Senate Bill Nearly Killed By Deficit Hawks: Will Include $350 Billion In New Tax Hikes

Following a report from the Joint Committee on Taxation, which unveiled late on Thursday afternoon that the Senate Tax bill would generate enough economic growth to lower its $1.4 trillion revenue cost by only about $458 billion over a decade - in other words it would still boost the deficit by roughly $1 trillion - in a dramatic showdown on the Senate floor, GOP leaders agreed to effectively increase taxes by $350 billion in response to a procedural ambush by deficit hawks led by Sen. Bob Corker that nearly killed the GOP tax reform bill.

According to Bloomberg, Senator David Perdue, a Georgia Republican, said that GOP Senators are "discussing a new compromise for their planned tax overhaul that would increase taxes in future years."

David Perdue

Quoted by The Hill, Senate Republican Whip John Cornyn told reporters after a round of intense discussions on the floor, “we have an alternative, frankly, tax increase we don’t want to do to try to address Sen. Corker’s concerns.”  Cornyn said the details of the proposal are being worked out.

Corker had insisted on a "trigger" proposal that would have rolled back tax relief in case economic projections fell short of expectations; the flipside is that it would have also made any recession in the near future far worse by staggering tax increases just as the economy slowed down, in the process sending the deficit soaring and accelerating the economic contraction.

And in an unexpected, 11th hour reversal, the Senate parliamentarian ruled Tuesday afternoon that the trigger would not pass procedural muster. “It doesn’t look like the trigger’s going to work according to the parliamentarian,” Cornyn said. Cornyn’s remarks came after an hourlong standoff on the Senate floor in which three Republicans - Corker, Ron Johnson and Jeff Flake - held up a procedural vote that would have sent the measure back to the Senate Finance Committee.

At least two of those members, senators Bob Corker of Tennessee and Jeff Flake of Arizona, had backed the trigger concept in recent days. Corker The deficit hawks threatened to vote for a motion to recommit the tax bill back to the Finance Committee. That move would have put the legislation in limbo for the foreseeable future and scuttled an all-night voting session on tax relief.

As The Hill adds, Republican leaders appeared extremely frustrated with Corker, Flake and Johnson during their intense discussions on Thursday night while the fate of the bill teetered in the balance.

McConnell’s face grew flushed as he huddled with Corker and Sen. Pat Toomey (R-Pa.), one of the main architects of the tax reform bill, while GOP colleagues crowded around them to listen in. Johnson said he joined Corker’s rebellion so he could win an assurance from GOP leaders about getting a vote on setting the corporate tax rate above the 20-percent level favored by President Trump.

Ultimately the hawks allowed the floor debate to continue, but it’s unclear whether or how their demands might be met. Meanwhile, Senator David Perdue said the estimated tax increase would be $350 billion over a decade. Cornyn told reporters that the size could be even larger. Senator Ron Johnson of Wisconsin said he held out as well, to ensure he can offer amendments, including one to raise the pass-through deduction to about 25%, paid for by eliminating the corporate deduction for state and local taxes.

Quoted by Bloomberg, Johnson said he doesn’t know if senators will finish the bill Thursday night. “We just saw a kink in the time plan right there so who knows what other cogs might be put in this wheel,” he said.

Republican Senator Lindsey Graham added: “I think you’re going to see a lot of these scrums, and here’s the way they’ll end: We’ll pass the bill sometime tomorrow.”

For the sake of the parabolic market, he better be right. 

This Isn't A Joke: The IRS Just Hired Equifax To Safeguard Taxpayer Data

Just hours after Equifax CEO Rick Smith wrapped up his testimony before the House Energy and Commerce committee – the first in a series of Congressional “fact-finding missions” about the hack - Politico reported that the IRS last week awarded the disgraced credit monitoring bureau with a $7.25 no-bid contract even as the company struggled to address suspicions that it mislead investors and customers by withholding information about one of the most damaging data breaches in US history.

Equifax famously waited more than a month to disclose that hackers had infiltrated its servers and absconded with the sensitive financial information of more than 140 million customers, sparking widespread outrage that only intensified after reporters discovered that several of the company’s senior executives – including its CFO – cashed out of shares and options in the weeks before the company came clean about the hack.

According to the terms of the IRS contract, Equifax would be responsible for verifying taxpayer identities and help prevent fraud under a no-bid contract issued last week.

As if the IRS"s decision to entrust the disgraced credit bureau with sensitive taxpayer data wasn"t galling enough, the agency seemingly fast-tracked the contract by classifying it as a “sole source order” – a designation that allows the agency to circumvent the bidding process by claiming a given vendor is the only one capable of executing the contract. However, the agency"s justification for this designation is baffling, considering that there are two other credit bureaus in the US that offer a nearly identical suite of services.

The notice describes the contract as a "sole source order," meaning Equifax is the only company deemed capable of providing the service. It says the order was issued to prevent a lapse in identity checks while officials resolve a dispute over a separate contract.

Lawmakers from both parties demanded an explanation from the agency, which has endured several memorable data-security lapses – including a 2015 breach that exposed the sensitive financial information of more than 100,000 taxpayers.

Reps. Suzan DelBene (D-Wash.) and Earl Blumenauer (D-Ore.) separately penned letters to IRS Commissioner John Koskinen demanding he explain the agency"s rationale for awarding the contract to Equifax and provide information on any alternatives the agency considered. "I was initially under the impression that my staff was sharing a copy of the Onion, until I realized this story was, in fact, true," Blumenauer wrote.

Senate Finance Committee Chairman Orrin Hatch criticized the agency’s decision as “irresponsible.”

"In the wake of one of the most massive data breaches in a decade, it’s irresponsible for the IRS to turn over millions in taxpayer dollars to a company that has yet to offer a succinct answer on how at least 145 million Americans had personally identifiable information exposed," Senate Finance Chairman Orrin Hatch (R-Utah) told POLITICO in a statement.

Hatch raised concerns about the IRS’s cybersecurity practices in a letter sent to the agency’s head last month. To help the agency improve its data-security safeguards, Congress recently allocated $106.4 million to bolster the agency’s identity theft protections.

Hatch questioned the agency"s security systems in a letter to Koskinen last month. Hatch said he was concerned that the IRS lacked the technology necessary "to safeguard the integrity of our tax administration system."

Ron Wyden said the Finance Committee would seek to verify whether Equifax was really the only company capable of executing the contract, as the agency insisted.

The committee"s ranking member, Sen. Ron Wyden (D-Ore.), piled on: "The Finance Committee will be looking into why Equifax was the only company to apply for and be rewarded with this. I will continue to take every measure possible to prevent taxpayer data from being compromised as this arrangement moves forward.”

In defending its decision, the IRS claimed that Equifax said that none of its data was involved in the data breach.

The IRS defended its decision, saying Equifax has told the agency that none of its data was affected by the breach. The agency also noted that Equifax already provides “similar services” to the agency under a different contract.

"Following an internal review and an on-site visit with Equifax, the IRS believes the service Equifax provided does not pose a risk to IRS data or systems," the statement reads. "At this time, we have seen no indications of tax fraud related to the Equifax breach, but we will continue to closely monitor the situation."

Given that Equifax waited more than a month to disclose the hack to the public – and has bungled seemingly every step in its response to the hack - the fact that the IRS justified its decision by, in effect, saying "they told me everything is fine" is hardly reassuring. As Yahoo demonstrated just last night, the true scope of cyber-security intrusions sometimes takes years to uncover, which is precisely why sticking with Equifax is a risky. Yahoo, of course, revealed yesterday that a 2013 data breach impact all 3 billion of the company’s user accounts – three times the one billion accounts previously reported by the company.

As lawmakers have suggested, when determining which companies should be trusted to safeguard tax payers" most sensitive financial data, the agency should"ve erred on the side of caution.

A Frustrated Bank Of America Asks "What Could Go Wrong?": Here Is Its Answer

For the past 3 months, Bank of America strategist David Woo has been warning that the market is precariously unbalanced, and as a result the smallest shift away from being "priced to perfection", or spike in volatility, could lead to a waterfall event. As we first reported back in July, Woo first warned that between the ongoing standoff in Washington, and the seemingly endless showdown with North Korea, there are two "dangerous" games of chicken afoot, both of which could culminate in a market crash. Woo even want on to lay out two "chicken" payoff matrices, one focusing on the ongoing "tax reform game"...

... the other on the "US-China game over North Korea."

So far, however, not only have these two games not culminated in any of the proposed negative scenarios, but as a result of the unstable equilibrium that has since developed, markets have successfully pushed on to all time highs.

So what"s going on here?

Well, as the increasingly frustrated Woo writes in a follow up note today, "nothing has changed in September so far. Nothing at all. Equity markets are still making new highs while rates volatility is making new lows, credit spreads remain near record lows, and investors just cannot buy enough EM assets."

Still, while not validating his bearish case, Woo admits that "financial markets continue to take cues from economic data that are painting a global synchronized recovery with little inflation pressure."

The just released August PMI data show that the longest streak of simultaneous manufacturing expansion in the US, China and EMU since 2010 is extending further (Chart 1). Growth momentum looks healthy and balanced: manufacturing new orders are in expansion territory for all of the nine largest economies in the world (Chart 2). All this with continued subdued price pressure.

And yet despite the seemingly benign macro and economic environment, and record S&P, BofA clients are increasingly on edge, very much like Goldman"s clients, who last week had just one question “Is an equity correction imminent?”  As Woo adds, "against this benign economic backdrop, the question we are getting the most from clients (institutional and corporate) is what could possibly go wrong?"

To this, BofA"s answer has been the same in the past three months:

"political risks are less benign than economic risks. We continue to believe that the greatest political risks are the showdown ahead over US tax reform in Washington and the brinksmanship between US and China over North Korea. With both coming to a head in the coming weeks, we believe that markets have not fully appreciated their significance and market implications."

As a result, expecting the two ongoing games of chicken to finally come to a violent, and risk-negative conclusion in the coming month(s), Woo retains his bearish stance, while taking stock of recent developments and provides an update of the bank"s view on how to position for these risks.

First on Tax Reform, BofA remains skeptical that a favorable outcome will manifest itself. Furthermore, even if a deal is reached, its implications, especially for the bond market would be to send rates higher, sparking a potential jump in rates vol that could trigger a similar reaction across equities. Furthermore, Woo also warns that the likelihood of a government shutdown has also risen proportionately

As Congress returns from summer recess, the momentum behind tax reform seems to be picking up. Kevin Brady, the House Ways and Means Chairman, promised last week to release the long-awaited tax reform plan on September 25, complete a budget by mid-October, and move onto drafting the tax reform legislation shortly after.

However, there are few signs that Republican leadership has resolved their differences over critical details of tax reform (such as the new rates, how tax cuts will be paid for, whether tax deductibility of interest expenses will stay, just to name a few). Orrin Hatch, the Senate Finance Committee Chairman, summarized the state of the affairs last week by pronouncing that his "Finance Committee will not be bound by any previous tax reform proposal or framework". He added that "We are not anyone"s rubber stamp." If this is the result of four months of negotiation, it does not bode well for the stated goal of the Republicans to complete tax reform before year-end.

Meanwhile, President Trump made a decision to side with the Democrats against his own party to raise the debt ceiling and keep the government funded until only December 15. Many commentators have suggested this reflects Trump"s frustration with the slow progress on tax reform. We view this as a potential turning point for tax reform.

The strategist lays out three takeaways from Trump"s unexpected move that could have potentially important market implications:

1. An increased likelihood of tax reform ultimately getting done, a scenario that would lead to a higher USD and higher TSY yields:

The failure of healthcare reform was a lesson about the risk of putting all the eggs in one basket. By siding with the Democrats, Trump shows he is open to a bipartisan approach to doing tax reform. An alliance between Trump and the Democrats makes sense at many different levels. To begin with, there is probably more common ground between Trump and the Democrats on fiscal policy (e.g., more infrastructure spending; lower income tax for the middle-class; higher income tax for the rich) than between Trump and his own party. Moreover, by reaching out to the Democrats, Trump may be trying to pressure the Republicans to move more decisively on their own tax reform proposal. The fact that Treasuries sold off and the USD rallied last week would suggest that the market agrees that a bipartisan approach could breathe new life into tax form.

2. An increased likelihood of a deficit-financed tax reform, a scenario resulting in higher rates and steeper curve, as well as a higher USD in the short-term but lower USD in the medium-term

A bipartisan approach could potentially remove currently the biggest road block to tax reform. Because the Republicans control only 52 seats in the Senate, a partisan tax reform bill will need to go through the reconciliation process that requires any tax cuts to be deficit neutral over ten years. This constraint implies either undesirable small tax cuts or unpopular offsetting new revenue. A bipartisan approach would circumvent this problem - if sixty votes can be secured in the Senate, tax cuts can be simply financed by debt, in other words, a bigger deficit.

What could be the size of the budget deficit in such a scenario? The US federal budget balance has been steadily deteriorating over the past two years (Chart 4). With one more month to go in fiscal year 2017, it looks like the deficit for the whole year could approach $650bn. Hurricane Harvey and Irma could add $100bn to the budget for fiscal year 2018. If tax reform just adds a couple hundred billion dollars of fiscal stimulus, we could see the deficit in 2018 approaching $1trn.

If this scenario materializes, it would be clearly quite negative for US Treasuries, especially given the increased supply of Treasuries that the market will have to absorb will come on top of those the market already has to take up from the unwinding of Fed balance sheet next year (close to $400bn). Relaxation of financial regulations, another major goal for the Trump administration, could place further upward pressure on rates as US banks will likely be required to hold less liquid assets like Treasuries in the new regulatory environment. What does this scenario mean for the USD? Certainly a combination of looser fiscal policy and tighter monetary policy would be supportive for the USD in the short-term. However, history tells us that a deterioration of the US fiscal position is almost never good for the USD over the medium-term (Chart 5).

An increased likelihood of a government shutdown in December, resulting in rates vol and USD vol set to go up over the next two months.

The fact that Trump pushed to raise the debt ceiling and keep the government funded only until December 15 reinforces our long-held view that the only real lever Trump has over Congress regarding tax reform is his ability to shut down the government (Beware of two games of chicken, July 17).  In our view, political brinksmanship may be the only way left to do tax reform and the process will be neither smooth nor pretty. Moreover, as time passes, we think tax reform is becoming increasingly binary. If it cannot get done by year-end, the odds go up that it will never get done as next year is an election year and political appetite for doing tax reform will shrink. The combination of a highly charged political process ahead and the binary nature of the outcome suggest interest rate vol remains too cheap (Chart 6). We like owning vol in the long-end of the curve that would be most correlated with relative safe haven demand and deficit concerns.

In summary: "We believe tax reform is turning into a very high stakes game of chicken with many things that can go wrong between now and December. The upcoming budget process could seriously undo the rapprochement between Trump and the Democrats; House Republicans and Senate Republicans may not be able to reach agreement on tax rates; the White House and House Republicans may not be able to agree on the tax treatment of interest expenses; the Tea Party may try to block any deal that would significantly boost the deficit."

* * *

Tax Reform aside, the other major game of chicken which Woo laid out back in July, and which is still ongoing, is the geopolitical risk as a result of the North Korea "game of chicken." As we showed last week, according to BofA"s latest fund manager survey, investors perceive geopolitical risks as the most likely trigger of higher market volatility for the rest of 2017 (Chart 7). And yet, in what appears to be rather frustrating to Woo, "investors do not appear to be in a hurry to act on these concerns", especially when looking at the level of the Kospi which promptly recouped all recent losses and continues to trade just shy of all time highs even as the KRW remains largely unperturbed by the recent geopolitical tensions.

Here is Woo:

Implied volatility and risk premium across markets remain near their year-low. Even those markets that are most directly linked to geopolitical risks shows few signs of panic. The South Korean stock market, which has rallied 18% YTD, is just 2.6% off its year-high. The KRW has risen 6% against the USD so far this year (Chart 8), keeping pace with its Asian counterparts like the SGD and TWD.

This contradiction is puzzling but probably reflects the extreme complexity of the North Korean crisis that is making it difficult for investors to separate the facts from the noise and the true intention of the players from their rhetoric.

While Bank of America says it "does not pretend to know how the crisis will end" it thinks the market does not fully appreciate the significance of two incontrovertible facts that are emerging from the crisis. As a result, Woo is convinced that gamma may be considerably undervalued ahead of an impending North Korean showdown. He explains why below:

1. Sanctions are not working

The two UN sanctions adopted since August have not achieved their intended results. Not only they have not lead to a moderation of North Korea"s behavior, they have provoked North Korea into further escalation (Chart 9). Following the UN sanction adopted on August 5, North Korea launched three short-range missiles on August 26, followed by a missile over Japan on August 29, and it conducted its sixth nuclear test on September 3 that experts say was a test of a hydrogen bomb. Following the second UN sanction adopted on September 12, North Korea fired another missile over Japan on September 14 that flew for 3,700 km (a demonstration that it now has the ability to reach Guam). 

Why are sanctions not registering the intended reaction? Is it possible that the North Korean leadership has invested so much political capital into the brinksmanship with the United States that accepting a defeat could seriously weaken its ability to rule or remain in power? Turning back may no longer be an option. Given the likely crippling economic impact of the new sanctions (designed to reduce North Korean export by 90% and energy import by 30%), game theory suggests that the North Korean leadership has a strong incentive to bring forward the final phase of the Game of Chicken.

2. China is the only player making concessions

Of the three key players at the table (US, North Korea and China), China has been the only party that has been making concessions. Under pressure from the US, China has agreed to cut coal, iron ore, and textile imports from North Korea and reduce energy exports to North Korea. These concessions, by allowing the US to push through two UN sanctions, have helped calm investors" nerves. The market appears willing to give diplomacy the benefit of doubt as long as the US and China are seen as working together to find a solution.

Developments over the past week suggest China"s willingness to make further concession may be reaching its limit. It agreed to support the second UN sanction only after it was watered down. After the North Korean missile launch on September 14, China rebuffed US demand to cut off oil exports to North Korea. China may not want to trigger a collapse of the North Korean regime that for the past sixty years provides a buffer against US troop presence in South Korea. Scholars estimates China lost between two hundred to four hundred soldiers during the Korean War to create the current status quo on the Korean Peninsula. 

If China"s willingness to give more ground may be limited (even with the approach of its 19th Party Congress on Oct 18), the market is not pricing much in terms of the risk of a deterioration of the US-China relationship. The CNH has strengthened so much this year that USD/CNH is back to early 2016 levels. The option market paints a worrying picture of complacency. USD/CNH risk reversal is at levels we have not seen since early 2014 (Chart 13). Washington has been threatening trade sanctions against China to force Chinese compliance on North Korea. We suspect an escalation of tension between Washington and Beijing would likely be accompanied by CNH weakening (intentional on the part of Beijing or not). Investors who share our concerns should consider buying 3m USD/CNH forward outright at 6.58 (pricing only a 0.5% depreciation of the CNH) or position for a reversal of the risk-reversal.

Putting it together, BofA"s analysis suggests that the risk is growing that the crisis - deferred for months - may come to a head in the not too distant future. This flies in the face of the current market consensus that the crisis is likely to drag on, as evidenced by the flatness of vol curves across markets. Incredibly, USD/KRW vol curve remains not only upward sloping (Chart 10) but steep, with 6m implied vol trading at an average premium over 1m (Chart 11). 

As such, in the context of the ongoing North Korean "game of chicken", Woo concludes that "The market is clearly not priced for any short-term shock. Investors who share our concerns should consider accumulating short-dated KRW puts or buying KRW gamma against selling long-dated vol (position for curve inversion on escalation)." Finally, Woo still thinks that the JPY would be a beneficiary of any escalation of geopolitical risks. "The JPY"s correlation with risk-off has been increasing. We are inclined to fade the bounce in USD/JPY last week after the adoption of UN sanctions. We believe investors should consider taking advantage of any further JPY depreciation before and after the upcoming FOMC meeting to selling USD/JPY. "

* * *

In summary, while the market may now be ignoring, or at least giving the benefit of the doubt to potential adverse outcomes from political risks in the form of both the tax reform process and the North Korean "games of chicken", BofA is convinced that since the "market is clearly not priced for any short-term shock", any adverse outcome could result in a potential risk-off move, one which breaks the market"s unstable equilibrium, and result in either a spike in KRW gamma or TSY yield and/or vol.

Will Bank of America be right? With both showdown in Washington over tax reform and brinksmanship over North Korea coming to a head in the coming weeks, we will have the answer very soon.

Obamacare Repeal Next Steps: Why Goldman Is Suddenly Far Less Optimistic

On Friday morning, in the aftermath of Trump"s surprising victory forcing the GOP Healthcare bill repealing Obamacare through the House, we noted that Goldman"s DC analyst Alec Phillips responded that, somewhat paradoxically, the impact on Trump"s broader economic agenda would actually be more adverse than most economist and pundits expected, stating that "the main effect of House passage is to delay the consideration of tax legislation, which looks even more likely than before to be delayed until 2018."

In a subsequent, and far more detailed note titled "Health Reform Gains Momentum as the Rest of the Agenda Slows", over the weekend Phillips has provided an extensive explanation why he believes that the passage of Trumpcare will likely adverse implications on Trump"s tax policy timeline.

Here is the summary from the Goldman analyst:

• House Republicans have passed their American Health Care Act (AHCA), moving repeal of the Affordable Care Act (ACA) one step closer to reality. However, while the House vote was necessary for ACA repeal, it is far from sufficient, and the process is likely to become harder after this first step.


• House passage increases the likelihood that health legislation will be enacted this year, though it still faces several obstacles. In the meantime, uncertainty regarding insurance regulation and subsidization could lead to lower enrollment and plan participation in the existing system, which has already struggled with weaker than expected enrollment and declining plan options.


• In isolation this legislative victory is likely to be interpreted as bullish for other aspects of the agenda, including tax reform, as it demonstrates that congressional Republicans may be able to form a working majority on controversial issues after all.


• However, the revival of health legislation, which could at least take a few more months to conclude, could substantially delay consideration of the remainder of the legislative agenda. This further reduces the likelihood that Congress will enact a tax cut before year-end, in light of the additional steps that would be necessary once the health bill has been enacted.


• While we continue to believe that tax legislation is likely to be enacted in early 2018, further delays could push consideration of tax legislation too close to the upcoming midterm election, reducing the likelihood that tax legislation is enacted in the next two years.

Here is his detailed breakdown why "A Longer Health Debate Means a Later Tax Debate"

Market participants, even those with no direct exposure to the health sector, have been watching the health care debate closely for signals regarding the rest of the political—and particularly, fiscal—agenda. However, in our view House passage of the AHCA sends a decidedly mixed signal for tax reform.

All other things being equal, the fact that House Republican leaders and the White House were able to assemble a majority in the House to support the AHCA suggests that it is more likely than previously expected that congressional Republicans might also be able to form a working majority on other controversial issues like tax reform. The current version of the AHCA also repeals roughly $1 trillion of taxes enacted to fund ACA subsidies. While these taxes are not directly related to tax legislation expected later this year, repealing these taxes in separate legislation would reduce the pressure on lawmakers to repeal some of them in tax legislation. Repealing these taxes is not essential to the tax reform effort, but makes it slightly easier.

That said, the direct effect of AHCA passage in the House is to likely delay the tax debate. As we have pointed out in the past, the rest of the fiscal agenda cannot move forward until the health issue is disposed with, either by enacting health legislation or, if health legislation stalls, through a decision by congressional leaders and the White House that they will postpone further consideration of health legislation in order to move on to other aspects of the agenda. This is because Republican leaders have decided to pass the health bill and the tax bill using the “reconciliation” process, which protects legislation from filibuster in the Senate and allows it to pass with only 51 votes—i.e., potentially with only Republican votes.

However, only one tax bill and one spending bill can be passed under the reconciliation process in each budget cycle, so congressional leaders decided earlier this year that the health bill would be passed first, followed by the FY2018 budget resolution, which would include a second set of instructions to pass tax legislation under the reconciliation process. Only after the FY2018 budget resolution passes would the actual tax legislation itself be considered by the House and Senate.

Until this week, the latter had looked more likely, as the House had appeared unlikely to pass the AHCA even after modifications, and prospects in the Senate looked even dimmer. Instead, Republican leaders now appear likely to pursue health legislation for a while longer. In the Senate, Finance Committee Chairman Orrin Hatch, whose committee will oversee both the health and tax legislation, said this week that Senate Republicans would like to finish the health bill by the end of July. While this seems like a reasonable goal, this issue has tended to take up more time than expected so far, and the risk is that the remaining steps take longer as well. Moreover, with congressional recess scheduled for the month of August and a contentious debate over spending and the debt limit likely in September and/or early October, the timeline suggests that tax legislation might not see the light of day until well into Q3 if not Q4, and that enactment is unlikely before Q1 2018.

Healthcare Before Taxes

This drawn out timing raises risks to the enactment of tax legislation, in our view. Spending the time and energy that is likely to be required to pass health legislation will reduce the political momentum for a tax bill. While there is no obvious political reason that a simple tax cut could not be enacted in early 2018, further delays could push consideration of tax legislation too close to the upcoming midterm election, reducing the likelihood that tax legislation is enacted in the next two years. We continue to believe that a tax cut is more likely than not, but as the debate on health legislation drags on the risks to this outcome have become higher in our view.

Some other big picture considerations from Goldman, looking at the state of healthcare "four months later"

The House passed the American Health Care Act (AHCA) on May 4, by a 217-213 vote. The vote occurred nearly four months after the House passed the initial instructions calling for passage of ACA repeal legislation. Over that period, the legislation changed several times; the approach House Republicans were initially expected to take was to pass two pieces of legislation, the first repealing most of the ACA, with a delayed effective date, and the second replacing it with a new system of benefits. If considered separately, this would have allowed for quick passage of repeal legislation and more careful consideration of the “replacement” bill at a later date. Various Republican lawmakers resisted this strategy, and Republican leaders instead opted for a single-bill approach. While this ultimately satisfied a majority of the House, it also took four months to accomplish. The remainder of the process might take at least this long.

Among the most important changes the AHCA makes are the repeal of the ACA’s expansion of Medicaid eligibility to adults with income up to 138% of the federal poverty level (about $34,000 per year for a family of four) and the shift of tax credits based on income and average premiums to a credit adjusted solely for age. The legislation would also change regulation of the individual insurance market, by allowing greater variation in premiums by age and the potential for premium variation by health status for individuals who do not maintain continuous coverage. The various changes take effect at different points over the next few years, with different transition periods, as shown in Exhibit 1.

Exhibit 1: The American Health Care Act

* * *

As noted previously, while ACA may have passed the House, now comes the hard part: the Senate:

Although House passage keeps the ACA effort alive, it might not move it very far forward. Senate passage is apt to be harder than House passage, in our view, for political as well as procedural reasons. The main political challenge is simply that 50 of 52 Republicans will need to support the bill in the Senate, and several have already raised concerns with the House-passed legislation. Among the political challenges:

• Major changes might be needed to bring centrist and blue-state Republicans onboard: Republicans representing states that voted Democratic in the last presidential election (or were very competitive) may have reservations regarding the bill. Sen. Collins of Maine has indicated opposition to the House-passed bill, for instance, citing the structure of tax credits, insurance regulatory changes, and the effect on Medicaid (Maine has not expanded its Medicaid program under the ACA). 


• Expansion-state Republicans will probably try to preserve Medicaid funding: 20 of the 52 Republicans in the Senate represent states that expanded eligibility for the Medicaid program. Four Republican senators—Sen. Gardner of Colorado, Sen. Murkowski of Alaska, Sen. Portman of Ohio, and Sen. Moore-Capito of West Virginia—have opposed an earlier version of the House legislation over its Medicaid cuts (the latest version does not change these provisions substantially). This is likely to be a critical consideration for some Republican senators whose states expanded Medicaid, as this was the primary source of coverage gains under the ACA. Projected coverage losses (Exhibit 2) have been one of the most controversial aspects of the legislation, and the publication of new estimates in the next couple of weeks may create additional political friction in the Senate. 

Coverage Would Revert to Pre-ACA Levels 

These political challenges might be overcome by substantial modification to the legislation, though this would risk losing support from conservative senators who have already expressed reservations about the amount of spending that would be maintained under the legislation, like Sen. Paul of Kentucky. However, even if Senate Republicans can agree in principle on how to modify the House’s bill, they also face two procedural obstacles:

• The Byrd Rule in the Senate: The AHCA is being considered under the reconciliation process, which affords it special procedural protections in the Senate, namely that it cannot be filibustered and thus requires only a simple majority to pass. With little prospect of Democratic support, this is essential to passage. However, with these privileges come costs; the Byrd rule in the Senate prohibits policy changes from inclusion in reconciliation legislation that are primarily non-budgetary in nature. In the context of the AHCA, this could pose a challenge for the changes to insurance market regulation in the House bill, including those that were central to winning support from conservative Republicans in the Freedom Caucus.


• Budgetary restrictions: The House-passed legislation was estimated to reduce the deficit by roughly $150bn over ten years before the latest round of changes were made. Congressional budget rules prohibit the Senate from changing the House-passed legislation to produce less savings. This could make reaching consensus more difficult, since several Senate Republicans will want to add back Medicaid funding or other health insurance subsidies. One solution to this would be to delay the repeal of the ACA taxes by a few years to allow for greater spending without reducing the net savings under the bill, but going too far in this direction could lose the support of conservative Republicans in the Senate and could make a compromise with the House more difficult.

Beyond the need to reach agreement in the Senate, Republican congressional leaders and the White House will also need to broker an agreement between the House and Senate on a single final version that both chambers can agree on. This is likely to prove to be the most difficult part of the process, given differences between the Freedom Caucus in the House and centrists in the Senate.

Finally, Goldman"s take on "The Shape of Things to Come"

Given these political challenges, Republican leaders might consider alternative approaches to address the ACA. The seeds of a potential compromise among House and Senate Republicans are visible in some recent Republican proposals:

• State flexibility: The recent compromise in the House allows states greater flexibility in certain areas; states would be able to opt in to an alternative block-grant structure for Medicaid, which allows greater flexibility in benefit design, and to opt out of certain insurance rules under the ACA, like the prohibition on pricing premiums based on health status (the current legislation would continue to prohibit this for applicants who maintain continuous insurance coverage). State flexibility could in theory be expanded to two other areas to broaden support for the legislation: first, states could be allowed a greater role in administering the subsidies for insurance in the individual market. The Cassidy-Collins plan in the Senate, for instance, would give states a choice of maintaining the current system of tax credits or moving into a new system based on subsidized health savings accounts. Second, conservatives and many Republican governors have supported allowing states more flexibility in managing their Medicaid programs. It is conceivable that a compromise between centrist and conservative Republicans could be reached by preserving a greater share of existing subsidies for health insurance (including the expansion of the Medicaid program under the ACA) but allowing states a greater role in determining the structure of these benefits. Of course, such a compromise could be constrained by some of the procedural issues noted earlier.


• Shifting risk: A common aspect of recent Republican health proposals has been to shift financial risk for health cost growth from the federal government to individuals enrolled in federal health programs and/or to state governments that share the cost of the Medicaid program. Medicare reform efforts over the years largely followed this model, as does the AHCA. It provides a tax credit for health insurance that varies by age but grows with medical CPI plus 1pp, rather than with the increase in the average health premium as the current subsidy does. It also would shift states to a per-capita or block-grant system that would cap the federal government’s exposure to increasing costs in these areas. The final negotiations on the House healthcare bill hinged on the distribution of risk between individuals and the government, and this looks likely to continue to be modified.


• Delayed implementation: The current legislation delays repeal of the Medicaid expansion until 2020 and allows current expansion enrollees at that point to continue coverage. Centrist Republicans seem likely to push for an even longer phaseout. It also appears possible that they could seek to slow changes to the refundable tax credits for insurance in the individual market. This could actually return the debate closer to where it started, when congressional Republican leaders planned to repeal the ACA but would have delayed the effective date by several years, expecting to make additional changes in the interim.

If comprehensive legislation fails, Republicans might instead opt to target a few unpopular provisions of the ACA instead. One provision might be the mandate on individuals to enroll in health insurance or face financial penalties. Repealing this provision would have the benefit of simplicity and could probably win broad Republican support. However, it would produce much less budgetary savings than the current legislation and would still probably substantially increase the projected uninsured population. Since it would not reduce spending enough to offset the repeal of nearly the $1 trillion in ACA taxes that the current legislation repeals, this option might be contemplated as a last resort if broader legislation stalls but looks unlikely to come up in the near term.

How Antonio Lee Snuck A Fake $3.6 Trillion Acquisition Past The SEC

Antonio Lee, "an American entrepreneur" and "world renowned artist," can be described as almost anything except humble..."scam artist" fits pretty well.  According to his official bio, Lee began his career in the cosmetology field, "as a barber", but quickly decided he was better suited to raise a $1 trillion "art investment fund."

Antonio Lee (born Antonio Luis Winters; July 14, 1984) is an American entrepreneur, world renowned artist, and YouTube celebrity specializing in acrylic painting. He is well known for his work in the field of Scientific and Performance Art. Lee is the grandson of renowned African-American artist, Annie Lee. Lee credits inspiration to Pablo Picasso, Leonardo Da Vinci, Annie Lee, Jean Michel Basquiat and Damien Hirst.

For the early part of Lee’s professional life he worked in the field of real estate and cosmetology, as a barber. However, he was severely injured during a case of police brutality. After much rehabilitation therapy Antonio Lee was able to regain mobility, but he is now limited in his range of motion as well as tolerance for sitting and standing.  Lee is the father of three girls Malia Lee, Naima Lee, & Ziya Lee. He married in 2011, however, due to marital hardships, he and his wife divorced in 2013. This injury took a toll on Lee, causing him to suffer from major depressive episodes.

In 2013, Lee founded YNoFace Holdings, a Wisconsin company, the first art investment fund created by an artist, that has offered the first issuer- issued private offering under the Jobs Act.

If fact, for those among our readership who would like more information, here is brief overview of the "YNOFACE Holdings" art fund that "acquires, markets, and holds original art as a capital appreciation investment based off the fundamental metrics"...seems solid.

YNOFACE Holdings Inc. acquires, markets, and holds original art as a capital appreciation investment based off the fundamental metrics. We are the first investment art fund created by an artist, world renowned scientific artist Antonio Lee. In addition we are made up of 17 independent contractors and growing. We will upload and share our 41 city global art tour and performances right here on YouTube for your enjoyment! We will showcase our art and the art of the world from a different perspective! Enjoying and Appreciating All That Exists!

And while all of the above from YNOFACE Holdings would seem odd enough, things took a turn for the truly bizarre recently when Lee decided to post an official 8-K with the Securities and Exchange Commission announcing the sale of his art fund to Google for $3.6 trillion, making him easily the wealthiest man in the world.  Per Bloomberg:

A few hours after the New York market close on Feb. 1, an obscure Chicago artist by the name of Antonio Lee told the world he had become the world’s richest man.

The 32-year-old painter said Google’s parent, Alphabet Inc., had bought his art company in exchange for a chunk of stock that made him wealthier than Microsoft Corp. co-founder Bill Gates, Berkshire Hathaway Inc.’s Warren Buffett and Amazon.com Inc.’s Jeff Bezos -- combined.

Of course, none of it was true. Yet, on that day, Lee managed to issue his fabricated report in the most authoritative of places: The U.S. Securities and Exchange Commission’s Edgar database -- the foundation of hundreds of billions of dollars in financial transactions each day.

All of which, of course, simply serves as a reminder that pretty much anyone, including a former barber turned trillionaire art collector from Chicago, can dupe the SEC.

For more than three decades, the SEC has accepted online submissions of regulatory filings -- basically, no questions asked. As many as 800,000 forms are filed each year, or about 3,000 per weekday. But, in a little known vulnerability at the heart of American capitalism, the government doesn’t vet them, and rarely even takes down those known to be shams.

“The SEC can’t stop them,” said Lawrence West, a former SEC associate enforcement director. “They can only punish the filer afterward and remove the filing from the system."

After the fraudulent Avon filing, U.S. Senator Chuck Grassley, the Iowa Republican and former chairman of the Finance Committee, told the SEC it must review its posting standards.

“This pattern of fraudulent conduct is troubling, especially in light of the relative ease in which a fake posting can be made,” Grassley wrote in a letter to the agency.

In response, Mary Jo White, who then chaired the SEC, said it wouldn’t be feasible to check information. She noted that there were on average 125 first-time filers daily in 2014, and the agency was studying the strengthening of its authentication process.

In fact, as Reuters pointed out last fall, Lee"s February filing with the SEC wasn"t even his first act of securities fraud as it was preceded by another fraudulent filing in which he purported to have acquired a modest $88 billion stake in BAML.

In the latest apparent spoof on a U.S. securities regulator"s online filing system, a Chicago-area artist with a fondness for inspirational quotes claimed to have acquired about $88 billion worth of Bank of America Corp shares on Wednesday.

While the SEC did not respond to a request for comment and Bank of America declined to comment, securities experts said there was no doubt the filing was a hoax.

In it, a company called YNOFACE Holdings Inc purportedly run by Antonio Lee said it had acquired 798.4 million Bank of America shares in an exchange on Aug. 15, and purchased another 4.2 billion common shares and 100 million preferred shares on Sept. 22.

The common shares alone would represent nearly half the bank"s total market cap. Bank of America"s largest shareholder, The Vanguard Group, has roughly 610 million shares, a stake of less than 6 percent.

In an earlier filing, YNOFACE said it had implausibly raised over $1 trillion for an art fund.

So, caveat lector -- let the reader beware.

Democrats Again Boycott Committee Vote, Blocking Confirmation Of Trump EPA Nominee

They are at it again.

For the second day in a row, after Senate Democrats boycotted the committee votes for Steven Mnuchin and Tom Price yesterday only for republicans to implement a loophole, allowing the vote to take place as described earlier, on Wednesday morning Senate Democrats again boycotted a committee vote on a President Trump  pick, this time focusing on his choice to lead the Environmental Protection Agency, preventing the GOP from moving his confirmation forward.

None of the Democrats on the Environment and Public Works panel, led by Sen. Tom Carper went into the meeting room, depriving the committee of the two minority party members it requires for a quorum to vote on Scott Pruitt. The Finance Committee’s Republicans bypassed the boycott Wednesday by voting to change the panel’s rules and allow a vote without Democrats, something the Environment panel could do to get Pruitt approved. 

The Wednesday move by Democrats was to protest committee Chairman John Barrasso’s (R-Wyo.) refusal to delay the vote until Pruitt gave more substantive answers to numerous questions that they had for him. “The committee Democrats are deeply concerned about the lack of thoroughness of Mr. Pruitt’s responses to our questions for the record,” Carper wrote to Barrasso

“I ask you to direct Mr. Pruitt to disclose information requested by Democratic members with the same level of transparency that this committee has required of past nominees.” The Democrats’ top complaints centered on documents they requested about litigation Pruitt led as Oklahoma’s attorney general and his positions on major EPA regulations, among other concerns.

Barrasso quickly shot down the request, saying Pruitt has met all of the requirements for a committee vote. “The committee’s review of Attorney General Pruitt’s nomination has been unparalleled in its scrutiny, thoroughness, and respect for minority rights,” he wrote.  “Attorney General Pruitt has answered more questions than any past EPA administrator nominee. He has been comprehensively vetted and has demonstrated his qualifications to lead the EPA.”

The boycott is unlikely to have a lasting effect: now that Republicans have shown how to override it, we expect the same outcome as in the now failed "block" of the Mnuchin, Price vote, in which republican committee members simply changed the rules, allowing the vote to proceed without the required Democrat quorum.

Mnuchin Dashes Banker Hopes That Prop Trading Is Coming Back

What a difference a week makes.

On January 23, Reuters reported that dialing back the Volcker Rule which limits banks" ability to engage in speculative investments using their own balance sheet, has emerged a top priority for President Donald Trump"s nominee for U.S. Treasury secretary, Steve Mnuchin.  In written responses to questions posed by members of the U.S. Senate Finance Committee, Mnuchin said he would use his role as head of the interagency Financial Stability Oversight Council to give the Volcker Rule a stricter definition of proprietary trading.

At issue is the Volcker Rule, a contentious provision in the 2010 Dodd-Frank Act that sought to prevent lenders from putting federally-insured deposits at risk through wagers on stocks, bonds and other assets.

"As Chair of FSOC I would plan to address the issue of the definition of the Volcker Rule to make sure that banks can provide the necessary liquidity for customer markets and address the issues in the Fed report," Mnuchin wrote in the document, which also included senators" questions and was verified by a Senate aide.

According to Reuters, Mnuchin also said that "regulators have applied proprietary trading prohibitions to too many activities" adding that "In the responses Mnuchin also made it clear he believes the rule should only apply to "a bank that benefits from federal deposit insurance." The Federal Deposit Insurance Corporation guarantees retail deposits at about 6,000 banks, including the consumer banking arms of the country"s largest investment banks."

Just a few days later, in a follow up to Mnuchin"s written responses, this time from Bloomberg, the interpretation of his statement was 180 degrees opposite, and as Bloomberg reported, "Steven Mnuchin made clear he doesn’t want Wall Street banks getting back into the business of making risky market bets with their own capital, after Senate Democrats pushed him to clarify his responses to questions they asked during his confirmation process to be Treasury secretary."

Why the difference? Because in the span of just two days, Mnuchin appears to have flip-flopped on Volcker:

Mnuchin’s updated comments, which Bloomberg News obtained, were made after several Democrats on the Senate Finance Committee felt his earlier responses weren’t adequate, according to a Jan. 25 letter that Senator Ron Wyden of Oregon wrote to Utah’s Orrin Hatch, the panel’s Republican chairman.

It appears that the biggest variance between the two sets of responses had to do with the new Treasury Secretary"s outlook on prop trading. Mnuchin"s Bloomberg added that in his written remarks to lawmakers, "Mnuchin said that even banking units that lack a government backstop should be restricted from making speculative trades." 

“A legal distinction between the insured and non-insured entity is an important factor in eliminating risky activities within the institution that has” insured deposits, Mnuchin said in an amended response to a senator’s question about Volcker. “I do not believe that the uninsured entity should be able to perform proprietary trading."

If Bloomberg"s interpretation of Mnuchin"s statement is accurate, it could cause substantial headaches for bank investors, many of which have priced in substantial deregulation, among which the return of the Volcker rule, as banks were once again expected to have free reign in a Dodd-Frank free environment.

* * *

In addition to Volcker, Mnuchin also weighed in on the issue of how to reform America’s GSE in particular, and mortgage-finance system in general, a topic that has huge consequences for the multitrillion mortgage industry and the fate of shareholders who’ve invested billions of dollars in Fannie Mae and Freddie Mac.  In his response, Mnuchin wrote that “any solution will be dependent upon the GSEs being capitalized properly and other such controls that eliminate risk to taxpayers.”

The answer could cheer some advocates of preserving Fannie and Freddie, including investors, small lenders, and some affordable housing groups. Over the past few years, those groups tried to convince the Obama administration to allow the companies to rebuild capital to no avail. In the days after President Donald Trump’s surprise election win in November, his advisers pledged to dismantle Dodd-Frank and cut regulations broadly.

Mnuchin took a softer tone at his hearing before the Finance Committee. He said he mostly favors making changes to rules put in place in the wake of the 2008 financial crisis, not repealing the law entirely. In his amended responses to the Finance panel, Mnuchin said he’d like to use “empirical assessments” to monitor the effects Dodd-Frank has had on the finance industry. He also said that he’ll advocate that any rules needed to protect “public safety” shouldn’t be included in the regulatory freeze Trump has ordered across all federal agencies.

* * *

Assuming that Mnuchin"s harsher, second set of responses is accurate, it may also be one of the reasons for today"s bank stock selloff, as yet another significiant decoupling between the post-Obama reality and the Trump hope was gently squeezed, prompting traders just how much will really change under Trump who is increasingly getting bogged down in day to day scandals and minutiae - involving both republicans and democrats - that have little to do with his economic promises, something which infurated none other than Matt Drudge earlier today.

Mnuchin Hearing Descends Into Early Chaos After Senator Offers "Valium" To Colleague

Earlier this morning we predicted a fiery confirmation hearing for Trump"s Treasury Secretary pick, Steven Mnuchin.  And right on cue, the confirmation had barely begun when it was promptly derailed after Senator Pat Roberts of Kansas suggested that his colleague, Senator Ron Wyden (D-OR), should pop a valium before the next round of questioning.

“Sen. Wyden, I’ve got a Valium pill here that you might want to take before the second round....just a suggestion, sir."

Of course, the comment didn"t go over well with Democrats on the Senate Finance Committee as Senator Sherrod Brown (D-OH) pounced on the remarks sending the hearing into a moment of pure chaos with Finance Committee Chairman Orrin Hatch (R-Utah) struggling to regain control.

“I just can’t quite believe that the senator would say that.  I just hope that doesn’t set the tone for 2017.”

.@SenPatRoberts to @RonWyden: “I’ve got a Valium pill here that you might want to take…" pic.twitter.com/GO6661dv3Y

— CSPAN (@cspan) January 19, 2017