the case for now, but if the White House continues down its current path, the risk could suddenly become much greater.
Bankshot is American Banker's column to provide real-time analysis and insight.