Playing the Blame Game
What was Michael Hsu Supposed to Do?
A few months ago I wrote about Senator Elizabeth Warren’s habit of reserving special criticism for Acting Comptroller of the Currency Michael Hsu, for instance calling him out by name at a speech in February by saying “OCC Acting Comptroller Hsu needs to learn to say no to anticompetitive bank mergers.”
Writing about the same speech, Capitol Account added some further context:
While Warren did castigate the Fed as well, the only regulator she called out by name was Hsu. And some took this as an unusually personal criticism. The OCC chief isn’t a steadfast de-regulator left over from the Trump administration. Rather, he’s a watchdog handpicked for the job by Janet Yellen, the Biden administration’s Treasury Secretary.
We called around to ask progressives whether there’s more to Warren’s frustration with Hsu than not liking his stance on bank marriages. In sum, they said she’s broadly not a fan and has advised the White House not to nominate him as the OCC’s permanent leader (which, we’re told, he wants).
Warren’s office didn’t respond to a request for comment. An OCC spokesperson declined to comment.
There’s speculation that some of Warren’s issues with Hsu date back to December 2021 when he didn’t take a public role supporting CFPB Director Rohit Chopra and then-FDIC member Martin Gruenberg in a successful fight to put bank merger policy on the FDIC’s agenda. (The heads of the OCC and CFPB are FDIC directors, so they get to vote on its efforts.)
Last weekend First Republic Bank, a state nonmember bank supervised by the FDIC, failed and was sold off in an auction run by the FDIC. JPMorgan Chase Bank emerged as the winning bidder after the FDIC determined that JPMCB’s bid was consistent with the least-cost test imposed by the Federal Deposit Insurance Act. The Office of the Comptroller of the Currency, as JPMCB’s primary federal regulator, approved the acquisition under the Bank Merger Act.
In a Financial Times article yesterday, Senator Warren says Acting Comptroller has questions to answer about the above series of events.
“We need a full explanation from OCC Acting Director [Michael] Hsu . . . on why he approved this giant bank merger and ignored other bids that posed less danger to the economy,” she said.
Robert Kuttner at The American Prospect (which also in the past has singled out Hsu for criticism) had a similar take on things, calling the JPMCB-First Republic transaction “the comptroller of the currency’s sweetheart deal” and describing the choice to go with JPMCB’s bid as a choice made by “the comptroller and the FDIC.”
Just as a factual matter I am not sure this is right. Senator Warren’s quote, and Kuttner’s description of this as an OCC-brokered deal, makes it sound as if the OCC itself was responsible for evaluating bids. That is not the OCC’s role; this was the remit of the FDIC. True, Acting Comptroller Hsu is an FDIC board member, but his is just one vote out of five.1
But more than the factual objection, I am struggling to envision how Senator Warren would have preferred the process to work out as a practical matter.
Start with the less charitable reading of Senator Warren’s comments. They could be read to imply that she would have preferred the FDIC determine (at 1 am, per the FT article) that JPM is the winning bidder as the FDIC felt it was forced to do under the statute, but then a few hours later have the Acting Comptroller say, sorry, no, deny the merger under the Bank Merger Act and, what, reopen the auction process? Award First Republic to the second-best bidder? Let First Republic open on Monday and see what happens?
But that reading is probably unfair. The steelman version of Senator Warren’s argument is probably something more like a scenario where Acting Comptroller Hsu had made clear well before the bids came in that the OCC would expect to have trouble approving any application from JPMCB (or another GSIB). But does the OCC actually have the authority to say something like that ex ante? (There were claims the FDIC did something similar in the initial SVB auction to deter bids from the very largest banks, which the agency denies.) Even if the OCC does have that power, what would that have done to the auction process?
One answer is that things would have been fine, and other, non-GSIB national banks interested in bidding would not have been deterred, such that the FDIC could have simply sold First Republic to PNC, Citizens or Fifth Third, the other banks that reportedly bid. But Senator Warren’s conclusion that these other bids would have “posed less danger to the economy” seems rather convenient. An acquisition by one of these firms, though certainly resulting in a much smaller firm than JPM, would closely resemble the recent large regional bank M&A deals (e.g., US Bank-MUFG Union Bank; BMO-Bank of the West; PNC-BBVA USA), all of which Senator Warren vociferously opposed while saying that the bank merger review process “poses a serious risk to the entire financial system.”
Throw in the fact that PNC’s bid reportedly had backing from Apollo and BlackRock (the former of which Senator Warren has described as “predatory” and the latter of which Senator Warren believes should be regulated as a SIFI), and you get the sense that regardless of what Acting Comptroller Hsu did, he would have been the target of criticism from the Senator.
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In terms of the substance of the OCC’s approval of the transaction, the approval letter is generally standard form,2 but there is one paragraph I thought was maybe interesting.
In its financial stability analysis, the OCC first says:
The Transaction does not increase risk to the stability of the United States banking or financial system as it facilitates the orderly resolution of an insured depository institution in default.
On its own, this is probably a bit too categorical — surely it is not the case that any orderly resolution of an IDI in default is neutral to financial stability. But I think the fairer way to read this is as saying that the financial stability factor is consistent with approval in light of the OCC’s observations that follow.
The Transaction would not materially complicate the Acquirer’s organizational structure or add complex interrelationships or any unique characteristics that would complicate resolution of the firm, or otherwise pose a greater significant risk to the financial system, in the event of financial distress. The Transaction will not result in a reduction in the availability of substitute providers. Further, the Acquirer and its parent companies are subject to U.S. resolution planning requirements, and the Acquirer is subject to U.S. recovery planning requirements.
That all seems true so far as it goes — it is tough to argue that post-transaction $3.9 trillion asset JPMorgan is meaningfully more complicated to resolve or interconnected than pre-transaction $3.7 trillion asset JPMorgan.3 Still, I think you could ask whether this mode of analysis focusing on incremental change, which the OCC is not alone in adopting,4 is the best way of approaching the financial stability factor.
Finally, the OCC closed its financial stability analysis paragraph with this observation.
As a result of the Transaction, Acquirer is required to update its capital, liquidity, and recovery and resolution planning requirements accordingly.
I was not sure how best to read this. One way to understand it as saying that the OCC is requiring JPMCB to make specific updates to, for example, its recovery plan or its resolution plan (similar to a condition the OCC has imposed in connection with at least one other recent merger). The other way to read it as making the more general statement that First Republic's assets and liabilities now will be subject to the heightened Category I standards to which JPM is subject, which all else is equal is good for financial stability.5 Again not an argument that seems wrong, exactly, but still one where you wonder how far it should logically be understood to extend.
All in all, I can understand where progressives are coming from with their unease over the OCC’s approval of this transaction, and the analysis of financial stability in bank mergers more generally. I just question whether early in the morning hours of May 1 was the best time to revisit this approach, and I can completely understand why the OCC concluded it was not.
Who Blocked TD-First Horizon?
In sort of a bizarro world version of the claim that Acting Comptroller Hsu did not do enough to stop the FDIC from selling First Republic to JPMCB, the Wall Street Journal editorial page on Friday offered a theory about why The Toronto-Dominion Bank was not able to secure regulatory approval for its acquisition of First Horizon.
Last March, Federal Deposit Insurance Corp. Chair Martin Gruenberg and his left-hand man Rohit Chopra, who heads the Consumer Financial Protection Bureau, solicited public comment on whether mergers that result in banks holding more than $100 billion in assets should be summarily rejected on grounds they’d present a systemic risk.
The FDIC hasn’t published new merger rules, but it appears to have pocket vetoed the TD-First Horizon deal.
This theory has some shortcomings.
TD Bank is a national bank, so the bank merger with First Horizon would have needed OCC approval. And then at the holding company level there was an application under the Bank Holding Company Act, which required the approval of the Federal Reserve Board. In other words, of the three U.S. federal banking regulators, the FDIC is the one agency whose approval was not required for TD-First Horizon.6
Also, even if they believe that the FDIC does have some sort of informal pocket veto authority, what is the WSJ editorial page’s theory for why the agency did not exercise this authority in relation to other large regional bank mergers over the past two years, which look quite similar to TD-First Horizon?
So if not the FDIC, what explains the lack of regulatory approval? The parties have explicitly stated it had nothing to do with First Horizon, but beyond that I am as stumped as everyone else.
One thing I have not seen discussed very much, though, is the fact that TD in early March 2023 closed its acquisition of Cowen Inc. Based on the public record TD did not file any application with the Federal Reserve Board in relation to this transaction, and so presumably relied on its authority under Section 4(k) of the Bank Holding Company Act to make nonbanking acquisitions without prior Board approval.7
There are various edge case technicalities you could offer as counterarguments, but in general the fact that as recently as early March TD was able to rely on Section 4(k) authority suggests that whatever the purported problem is at TD, it had not (yet?) resulted in unsatisfactory supervisory ratings for either TD or its depository institution subsidiaries.
Other hypotheses I have seen:
In late March Capitol Forum reported that the U.S. banking regulators were waiting to act on the deal until conclusion of an unspecified DOJ investigation.
In theory TD’s home country regulator in Canada could have had an objection to the deal, but no one seems to be taking that possibility too seriously.
There is also just the fact that the merger agreement signed in February 2022 contemplated an all-cash transaction in which TD was to pay $13.4 billion for a company that is now worth . . . less than that. So you can understand why TD could have been less enthused about this deal than it was early last year, but there is nothing public to suggest TD conducted itself in anything but good faith in trying to secure regulatory approvals and close the deal.
TD has an earnings call scheduled for later this month on which it is possible we will learn more about what happened,8 but I would not count on that, as the termination and release the parties signed limits what each party can say about the deal.
Thanks for reading! Thoughts, challenges, criticisms are always welcome at bankregblog@gmail.com.
We do not know how the FDIC board voted on anything in relation to the First Republic receivership or the sale to JPMCB as the FDIC has not released that information. Update 8:00 am Pacific Time: Someone one who would know better than I would emailed to say that the reason there has been nothing from the FDIC as to its board vote on matter was that the least cost determination was made by staff acting under delegated authority.
In a different post earlier this week Kuttner wrote “I’m told that at least one [regulator] raised serious objections” to the deal. Based on nothing other than his public statements, my guess would be the unnamed regulator is CFPB Director Chopra, but again this is just a guess.
My math here is dumb and inexact. I am just taking the $3.74 trillion in total assets JPM reported in its latest 10-Q and adding the $185.8 billion in assets it acquired in the First Republic deal, as calculated in JPM’s slide deck here.
See for example the Federal Reserve Board’s orders approving Morgan Stanley’s acquisition of E*TRADE (“As a result of the proposed transaction, Morgan Stanley’s GSIB method 1 score would increase by only 2 percent, from 259 to 264 basis points.”) or PNC’s acquisition of BBVA USA (“Finally, [PNC’s pro forma post-closing GSIB] score is close to PNC’s current method 1 score, indicating that the transaction would not increase materially PNC’s systemic importance.”).
This would be similar to an observation the Federal Reserve Board made in approving Morgan Stanley’s acquisition of E*TRADE.
Following the acquisition, all of E*TRADE’s activities would be subject to the strictest standards. [FN]
[FN] For example, E*TRADE is currently subject to a common equity tier 1 (“CET1”) capital requirement of 7.0 percent. Following the transaction, the exact same assets held by Morgan Stanley would be subject to a CET1 capital requirement of 13.2 percent.
Incidentally, First Horizon Bank is a state member bank, so it is not even the case that the FDIC had direct supervisory input to give with respect to the target.
The transaction was also not expected to be subject to Board approval under Section 163(b) of the Dodd-Frank Act, and the parties actually included a closing condition to that effect. As summarized in the merger proxy:
The obligation of the TD parties to effect the merger is also subject to the satisfaction, or waiver by TD parties, at or prior to the effective time, of the following conditions: […]
the total consolidated assets of Cowen shall be less than the $10 billion threshold set forth in Section 163(b) of the Dodd Frank Act and Cowen shall be “substantially engaged” in activities that are financial in nature, incidental to a financial activity, or otherwise permissible for the financial holding company under section 4(c) of the BHC Act (12 U.S.C. 1843(c)), all within the meaning of 12 C.F.R. 225.85(a)(3), as of the closing date.
First Horizon had an update call on Thursday on which it reiterated that the failure to timely obtain regulatory approvals had nothing to do with First Horizon, but otherwise referred all questions to TD.