Outbound investments in an uncertain world

From: POLITICO's Morning Money - Thursday Jun 01,2023 12:02 pm

Jun 01, 2023

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Breaking: On Wednesday night, the House voted 314-117 to pass the Fiscal Responsibility Act, clearing a major hurdle in advance of Treasury Secretary Janet Yellen’s June 5 deadline to raise the debt limit. While the bill is expected to pass the Senate, lawmakers like Sens. Mike Lee (R-Utah) and Rand Paul (R-Ky.) could throw up procedural hurdles to drag the fight into the weekend.

Back to our regularly scheduled programming.

Wall Street spent decades building the necessary relationships in Beijing to power multibillion dollar investment funds and countless cross-border partnerships. Keeping those relationships could get a lot more difficult — particularly for U.S. firms focused on the technology sector.

Assistant Treasury Secretary Paul Rosen told the Senate Banking Committee on Wednesday that President Joe Biden’s long-awaited executive order on outbound investments will embolden regulators to review and deny U.S. financing for Chinese advanced microchips, artificial intelligence and quantum computing, our Gavin Bade reports. (If you haven’t already, check out Gavin’s killer report on Biden’s efforts to craft a new economic order).

“What we are currently working toward is a program that restricts the flow of U.S. investment dollars that comes with know-how and expertise into certain and specific sectors and subsectors of concern,” Rosen said. That includes projects that could benefit “their military, intelligence capabilities and mass surveillance.”

He later said the administration would take a “tailored, narrow, administrable and understandable approach” to ensure the businesses affected would have a clear sense of how they will have to comply.

That could be tricky. Some of these technologies will no doubt have both benign and harmful uses. Sussing out if financiers have invested in good or bad actors — particularly if those actors are subject to some Chinese government oversight — could be like untangling a plateful of noodles. And that only gets tougher as more businesses look to invest in technologies that could be subject to outbound review.

American efforts to throw up barriers to certain corners of the Chinese market has led many to fear that their deeply intertwined economies could eventually decouple. JPMorgan CEO Jamie Dimon told Bloomberg in Shanghai that those fears are slightly overblown and that his bank, the largest U.S. lender, would stay in China even though relations between the two countries are “far more complex now.”

“Over time, there’ll be less trade,” he said. “It’ll take years for this thing to take place, but it won’t be a decoupling and the world will go on.”

In the meantime, U.S. and global businesses are scrambling to keep up with an increasingly complex geopolitical order that’s created what Jared Cohen of Goldman Sachs dubbed “geopolitical swing states” — increasingly powerful nations that will sway between the U.S., China and Russia without locking into any alignment.

That could force “a reorientation of where capital flows,” he said in an interview. “I think most companies are going to have to sort of reactively navigate this from a commercial perspective.”

He added: “They're thinking about it not dissimilarly to how certain countries are thinking about it. Which is: what advantages and leverage do I have in this particular moment to ride the geopolitical wave?”

IT’S THURSDAY — All eyes now turn to the Senate. Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

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Driving the day

ADP’s May employment report is out at 8:15 a.m. … The ISM manufacturing index will be released at 10 a.m. … Philadelphia Fed President Patrick Harker will speak on a National Association for Business Economics webinar at 1 p.m. …

Big scoop from Zach — “Sen. Elizabeth Warren’s push to hit the executives of failed banks with sharper penalties is getting a big boost from an unexpected conservative partner — Sen. J.D. Vance. Warren on Thursday unveiled Congress’s most politically viable response yet to the economy-shaking collapse of Silicon Valley Bank, with a bill backed by 11 other senators that would require the government to claw back executive compensation at large failed banks in a bid to deter excessive risk-taking.

‘This is not just for show,’ Warren said in an interview. ‘We actually want to make change, and we've got a bill where we can get this done.’”

— Meanwhile, Victoria Guida reports that FDIC Chair Martin Gruenberg on Wednesday said financial regulators are working on a new proposal to place more restrictions on incentive-based compensation for executives.

JOLTS jolt — There were an eye-popping 10.1 million job openings in the U.S. at the end of April, according to the Bureau of Labor Statistics, reversing three months of declines that suggested the labor market was finally softening. Federal Reserve Chair Jerome Powell has pointed to the piping hot labor market as a sign that the battle with inflation is far from over. The May jobs report is out Friday and the median expectation is for unemployment to tick slightly upward to 3.5 percent as wage and job growth cools.

— The WSJ’s Nick Timiraos: “Federal Reserve officials signaled they are increasingly likely to hold interest rates steady at their June meeting before preparing to raise them again later this summer.”

Rest in peace — Former SEC Chair Harvey Pitt, 78, died on May 30, our Declan Harty reports: “Pitt led the SEC from 2001 to 2003, joining the agency just weeks before the Sept. 11 attacks that shut down the U.S. stock market for four trading days. He was widely heralded for helping shepherd Wall Street through the fallout.”

Jobs Report

First in MM — Meredith Whitney is rebooting her eponymous advisory firm 10 years after publishing her last piece of analysis on the financial sector. Whitney, whose work as an Oppenheimer & Co analyst spotlighted major problems at Citigroup and within subprime mortgage bond markets — eventually providing the basis for the opening chapter of Michael Lewis’s book “The Big Short” — worked as an asset manager in recent years before signing on as a chief financial officer at Zume and Kindbody.

In a note to former clients, Whitney said she was “overflowing with themes I want to write about and publish,” including how businesses, banks and housing markets will adapt to higher borrowing costs after a decade of “free money.”

One of her first research targets? How regulators manage turmoil in the regional banking sector. “To consolidate a bunch of California banks isn’t really a viable growth policy,” Whitney told MM. “Who's going to want to invest in, basically, two car wrecks in one garage?”

Joe Cisewski is leaving the CFTC to return to the private sector after a nearly year-long stint as Commissioner Christy Goldsmith Romero’s chief of staff. Goldsmith Romero said it was a “joy” to work with Cisewski, adding that she regularly relied on his “fintech expertise and constant eye on customer protection and financial stability.” Cisewski’s last day is Friday. — Declan Harty

Regulatory Corner

TBD — Victoria reports that banks logged hefty profits in the first quarter of the year, according to data from the FDIC. But FDIC Chair Marty Gruenberg said to take those figures with a grain of salt: “The more lasting effects of the industry’s response to that stress may not become fully apparent until second-quarter results,” he said.

— Our Hannah Brenton: “The European Central Bank today warned the eurozone’s financial stability ‘remains fragile’ after bank failures in the U.S. demonstrated how higher interest rates can cause unexpected stress.”

— Our Katy O’Donnell: “FHA proposes new relief option for struggling homeowners”

In the markets

A bizarre day for Dimon headlines — Bloomberg’s Adam Haigh and Stephen Engle: “Jamie Dimon said pursuing a political career has crossed his mind amid speculation about what might come next for the chief executive officer of JPMorgan Chase & Co.”

— Bloomberg’s Brandon Sapienza: “Bill Ackman Says Jamie Dimon Should Run for President in 2024”

— The WSJ’s Khadeeja Safdar and David Benoit: “Jamie Dimon Says He Never Discussed Epstein’s Accounts; Staley Says He Did”

— Three weeks after Sen. Tina Smith sent a letter to the JPMorgan chief demanding information about the bank’s relationship with the disgraced financier, the Minnesota Democrat’s office told your host that they’ve been in communication with the bank and “expect to receive a response addressing Senator Smith’s questions soon.”

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