The Limiting Principle for Congress’ Power to Subpoena Presidential Records Isn’t Hard to Find

The Supreme Court.

 

 

 

 

 

 

In today’s Supreme Court oral argument in Trump v. Mazarsone of two cases concerning the scope of Congress’ power to subpoena President Trump’s financial documents,  House of Representatives lawyer Douglas Letter repeatedly failed to provide any limiting principle constraining Congress’ powers to subpoena the president’s records. Cornell Law Professor Michael Dorf and co-blogger Jonathan Adler argue that this was a serious error, making it likely that the five conservative justices will rule against the House. They compare it to Clinton Administration Solicitor General Drew Days’ famous mistake in United States v. Lopez (1995), where he was unable to articulate any limits to Congress’ power to regulate interstate commerce. The result was the federal government’s first defeat in a Supreme Court Commerce Clause case in many decades.

Josh Blackman argues that Letter did not make a mistake, but rather deliberately refused to concede any limits to his client’s power.

Either way, Letter’s failure to identify a limit is a weakness in the House’s case, and one that could well lead to defeat. Fortunately, however, finding a limit is actually easy. Whether Letter’s faux pas was an unforced error or a deliberate tactic, the Court is not bound by it. It can readily rule in favor of the House without giving Congress unlimited subpoena power.

Ironically, Drew Days’ defeat in 1995 is a big part of the reason why Douglas Letter’s case need not suffer the same fate. From the New Deal era to the 1990s, many legal commentators assumed there were no longer any judicially enforceable structural limits to Congressional legislative power. But beginning in the 1990s, the Rehnquist  and Roberts courts decided a series of cases that reinvigorated such limits. Among other things, the Court ruled that the Commerce Clause cannot be used to regulate some types of “noneconomic activity” or impose mandates on “inactivity,” that the federal government may not commandeer state governments, and that there are limits to its powers under the enforcement clauses of the Fourteenth and Fifteenth Amendments. Most recently, in Murphy v. NCAA, the Court ruled that Congress cannot pressure states to ban sports gambling under their own laws, a decision that had important implications for other assertions of federal power, including attempts to coerce sanctuary cities.

Both sides in Mazars agree that Congress can only use its subpoena power in these cases if there is a “valid legislative purpose.” Obviously, there cannot be such a purpose in cases where Congress seeks to enact legislation that is beyond the scope of its powers. And under the federalism decisions of the last thirty years, those powers now have real, even if still modest, limits.

For example, Congress could not subpoena information related to Trump’s many affairs and his divorce settlements with his two previous wives. Marriage and divorce are matters largely left to state regulation, not federal. Similarly, Congress could not use its legislative authority to investigate whether it should force state or local governments to curtail possibly unethical business dealings by the Trump family. The anti-commandeering rule forbids such laws.

Despite the Court’s recent federalism decisions, congressional legislative power remains very broad. Some subjects that Congress cannot regulate directly might nonetheless be subject to investigation, because they are relevant to matters over which Congress does have authority. But if there is a problem here, it is not the lack of a limiting principle on Congress’ subpoena power, but insufficient judicial enforcement of substantive limits on the scope of congressional authority.

I have long argued that the Court should enforce such limits more aggressively. But, until then, it stands to reason that any matter on which Congress may legislate is also one that it can investigate in order to get relevant information. In the case of Trump’s financial records, Congress surely has the power to legislate on conflicts of interest in the executive branch, of which Trump’s business activities create many. His records are also relevant to Congress’ power to legislate income tax laws, as there may be good reason to impose special restrictions on the president and other high-ranking federal officials.

Congress’ motives in conducting such investigations may not be purely public-spirited. The president’s partisan opponents could potentially use the information they uncover for political purposes. But political self-interest is at the heart of a great deal of legislative activity, and does not thereby render that activity unconstitutional. There is a crucial distinction here between Congress’ possible political motives here, and Trump’s anti-Muslim motives in the travel ban case. Discrimination on the basis of religion is unconstitutional (even if cloaked under supposedly neutral criteria), whereas seeking political advantage is not.

Steve Sachs points out that Congress could potentially use subpoena power to investigate issues beyond the scope of its legislative authority because it has the power to initiate constitutional amendments. A proposed constitutional amendment can legitimately deal with issues that Congress cannot legislate about under the existing Constitution. However, if the amendment power is the only basis for a subpoena, Congress would at the very least have to be in the process of actually holding hearings or otherwise considering some potential amendment. And if the supposed amendment turns out to be a complete sham cooked up purely for purposes of subpoenaing information, that fact is likely to leak out, and courts should be able to take notice of it and rule accordingly.

Douglas Letter’s inability or unwillingness to identify a limiting principle was indeed an error in some ways analogous to Drew Days’ failure in Lopez. But Days’ defeat could yet turn out to be Letter’s salvation.

 

 

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The Limiting Principle for Congress’ Power to Subpoena Presidential Records Isn’t Hard to Find

The Supreme Court.

 

 

 

 

 

 

In today’s Supreme Court oral argument in Trump v. Mazarsone of two cases concerning the scope of Congress’ power to subpoena President Trump’s financial documents,  House of Representatives lawyer Douglas Letter repeatedly failed to provide any limiting principle constraining Congress’ powers to subpoena the president’s records. Cornell Law Professor Michael Dorf and co-blogger Jonathan Adler argue that this was a serious error, making it likely that the five conservative justices will rule against the House. They compare it to Clinton Administration Solicitor General Drew Days’ famous mistake in United States v. Lopez (1995), where he was unable to articulate any limits to Congress’ power to regulate interstate commerce. The result was the federal government’s first defeat in a Supreme Court Commerce Clause case in many decades.

Josh Blackman argues that Letter did not make a mistake, but rather deliberately refused to concede any limits to his client’s power.

Either way, Letter’s failure to identify a limit is a weakness in the House’s case, and one that could well lead to defeat. Fortunately, however, finding a limit is actually easy. Whether Letter’s faux pas was an unforced error or a deliberate tactic, the Court is not bound by it. It can readily rule in favor of the House without giving Congress unlimited subpoena power.

Ironically, Drew Days’ defeat in 1995 is a big part of the reason why Douglas Letter’s case need not suffer the same fate. From the New Deal era to the 1990s, many legal commentators assumed there were no longer any judicially enforceable structural limits to Congressional legislative power. But beginning in the 1990s, the Rehnquist  and Roberts courts decided a series of cases that reinvigorated such limits. Among other things, the Court ruled that the Commerce Clause cannot be used to regulate some types of “noneconomic activity” or impose mandates on “inactivity,” that the federal government may not commandeer state governments, and that there are limits to its powers under the enforcement clauses of the Fourteenth and Fifteenth Amendments. Most recently, in Murphy v. NCAA, the Court ruled that Congress cannot pressure states to ban sports gambling under their own laws, a decision that had important implications for other assertions of federal power, including attempts to coerce sanctuary cities.

Both sides in Mazars agree that Congress can only use its subpoena power in these cases if there is a “valid legislative purpose.” Obviously, there cannot be such a purpose in cases where Congress seeks to enact legislation that is beyond the scope of its powers. And under the federalism decisions of the last thirty years, those powers now have real, even if still modest, limits.

For example, Congress could not subpoena information related to Trump’s many affairs and his divorce settlements with his two previous wives. Marriage and divorce are matters largely left to state regulation, not federal. Similarly, Congress could not use its legislative authority to investigate whether it should force state or local governments to curtail possibly unethical business dealings by the Trump family. The anti-commandeering rule forbids such laws.

Despite the Court’s recent federalism decisions, congressional legislative power remains very broad. Some subjects that Congress cannot regulate directly might nonetheless be subject to investigation, because they are relevant to matters over which Congress does have authority. But if there is a problem here, it is not the lack of a limiting principle on Congress’ subpoena power, but insufficient judicial enforcement of substantive limits on the scope of congressional authority.

I have long argued that the Court should enforce such limits more aggressively. But, until then, it stands to reason that any matter on which Congress may legislate is also one that it can investigate in order to get relevant information. In the case of Trump’s financial records, Congress surely has the power to legislate on conflicts of interest in the executive branch, of which Trump’s business activities create many. His records are also relevant to Congress’ power to legislate income tax laws, as there may be good reason to impose special restrictions on the president and other high-ranking federal officials.

Congress’ motives in conducting such investigations may not be purely public-spirited. The president’s partisan opponents could potentially use the information they uncover for political purposes. But political self-interest is at the heart of a great deal of legislative activity, and does not thereby render that activity unconstitutional. There is a crucial distinction here between Congress’ possible political motives here, and Trump’s anti-Muslim motives in the travel ban case. Discrimination on the basis of religion is unconstitutional (even if cloaked under supposedly neutral criteria), whereas seeking political advantage is not.

Steve Sachs points out that Congress could potentially use subpoena power to investigate issues beyond the scope of its legislative authority because it has the power to initiate constitutional amendments. A proposed constitutional amendment can legitimately deal with issues that Congress cannot legislate about under the existing Constitution. However, if the amendment power is the only basis for a subpoena, Congress would at the very least have to be in the process of actually holding hearings or otherwise considering some potential amendment. And if the supposed amendment turns out to be a complete sham cooked up purely for purposes of subpoenaing information, that fact is likely to leak out, and courts should be able to take notice of it and rule accordingly.

Douglas Letter’s inability or unwillingness to identify a limiting principle was indeed an error in some ways analogous to Drew Days’ failure in Lopez. But Days’ defeat could yet turn out to be Letter’s salvation.

 

 

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Druckenmiller Turns Apocalyptic: “Risk-Reward For Equities Is As Bad As I’ve Seen It In My Career”

Druckenmiller Turns Apocalyptic: “Risk-Reward For Equities Is As Bad As I’ve Seen It In My Career”

Investing legend Stan Druckenmiller unleashed a firehose of cold water on market bulls today during an interview with the Economic Club of NY (the same venue that will interview Jerome Powell tomorrow on the topic of negative interest rates), when he said the “The risk-reward for equity is maybe as bad as I’ve seen it in my career,” (although “the wild card here is the Fed can always step up their purchases”), that the government stimulus programs won’t be enough to overcome the economic problems, that it makes no sense for the market to jump so much when optimism emerges around certain drugs like remdesivir (“I don’t see why anybody would change their behavior because there’s a viral drug out there”) and that “there’s a good chance that we just cracked the credit bubble that’s the result of free money.”

“The consensus out there seems to be: ‘Don’t worry, the Fed has your back’,” Druckenmiller said during Tuesday’s webcast before adding “there’s only one problem with that: our analysis says it’s not true.”

Furthermore, while traders think there is “massive” liquidity and that the stimulus programs are big enough to solve the problems facing the U.S., resulting in stratospheric P/E multiples, the economic effects of the coronavirus are likely to be long lasting and will lead to a “slew” of bankruptcies, Druck said, agreeing with our observations from last week that the underlying problems are shifting from illiquidity to insolvency, as a “biblical” wave of defaults is coming:

“I pray I’m wrong on this, but I just think that the V-out is a fantasy,” the trading legend said, crushing hopes for a V-shaped recovery, assuming anyone still harbored those, and added that the recent increase in unemployment in the U.S. stunning. The official U.S. unemployment rate is at 14.7%, the highest level since the Great Depression.

As Bloomberg summarizes, “Druckenmiller’s remarks are among the strongest comments yet by a Wall Street heavyweight on the bleak outlook facing the U.S.” Druck’s apocalyptic outlooks also sharply contrasts to the optimism that has pushed the S&P 500 Index to rally 30% since its March low even as the pandemic has brought the economy to a standstill, seized up credit markets and ended the longest bull market in history, all thanks to the now ubiquitous Fed backstop and moral hazard.

And speaking of the Fed, Druckenmiller said that the Fed’s $2.3 trillion move to shore up markets in March, was “somewhat puzzling and aggressive” adding that the Fed “may not have had to take such extreme measures to shore up the U.S. economy in March had they acted earlier to normalize interest rates”, which it of course can’t as the stock market has been in one giant post-financial crisis bubble, and why the Fed’s modest attempt to normalize rates ended in catastrophe in 2018.

Worse, Drucknemiller said that the Fed’s $3 trillion in stimulus programs aren’t likely to spur future economic growth: “It was basically a combination of transfer payments to individuals, basically paying them more not to work than to work. And in addition to that, it was a bunch of payments to zombie companies to keep them alive.”

And with the US set to introduce negative rates over the next 6-12 months much to Donald Trump’s delight, discussing negative rates Drucknemiller said that “I don’t understand even what the argument is.”

Touching on another source of stimulus – which it now appears is indispenable for the US economy not to collapse in cardiac shock – Druck then discussed the “record low” unemployment headed into the Covid-19 crisis, Druckenmiller said that unemployment may have been at a record low going into  Covid-19, but to me it was a result of reckless fiscal spending and huge leveraging on the government side.”

Which also explains why the Fed and Treasury effectively merged to unleash helicopter money, as the economic and market performance before the covid-crisis were already the result of one giant monetary and fiscal bubble, so the only possible resolution would have been an even more gigantic monetary and fiscal bubble. And that’s precisely what we got.

That said, Druckenmiller did agree with David Zervos that “liquidity is going to move markets more than earnings during this period”, which means that for better or worse, fundamentals are indeed dead. The silver lining is that the former Soros chief strategist said he thinks that the current liquidity will soon shrink as US Treasury borrowing crowds out the private economy and even overwhelms Fed purchases. Indicatively, Deutsche Bank believes the US will issue over $5 trillion in debt this year.

Commenting on the coronavrisis response, Druckenmiller said that neither Taiwan or Hong Kong had to lockdown their economies to fight Covid-19, while in the US “this is one of the most bizarre decision making processes I’ve ever seen” elaborating that the economically cripplling shutdown is a bad idea, and adding that “I can guarantee you poverty kills.”

The investing legend spared no words for his criticism of the Trump administration’s response to the coronavirus outbreak, saying he would not be surprised if it becomes the “poster child for the worst public policy decisions ever made from a cost-benefit analysis.”

Probably so, but when the money helicopters are now in the air paradropping cash who cares? Incidentally, that may explain why Druck was quick to point out that gold is now 28% higher than it was a year ago. Separately, Drucknemiller, said that on a relative basis, he’s as bullish on long-short strategies as he’s been in 10 years. “That’s partly because I’m worried about everything else.”

Finally, Druckenmiller is also bullish on Amazon.com, saying people should be thankful that the company exists right now given the number of jobs created and that it has “made all of lives better. I think it’s an amazing company. I get a little emotional when politicians attack it.”


Tyler Durden

Tue, 05/12/2020 – 21:24

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An Interesting Historical Note About the Bakke Case

Regents of the University of California v. Bakke was the Supreme Court’s first major opinion on the constitutionality of government affirmative action preferences. I am (barely) old enough to have read about the controversy contemporaneously (as I had a subscription to the New York Times for five cents a day in sixth grade through my elementary school (!)), and of course have read about it often since. Both at the time and beyond, the case has been portrayed as pitting racial preferences for African Americans against the rights of white students like Bakke, who insisted on race neutrality.

Justice Thurgood Marshall’s emphatic dissent helped crystallize the black-white prism through which the case is viewed. His opinion begins, “I do not agree that petitioner’s admissions program violates the Constitution. For it must be remembered that, during most of the past 200 years, the Constitution as interpreted by this Court did not prohibit the most ingenious and pervasive forms of discrimination against the Negro. Now, when a State acts to remedy the effects of that legacy of discrimination, I cannot believe that this same Constitution stands as a barrier.”

The strange thing about this framing of the case is that African Americans not only weren’t the only beneficiaries of the minority quota that University of Davis Medical School established, they weren’t even the primary beneficiaries. As Justice Powell explained, in 1971 Davis increased the medical school class size from 50 to 100, and “from 1971—through 1974, the special program resulted in the admission of 21 black students, 30 Mexican-Americans, and 12 Asians, for a total of 63 minority students. Over the same period, the regular admissions program produced 1 black, 6 Mexican-Americans, and 37 Asians, for a total of 44 minority students.”

Two things are notable about these statistics. First, almost 50% more Mexican-Americans than African Americans were admitted under the affirmative action/quota program.

Second, out of 400 students in four years, under regular admissions 37 Asians were admitted, or almost 10% of the class. At the time, Asian Americans were about 2.5% of California’s population. Despite Asians being present well above their demographic percentage in the class via regular admissions, 12 additional Asians were admitted under the minority quota. Regardless of whether one’s rationale for affirmative action is “diversity” (as Justice Powell pioneered in his Bakke concurrence) or recompense for exclusion from educational opportunities due to historical and current discrimination, it’s hard to see the legal rationale for “Asian preferences” given their strong representation among the student body without such preferences.

In the Court’s various opinions, meanwhile, the words “Negro” or “Negroes” appear dozens of times; Asians and Mexicans are barely mentioned. Justice Powell’s opinion does have a footnote addressing the Asian anomaly: “The University is unable to explain its selection of only the four favored groups—Negroes, Mexican-Americans, American-Indians, and Asians—for preferential treatment. The inclusion of the last group is especially curious in light of the substantial numbers of Asians admitted through the regular admissions process.” But that’s about it.

It’s rather curious that both the Court and public discussion focused on the black-white dynamic, given that twice as many Mexican and Asian Americans were admitted under the minority quota as African American. But it seems that Bakke set a pattern for future discussions of affirmative action. Today, African Americans are a shrinking minority of those eligible for most affirmative action programs. If one adds together the population of Hispanics, Asian-Americans (who are eligible for government contracting and other preferences, but not university admissions preferences), and Native Americans, they outnumber African Americans by over 2-1. But we still debate racial and ethnic preferences as if the vast majority of beneficiaries are African Americans. (And, I should add, those who implement affirmative action programs still are unable to explain why they use the favored groups, e.g., why white Argentines get preferences but dark-skinned Yemenis do not, or why people from India are lumped in the same category with people from Malaysia).

Anyway, I wonder how the litigation would have gone if Bakke’s attorneys had argued that affirmative action preferences, even quotas, were lawful given the special history of African Americans, but that Davis’ program was unconstitutional because it extended the same benefits to other groups that did not have a 400 year history of slavery and Jim Crow.

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An Interesting Historical Note About the Bakke Case

Regents of the University of California v. Bakke was the Supreme Court’s first major opinion on the constitutionality of government affirmative action preferences. I am (barely) old enough to have read about the controversy contemporaneously (as I had a subscription to the New York Times for five cents a day in sixth grade through my elementary school (!)), and of course have read about it often since. Both at the time and beyond, the case has been portrayed as pitting racial preferences for African Americans against the rights of white students like Bakke, who insisted on race neutrality.

Justice Thurgood Marshall’s emphatic dissent helped crystallize the black-white prism through which the case is viewed. His opinion begins, “I do not agree that petitioner’s admissions program violates the Constitution. For it must be remembered that, during most of the past 200 years, the Constitution as interpreted by this Court did not prohibit the most ingenious and pervasive forms of discrimination against the Negro. Now, when a State acts to remedy the effects of that legacy of discrimination, I cannot believe that this same Constitution stands as a barrier.”

The strange thing about this framing of the case is that African Americans not only weren’t the only beneficiaries of the minority quota that University of Davis Medical School established, they weren’t even the primary beneficiaries. As Justice Powell explained, in 1971 Davis increased the medical school class size from 50 to 100, and “from 1971—through 1974, the special program resulted in the admission of 21 black students, 30 Mexican-Americans, and 12 Asians, for a total of 63 minority students. Over the same period, the regular admissions program produced 1 black, 6 Mexican-Americans, and 37 Asians, for a total of 44 minority students.”

Two things are notable about these statistics. First, almost 50% more Mexican-Americans than African Americans were admitted under the affirmative action/quota program.

Second, out of 400 students in four years, under regular admissions 37 Asians were admitted, or almost 10% of the class. At the time, Asian Americans were about 2.5% of California’s population. Despite Asians being present well above their demographic numbers in the class via regular admissions, 12 additional Asians were admitted under the minority quota. Regardless of whether one’s rationale for affirmative action is “diversity” (as Justice Powell pioneered in his Bakke concurrence) or recompense for exclusion from educational opportunities due to historical and current discrimination, it’s hard to see the legal rationale for “Asian preferences” given their strong representation among the student body without such preferences.

In the Court’s various opinions, meanwhile, the words “Negro” or “Negroes” appear dozens of times; Asians and Mexicans are barely mentioned. Justice Powell’s opinion does have a footnote addressing the Asian anomaly: “The University is unable to explain its selection of only the four favored groups—Negroes, Mexican-Americans, American-Indians, and Asians—for preferential treatment. The inclusion of the last group is especially curious in light of the substantial numbers of Asians admitted through the regular admissions process.” But that’s about it.

It’s rather curious that both the Court and public discussion focused on the black-white dynamic, given that twice as many Mexican and Asian Americans were admitted under the minority quota as African American. But it seems that Bakke set a pattern for future discussions of affirmative action. Today, African Americans are a shrinking minority of those eligible for most affirmative action programs. If one adds together the population of Hispanics, Asian-Americans (who are eligible for government contracting and other preferences, but not university admissions preferences), and Native Americans, they outnumber African Americans by over 2-1. But we still debate racial and ethnic preferences as if the vast majority of beneficiaries are African Americans. (And, I should add, those who implement affirmative action programs still are unable to explain why they use the favored groups, e.g., why white Argentines get preferences but dark-skinned Yemenis do not, or why people from India are lumped in the same category with people from Malaysia).

Anyway, I wonder how the litigation would have gone if Bakke’s attorneys had argued that affirmative action preferences, even quotas, were lawful given the special history of African Americans, but that Davis’ program was unconstitutional because it extended the same benefits to other groups that did not have a 400 year history of slavery and Jim Crow.

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China Auto Sales Fall 5.6% YOY In April Despite Sizeable Bounce Back From March

China Auto Sales Fall 5.6% YOY In April Despite Sizeable Bounce Back From March

The auto market in China is a widely watched economic gauge and leading indicator for the rest of the world, not only because the country is the number one seller of vehicles worldwide, but now also as a litmus test as to how the country’s coronavirus re-opening is faring.

For now, despite a questionable miraculous-looking rebound, sales are still falling.

April’s auto sales numbers came in down 5.6% compared to last year, despite rising 37% from March numbers, according to data released Sunday by the China Passenger Car Association and MarketWatch

The CAAM claims that declines are moderating although we have a tough time believing (pardon our skepticism of China) that such a V-shaped recovery is possible in the country where the outbreak first began.

According to China’s data, the YOY growth rebound is pronounced and April’s drop pales in comparison to a 40% YOY drop in March and a 79% YOY drop in February. 

The Chinese government is going to attempt to spur demand with new policies aimed at enticing buyers, according to Bloomberg, citing an unnamed automotive industry group in China. 

Recall, we have recently noted that U.S. auto manufacturers are teeing up sizeable incentives to get buyers back into showrooms. Europe is following suit, with Volkswagen starting a sales initiative to revive demand, including improved leasing and financing terms. 

Meanwhile, optimism for May in China is already muted.

Not only is the country still struggling with lockdowns, but the first five days in May were a labor holiday that could have a negative impact on sales. 

Outlook for the year is also less-than-optimistic. The CAAM predicts that sales will drop 15% to 25% for the year, depending on whether or not the country is able to further slow the spread of the virus.


Tyler Durden

Tue, 05/12/2020 – 21:05

via ZeroHedge News https://ift.tt/3bsz8Bi Tyler Durden

Indian Cops Use Metal Tool To Grab Social Distancing Dissidents

Indian Cops Use Metal Tool To Grab Social Distancing Dissidents

Authored by Paul Joseph Watson via Summit News,

A video out of India shows police officers using a bizarre metal contraption to grab dissidents who violate coronavirus social distancing rules.

“Hands up!” barks a police officer at a man during a demonstration of the tool, which looks like a kind of cattle prod but presumably isn’t electrified (yet).

The dissenter is then entrapped by the mechanism, which closes around his body like some kind of venus fly trap for humans.

It could also be described as a sort of handcuff for the entire body.

The officer then uses the tool to push the man towards the back of a van.

“Thanks to this over-sized pick-up reacher, the police can now arrest Covid dissidents without risking infection,” writes Toby Young.

While Singapore’s robot dog is a significantly more high tech way of enforcing social distancing, India seems to prefer going old school.

*  *  *

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Tyler Durden

Tue, 05/12/2020 – 20:45

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Futures Slide After Senators Propose Legislation To Sanction China If No “Full Accounting” For Coronavirus Outbreak

Futures Slide After Senators Propose Legislation To Sanction China If No “Full Accounting” For Coronavirus Outbreak

Just hours after futures tumbled following a report that Republican Senator Graham and GOP Senators have introduced a bill sanctioning China for human rights abuses and over its treatment of Uighurs, moments ago futures took another leg lower on the back of an AFP report that Republican senators proposed legislation that would empower President Donald Trump to slap sanctions on China if Beijing does not give a “full accounting” for the coronavirus outbreak.

In other words, unless there was something lost in translation, Trump will have a carte blanche to sanction China on two account: the Uighurs and Beijing’s secrecy over the origin of the coronavirus pandemic.

“The Chinese Communist Party must be held accountable for the detrimental role they played in this pandemic,” said Senator Jim Inhofe, one of the sponsors of the “COVID-19 Accountability Act”, adding that China’s “outright deception of the origin and spread of the virus cost the world valuable time and lives as it began to spread.”

The legislation will give Trump 60 days to certify to Congress that China has provided a full accounting on the COVID-19 outbreak to an investigation that could be led by the United States and its allies, or a United Nations body like the World Health Organization. Of course, China has repeatedly refused to allow any such “accounting” to the WHO; one can imagine how it will respond when a US body demands similar “accounting.”

As a reminder, yesterday Beijing banned roughly 35% of Australian beef imports due to the country’s demand a probe into the coronavirus origins be launched.

But wait, it gets better: In an act that China would see as violating its sovereignty, Trump must also certify that China has closed its highest-risk wet markets and released Hong Kong activists arrested in post-COVID-19 crackdowns. Without certification, Trump would be authorized under the legislation to impose sanctions like asset freezes, travel bans and visa revocations, as well as restricting Chinese businesses’ access to US bank financing and capital markets.

“China refuses to allow the international community to go into the Wuhan lab to investigate,” said Senator Lindsey Graham, another sponsor of the bill.

“They refuse to allow investigators to study how this outbreak started. I’m convinced China will never cooperate with a serious investigation unless they are made to do so.”

Following the report, futures whic had already legged sharply lower on Tuesday afternoon, tumbled to session lows, as traders now await China’s less than diginified response and as it becomes all too clear that launching a full on assault on China will be a core aspect of Trump’s re-election campaign.

 

 


Tyler Durden

Tue, 05/12/2020 – 20:25

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In Unprecedented Move, Two Fund Giants Liquidate CLO Warehouses

In Unprecedented Move, Two Fund Giants Liquidate CLO Warehouses

Yesterday we laid out how the magic of modern monetary alchemy (not to be confused with the blunt brain trauma that is the magic money tree of helicopter money) works, by showing how a CLO takes 96% junk rates loans and by repackaging this portfolio, or “warehousing” it into a CLO, the product were tranched bonds of which 87% were rated investment grade.

And while in theory this works by “diversifying” away individual credit risk, in practice the whole exercise is nothing but smoke and mirrors which crumbles the moment an adverse systemic event – such as a global viral pandemic – reveals that the investment grade emperor is really wearing junk-rated clothes.

Of course, it is the very process of warehousing that made all this possible and resulted in record demand for leveraged loans for the past few years, with CLOs becoming the biggest source of demand for the $1 trillion leveraged loan market, because as we concluded in our article, this CLO sleight of hand “worked splendidly as long as nobody questioned the “alchemy” behind the biggest magic trick Wall Street pulled in the past decade. Alas, alchemy does not exist, and just like all those buying “gold” from carnival charlatans eventually realized they were holding on to lead, so all those who naively believed they had purchased investment grade securities are about to learn the hard way that what they really owned was, aptly-named, junk.”

Fast forward to today, when investors finally appear to be asking what good are CLOs, and what is the point of tranching cash flows, if virtually all underlying junk loans will soon end up – true to their name – in default, with no cash flows left to tranche.

Bloomberg reports that two funds that aimed to bundle leveraged loans into bonds decided instead to liquidate the loans they had bought, a rare step reflecting just how the pandemic has cooled the market for securities known as collateralized loan obligations.

At a time of massive downgrades of both underlying loans and resulting CLO bonds, Steele Creek Investment Management and AXA Investment Managers both sold off loans they had planned to package into CLOs, according to Bloomberg citing people familiar with the matter. The funds had paid for the loans using temporary lines of credit known as warehouses.

With leveraged loan prices plunged to their lowest level in more than a decade in March, CLOs have been left scrambling to find buyers for their securities, and as a result Steele Creek and AXA Investment Managers decided to instead liquidate their warehouses, a move that some investors fear may become increasingly common, and could push loan prices even lower.

Steele Creek, a Moelis Asset Management company, put a $177 million warehouse loan portfolio up for sale on May 4, the people said. A spokesperson for Steele Creek declined to comment. AXA’s asset management arm sold a warehouse for a CLO it was arranging with Citigroup, said the people, asking not to be identified discussing a private matter.

As Bloomberg notes, selling loans held in warehouses may make more sense now after prices have recovered somewhat from their March levels amid growing Federal Reserve support for credit markets, making potential losses relatively manageable, investors said.

In keeping with the intricacies of structured credit, a CLO warehouse is often funded in part by outside investors who bear the initial pain if the loans go bad, known as the first loss, similar to the equity tranche of the final CLO itself. They usually choose to roll their investment into the riskiest securities of a CLO when the deal is ready to close, known as the equity portion. AXA Investment Management’s decision was made in conjunction with, and in the best interests of the first loss provider, according to Yannick Le Serviget, the firm’s global head of leveraged loans and private debt. AXA IM declined to comment on specifics of the transaction.

“Given the large repricing of the loan market, specifically good quality portfolios, it did make sense to take advantage of the upward pricing,” Le Serviget said.

While such liquidations are extremely rare, fears of CLO warehouse unwinds emerged in March once pandemic fears started hammering corporate debt markets broadly. The, as we reported last month, ratings firms downgraded a wave of loans as the pandemic weighed on companies’ sales. The average loan price plummeted to around 76 cents on the dollar in late March, before rebounding to around 87 cents.

What makes the liquidation scenario especially concerning is that most CLO warehouses aren’t forced to sell loans if prices fall below particular levels, and since the facilities usually mature in 12 to 18 months, fund managers and investors have breathing room to decide whether to liquidate or go through with the CLO. Unwinding a facility at depressed prices could force some CLO investors to bear losses, making them less inclined to push for an unwind.

But investors in the CLO who are among the first to take losses might become more inclined to liquidate a warehouse if i) the loans become impaired, or if ii) they see little scope for price recovery over the medium term. In some cases it may also make more economic sense not to proceed with a transaction if there is a buyer for the loans in the warehouse, investors say. Banks may also pressure CLO managers to end deals if assets are sitting in a warehouse for too long.

The concern is that if despite the recent rebound in both loan prices and various CLO tranches, as per the Palmer Square index, two fund giants decided to unwind warehouses, then the signal is clear: this is as good as it will get for the leveraged loan market – i.e., this is the apex of the dead cat bounce – and what is coming will be much uglier.

* * *

The stunning move by Axa and Steele Creek may explain why on Tuesday, the Fed revised its Term Asset-Backed Securities Loan Facility to allow CLOs that hold a broader range of leveraged loans to be used as collateral. According to a Fed statement, the central bank will now accept new AAA CLOs with leveraged loans, including refinanced loans, that priced as far back as January 2019, compared to the previous term sheet where eligible CLO could only hold newly-originated loans.

Still, the Fed’s involvement is largely superficial to the CLO market which until now had not benefited much from the central bank’s effort to boost credit liquidity: as Bloomberg notes, the terms still require eligible CLOs be static vehicles wherein managers can’t actively trade the loans underpinning the deals, a structure that makes up only a small portion of the market. “It’s not going to open up the floodgates, but it can have some measured effects,” said Gregg Jubin, a partner at Cadwalader. “This looks certainly better than the first iteration.”

It is hardly a coincidence that the Fed announcement comes just as a warehouse was liquidated. According to Jubin, the changes may benefit existing CLO warehouses that hold qualifying loans. On the other hand, some pointed out to the prohibitive interest rate demanded by the Fed under TALF , which will be 150 bps over 30-day average SOFR, making the facility quite expensive .

It’s “a positive sign for the market that the look back for eligible collateral extends back to the beginning of 2019 and also includes refinancings since that time, as is the fact that the Fed appears to have taken into consideration certain detailed aspects of how the CLO market operates,” said Nick Robinson, a partner at Allen & Overy LLP. And while this may be good news for investors in recent AAA CLOs tranches – mostly Japanese retirees – everyone else, i.e., all those who hold to AA and lower rated tranches, remain in the cold and will have to wait for the next crash in hopes the Fed expands the scope of TALF again, or else have no choice but to sell now that the AXAs of the world have suggested this is as good as it will get.


Tyler Durden

Tue, 05/12/2020 – 20:07

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The Billion-Dollar Buyer Of Cohiba, Romeo y Julieta, And Montecristo Cigar Brands Remains A Smoky Mystery

The Billion-Dollar Buyer Of Cohiba, Romeo y Julieta, And Montecristo Cigar Brands Remains A Smoky Mystery

The consortium of buyers of Imperial Brands’ cigar business, who will be acquiring the world renowned Cohiba brand, have mostly remained under the radar. The deal itself has also been “shrouded in a smoky veil of secrecy”, according to Bloomberg

However, one group of investors is being led by an Asian Gambling Executive who helps run operations in Macau, it is now being reported. Imperial has continued to decline comment on who is buying the business, simply calling them “the right long-term owners” for the brands. 

Imperial decided last month to sell its premium cigar business for $1.1 billion to Allied Cigar Corporation. Imperial’s brand portfolio also includes Romeo y Julieta and Montecristo.

Allied Cigar is a private firm that was incorporated in Hong Kong on March 10, according to registry filings. Chiu King-yan, who is the CFO of Macau’s biggest junket operator, SunCity Group Holdings Ltd., was listed as a board member. 

Chiu is also a director of Summit Ascent Holdings Ltd., the Hong Kong-listed firm behind a hotel and casino complex near Vladivostok, Russia.

SunCity owns a majority stake in Summit Ascent and has been expanding outside of Macau in recent years. It has opened a resort project in Vietnam and is currently looking for projects in places like Cambodia and Japan. 

Other board members include Chiu Ping-shun and Joyce Lam. There is little information available on them in the public domain and there has been no additional evidence to suggest that SunCity is involved directly in the acquisition. 

It’s unusual for an acquisition this large to go off without transparency on who the acquirer is.

This is complicated by the fact that the deal includes Imperial’s 50/50 joint venture in Cuba, which distributes and sells the Cohiba, Romeo y Julieta and Montecristo brands. Cuba has been isolated by U.S. sanctions for decades, making it tough for the two countries to do business, Bloomberg concludes.

We’ll continue to keep a close eye on this story as it develops.  


Tyler Durden

Tue, 05/12/2020 – 19:45

via ZeroHedge News https://ift.tt/2WNKQl2 Tyler Durden