Washington wakes up to real estate risk

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Feb 09, 2024 View in browser   By Zachary Warmbrodt and Eleanor Mueller Presented by Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. QUICK FIX Policymakers are bracing for a fresh wave of post-pandemic economic pain. The troubles at New York Community Bancorp. are focusing Washington’s attention on commercial real estate risks that have been looming for years, as businesses vacate office space, landlords lose rental income and banks take a hit from bad loans. Higher interest rates make it worse. While NYCB appears to be stable, Treasury Secretary Janet Yellen and lawmakers who spoke with MM this week are signaling the potential for broader fallout. The Financial Stability Oversight Council, a panel of top regulators led by Yellen, recently flagged commercial real estate in its annual report as a top financial risk. The Congressional Research Service also released a pair of reports late last year on bank exposures and potential macroeconomic stress. Banks hold an estimated $3 trillion in CRE loans, accounting for about half of the total market. "I hope and believe it will not end up being a systemic risk to the banking system,” Yellen told the Senate Banking Committee Thursday. “Exposure of the largest banks is quite low. But there may be smaller banks that are stressed by these developments." Lawmakers who have been tracking the issue frame it as a kind of slow-motion catastrophe – an inevitable economic problem building for years on post-Covid supply and demand dynamics. “It’s not a state secret that commercial real estate, particularly office, is a ticking time bomb within the banking system and could trigger a second wave of bank failures,” Rep. Ritchie Torres, a New York Democrat, told MM. “We should do everything we can to prevent it.” He raised the issue with Yellen on Tuesday. “There’s a lot of froth in the water,” said Sen. Thom Tillis, a North Carolina Republican on the Banking Committee. “My guess is we’re going to see a couple of failures or resets at banks that are heavily biased in their commercial real estate portfolio.” Tillis warned against conflating the current situation with last March’s banking failures. He said there’s “a broader base of risk out there.” “You just have to go out and take a look at the banking industry,” he said. “The ones that are biased in commercial real estate, they're all going to go through some challenges. Some of them have already hedged against it, but not all of them." The question now, he said, is “how can it be eased.” (He’s not sure what Congress can do.) Happy Friday — What do you think? Send thoughts and tips to zwarmbrodt@politico.com. A message from Chime: Tired of overdraft fees? Learn how Chime is different. Chime is expanding banking with no overdraft fees to everyday people. Cost is a barrier to many, which is why Chime never charges overdraft or monthly fees — and there are no minimum balance requirements for our checking and savings accounts. We reach customers traditional banks don't, can't or won't and are helping everyone unlock financial progress. Learn more.   Driving the day Revised CPI is out at 8:30 a.m. New FDIC drama — The Wall Street Journal reports that two FDIC departments tasked with investigating harassment and discrimination at the agency have long faced allegations of misconduct. At least 12 managers in the FDIC’s HR department and its Office of Minority and Women Inclusion have drawn complaints from their employees since 2018. Two employees received settlements after alleging they were sexually harassed on the job and that their managers didn’t address their concerns. The dollar is so back — The FT reports that hedge funds have scrapped their bets against the dollar after the U.S. economy’s unexpected resilience sparked a rebound. “The consensus view of dollar weakness coming into the year was wrong and people have flipped their positions,” Citigroup head of FX sales Sam Hewson said. Trump SPAC update — Per Reuters, the blank-check acquisition company that’s trying to take former President Donald Trump's social media platform public is nearing a $50 million financing deal. It will help fund Digital World Acquisition Corp. while it works to complete its merger with Trump Media & Technology Group, which owns Truth Social.   A message from Chime:   China House China hawks target VC’s — Per Gavin Bade, a new report from the House Select Committee on China says that five U.S. venture capital firms have helped fund Chinese AI and technology companies now being used by the Communist Party for malicious purposes. Sequoia Capital, according to the report, told the committee that its entry into China coincided with U.S. government policies that encouraged businesses to invest in the region.   CONGRESS OVERDRIVE: Since day one, POLITICO has been laser-focused on Capitol Hill, serving up the juiciest Congress coverage. Now, we’re upping our game to ensure you’re up to speed and in the know on every tasty morsel and newsy nugget from inside the Capitol Dome, around the clock. Wake up, read Playbook AM, get up to speed at midday with our Playbook PM halftime report, and fuel your nightly conversations with Inside Congress in the evening. Plus, never miss a beat with buzzy, real-time updates throughout the day via our Inside Congress Live feature. Learn more and subscribe here.     Regulatory Corner New hedge fund rules — Regulations finalized by the SEC and CFTC will require hedge funds to start divulging more details about their portfolios, turnover and risk performance, Declan Harty reports. The rules are intended to help FSOC monitor the industry. Gensler responds to Congress on SEC hack — Per Jasper Goodman, SEC Chair Gary Gensler told House members that law enforcement is continuing to investigate how a hacker gained access to the agency’s X account to post about bitcoin ETFs. Gensler wrote in a letter this week that the account was breached in “an apparent ‘SIM swap’ attack.” Whistleblowers win — The Supreme Court bolstered the ability of whistleblowers to win retaliation lawsuits against their employers under Sarbanes-Oxley, Declan reports. Whistleblower advocates had been worried that the case jeopardized protections for corporate tipsters. A message from Chime: Chime is expanding banking with no overdraft fees to everyday people. Cost is a barrier to many, which is why Chime never charges overdraft or monthly fees — and there are no minimum balance requirements for our checking and savings accounts. We reach customers traditional banks don't, can't or won't and are helping everyone unlock financial progress. Learn more.   Crypto Coming soon: House digs into crypto crime — House Financial Services is planning a Feb. 15 hearing on “approaches to combat illicit activity” in crypto. It’s worth keeping tabs as House and Senate lawmakers prep plans for addressing money laundering in digital assets. Eleanor has reported that House Republicans are including crypto AML safeguards in a revised version of their SEC-CFTC digital asset bill. JPMorgan rains on crypto’s parade (again) — Per CoinDesk, a survey by the bank found that 78 percent of institutional traders aren’t planning to trade crypto (an uptick from last year) and a shrinking, small group see the underlying technology as having a big impact on trading in the near future.   YOUR GUIDE TO EMPIRE STATE POLITICS: From the newsroom that doesn’t sleep, POLITICO's New York Playbook is the ultimate guide for power players navigating the intricate landscape of Empire State politics. Stay ahead of the curve with the latest and most important stories from Albany, New York City and around the state, with in-depth, original reporting to stay ahead of policy trends and political developments. Subscribe now to keep up with the daily hustle and bustle of NY politics.        Follow us on Twitter Mark McQuillan @mcqdc Zachary Warmbrodt @Zachary Victoria Guida @vtg2 Declan Harty @ @declanharty Eleanor Mueller @eleanor_mueller Katy O'Donnell @katyodonnell_ Sam Sutton @samjsutton   Follow us

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