WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
May 16, 2008
The House and Senate approved farm bill reauthorization legislation including a number of energy and conservation tax incentives, and Commodity Futures Trading Commission (CFTC) reauthorization language this week. While the president is expected to veto the bill, the House and Senate votes were larger than the two-thirds majority required to override a veto.
The House Ways and Means Committee approved a $55 billion package of energy and tax extenders by a vote of 25-12. The bill includes a one-year extension of the active financing exception under Subpart F and a number of tax-exempt and tax-credit bond related provisions. The bill is offset by a delaying for nine years the worldwide interest allocation election, imposing current taxation on deferred compensation plans in countries in which the U.S. does not have a tax treaty and extending coal excise taxes.
The Senate Banking Committee is expected to continue its markup of a housing bill —including government sponsored enterprise (GSE) regulatory reform and the HOPE for Homeowners Act—next week. The Committee adjourned this week’s markup to give Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) more time to finalize an agreement on the bill.
During this week’s Joint Economic Committee hearing on how to prevent a future credit crisis, Chairman Charles Schumer (D-NY) supported the creation of a credit default swap (CDS) clearinghouse in order to create transparency in the CDS market.
John Fenton, deputy director, Market Surveillance, CFTC, told members of the House Agriculture Subcommittee on General Farm Commodities and Risk Management, there is no indication speculators are driving the increase in commodity prices.
House and Senate Approve Farm Bill Conference Report
After weeks of negotiations to resolve the differences between the House and Senate farm bills, the House and Senate approved the farm bill conference report this week including a $1.7 billion tax package and reauthorization of the Commodity Futures Trading Commission (CFTC). The Food, Conservation and Energy Act of 2008 (H.R.2419) was approved by the House by a vote of 318-106. The Senate approved the conference report by a vote of 81-15. The conference report includes a number of energy and conservation tax incentives—including $500 million in tax-credit timber conservation bonds to be issued by qualified non-profit organizations and for the acquisition of qualified forest and forest lands. The Food, Conservation and Energy Act also updates the Agricultural (Aggie) Bond program, which authorizes State and local governments to issue tax-exempt bonds to provide low interest loans for first-time ranchers and farmers. The bill would increase the loan limit from $250,000 to $450,000, indexes the limit for inflation; and would also eliminate the current dollar limitation on the definition of substantial farmland.
The Food, Conservation and Energy Act would also reauthorize the Commodity Futures Trading Commission for five years through 2013. Negotiations on CFTC reauthorization language have been ongoing since 2002. The bill also includes a number of provisions recommended by the President’s Working Group on Financial Markets (PWG), which clarify the CFTC’s authority over certain retail foreign currency transactions, the CFTC’s anti-fraud authority over principal-to-principal transactions, and the CFTC’s enforcement powers. The bill also calls on the PWG to ensure the Securities and Exchange Commission (SEC) and the CFTC issue joint rulemaking on portfolio margining for security option and security futures products by September 30, 2009 and joint rulemaking resolving issues concerning foreign and debt security indices by June 30, 2009. The bill also includes a provision recommended by the PWG granting the CFTC exclusive jurisdiction over significant price discovery contracts on Exempt Commercial Markets (ECMs). Also, electronic trading facilities (ETFs) would be required to prevent manipulation and price distortion by monitoring trading, ensuring contracts are not susceptible to manipulation, limiting the size of positions to prevent excessive speculation and reducing holdings of traders in violation of position limits. Electronic exchanges would also have to collect information on trading activity, supply large trader reports to the CFTC and publish price, trading volume and other trading data on a daily basis. The CFTC is required to review all electronic contracts to identify that those that perform a significant price discovery function are regulated appropriately.
The Food, Conservation and Energy Act is now ready to be sent to the White House. The president has said he will veto the bill. However, both the House and Senate votes were larger than the two-thirds majority required to override a presidential veto.
Ways and Means Approves Extenders Bill
The House Ways and Means Committee approved the Energy and Tax Extenders Act of 2008 (H.R.6049) by a vote of 25-12. The $55 billion bill includes an extension of tax incentives for investment in renewable energy, energy efficiency and conservation and extends a number of provisions which expired at the end of 2007 or will expire at the end of 2008. H.R.6049 would extend the active financing exception under Subpart F, which is currently scheduled to expire in December 2008, for one year. The bill also extends the current law look-through treatment of payments between related controlled foreign corporations for one year through 2009. The Energy and Tax Extenders Act would also extend the Section 45 renewable energy production credit placed-in service date for three years for all qualified facilities except wind power, which would be extended for just one year. The bill would extend for one year (through 2008) the ability to make tax-free charitable contributions from an Individual Retirement Account (IRA) of up to $100,000. H.R.6049 would also extend for one year (through 2008) the special rules that allow veterans to qualify for State-operated, tax-exempt mortgage revenue bond programs without regard to the first-time home buyer requirements. The bill would expand the GO Zone bond program to allow two additional counties in Alabama to qualify for tax-exempt bond financing.
The bill also includes a number of tax-exempt and tax-credit bond related provisions:
- CREBS: The bill would authorize $2 billion in clean renewable energy bonds (CREBs) to finance facilities that generate electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, and landfill gas among others. The authority would be divided between qualifying projects of State/local/tribal governments; public power providers; and electric cooperatives.
- Qualified Energy Conservation Bonds: The bill would authorize $3 million in tax-credit bonds to finance State and local government programs and initiatives designed to reduce greenhouse gas emissions.
- Qualified Green Building and Sustainable Design Project Bonds: The bill would extend the authority to issue qualified green building and sustainable design project bonds through the end of 2012. Currently the authority to issue these bonds is set to expire on September 30, 2007.
- QZABs: The bill allows an additional $400M in qualified zone academy bonds (QZABs) to be used to finance renovations, equipment purchases, developing course material and training teachers and personnel at a qualified zone academy. The bill modifies the current law-arbitrage restrictions for QZABs.
The Energy and Tax Extenders Act of 2008 is fully offset with three provisions: a provision that would delay for nine years the effective date of the worldwide interest allocation election that would otherwise take effect next year; a provision that would impose current taxation on deferred compensation plans in countries in which the U.S. does not have a tax treaty and an extension of coal excise taxes. Under the deferred compensation proposal, any compensation that is deferred under a nonqualified deferred compensation plan of a nonqualified entity is includible in gross income by the service provider when there is no substantial risk of forfeiture of the service provider’s rights to the compensation. The proposal applies in addition to the requirements of Section 409A and is effective with respect to amounts deferred which are attributable to service preformed after December 31, 2008. During debate on the bill, the Committee defeated a number of amendments, including an amendment offered by Rep. Tom Reynolds (R-NY) to include an individual alternative minimum tax (AMT) patch for 2008. The Reynolds amendment was defeated by a vote of 15-24. An amendment offered by Rep. Phil English (R-PA) to eliminate the AMT beginning in 2019 was defeated by a 15-24 vote. The Committee also defeated an en bloc amendment—which included an amendment offered by Rep. Kevin Brady (R-TX) to strike any revenue offset from the bill; an amendment offered by Rep. Wally Herger (R-CA) to extend the AMT patch for one year and all of the 2007 and 2008 extenders through 2009; and others—was defeated by a vote of 12-23.
The House is expected to debate the Energy and Tax Incentives Act of 2008 during the week of May 19. Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) introduced a package of extenders—including a one-year AMT patch—in April. The Senate Finance extender package did not include offsets.
Banking Committee Housing Markup to Continue Next Week
The Senate Banking Committee is expected to reconvene a markup of housing legislation next week, after adjourning this week’s markup in order to give Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) additional time to finalize an agreement on the bill. The package would include government sponsored enterprise (GSE) regulatory reform as well as the creation of a program to allow the Federal Housing Administration (FHA) to insure up to $300 billion worth of refinanced mortgages for borrowers facing foreclosure. According to the text of the Federal Housing Finance Regulatory Reform Act of 2008, released by Chairman Dodd earlier in the week, the bill would establish a GSE regulator with new powers to regulate safety and soundness, capital, portfolio holdings, internal management and ensuring the companies meet their mission of providing a source of affordable financing for home ownership. The bill requires the new regulator to establish standards regulating the size and growth rate of the GSE portfolios consistent with the mission and safety and soundness of the GSEs. It also would establish an affordable housing fund to be financed through contributions by the GSEs in amounts equal to 4.2 basis points on each dollar of unpaid principal balance of each year’s total new business purchases.
The bill includes the text from the Hope for Homeowners Act, proposed by Chairman Dodd in March. The Act creates a new FHA program to insure refinanced loans for distressed borrowers. In order to refinance, the principal would have to be written down to 90 percent of the current appraised value of the property. The program would be overseen by a Board, made up of the HUD Secretary, the Secretary of the Treasury and the Chairman of the Federal Deposit Insurance Corporation (FDIC). Only owner-occupant mortgages would be eligible for the program. Other eligibility criteria would be established by the Board. The program could insure up to $300B in loans. The size of the new loans issued would be the lesser of either 1) the amount the borrower can afford to repay, based on certain criteria; 2) if the Board establishes an auction process, the amount established at auction for the mortgage. The program would sunset December 31, 2012.
Chairman Dodd and Ranking Member Shelby are said to be negotiating on the bill’s provisions related to funding for the FHA program; the GSE affordable housing fund and the portfolio and capital reserve language. Staff is expected to work on changes to the bill over the weekend and the Committee is likely to continue its markup of the bill next week.
JEC Examines Ways to Prevent Future Credit Crisis
During this week’s Joint Economic Committee hearing on how to prevent a future credit crisis, Chairman Charles Schumer (D-NY) said financial regulation needs to keep pace with financial innovation, and called for investment banks to be supervised more strictly. He supported the creation of a credit default swap (CDS) clearinghouse, saying it would help maintain oversight and create transparency in CDS market. In addition, Schumer called for regulatory coordination with U.S. international partners to strengthen the global market as well. Vice Chair Carolyn Maloney (D-NY) supported the creation of a “super regulator” to replace the current inefficient multiple regulator structure, to work with the Basel Committee on capital adequacy standards and have the authority to supervise investment bank holding companies with bank affiliates. Paul Volcker, former chairman of the Federal Reserve Board of Governors, told Schumer the Fed acted appropriately in the Bear Stearns situation given the short time period and the potential systemic contagion, but he still believes the entire set of circumstances should be reviewed. He suggested banks or investment banks that package or sell debt instruments be required to maintain some of the instruments themselves. Volker suggested changing the Fed to a consolidated regulatory entity would be effective if the new authority and power were balanced and not over-reaching. In the interim, the Congress could appoint, within the Fed, an official chief supervisory regulator.
Douglas W. Elmendorf, senior economic fellow, Brookings Institution, suggested four principles to guide financial regulatory reform: 1) financial regulation should try to keep pace with financial innovation, 2) mortgage originators should have simpler disclosures for everyone and limits on offerings in subprime borrowers, 3) financial instruments and institutions should be more transparent, and 4) key financial institutions should be less leveraged and more liquid. Ellen Seidman, director, Financial Services Project, New America Foundation, suggested six critical strategies for a new financial regulatory system: 1) effective enforcement, 2) risk assessment, 3) capital adequacy, 4) enhanced responsibility, 5) regulatory consistency, and 6) alignment of incentives with practices. Alex Pollock, resident fellow, American Enterprise Institute, suggested improvements to U.S. financial regulation: 1) a simple and straightforward one-page mortgage disclosure form, 2) remove government support for rating agencies, 3) encourage credit risk retention by mortgage originators, 4) countercyclical management of loan-to-value ratios, 5) create a “super Fed” with broader authorities and powers, 6) increase government-sponsored enterprise (GSE) responsibility for refinancing the bust, 7) control “fair value” accounting, and 8) study of financial literacy.
CFTC Says No Indication Speculators Driving Increased Commodity Prices
John Fenton, deputy director, Market Surveillance Section, Commodity Futures Trading Commission (CFTC), told members of the House Agriculture Subcommittee on General Farm Commodities and Risk Management this week, there is no indication speculators are driving the increase in commodity prices. Fenton said the market is reflecting fundamentals of supply and demand. Subcommittee Chairman Bob Etheridge (D-NC) noted the Commodity Futures Trading Commission (CFTC) hearing on futures markets demonstrated consensus on the facts of the commodities market events, but showed no consensus on the causes of the increased market pricing and volatility. Ranking Member Jerry Moran (R-KS) said he believes the CFTC is performing its role of monitoring the markets, and said he wants to learn more from the data the CFTC has been collecting on commodities trading. Moran said any changes to the current market system should not concentrate on any particular participant class. Jeff Harris, chief economist, CFTC, said other causes of market fluctuations include geo-political uncertainty, growth in open-interest hedging, increased shorting, and record volumes traded in all markets. Fenton added tremendous world demand, particularly in emerging markets and China, have also affected pricing across the board. He said increased institutional investments in commodities have also infused more money into the markets.
Fenton said sovereign wealth funds (SWFs) have limited trading directly in the commodities market, but there is some investment by SWFs indirectly through their money managers. Fenton said the CFTC needs increased tools and funding to monitor SWF investments. Gerry Ramm, president, Inland Oil Company, on behalf of Petroleum Marketers Association of America (PMAA), recommended Congress: 1) close the administrative foreign boards-of-trade loophole via review or elimination of CFTC “no action letters” to overseas energy trading platforms; 2) raise margin requirements for non-commercial entities only; 3) require non-commercial traders to have the ability to take physical delivery of some of the product; 4) impose new transaction fees for non-commercial traders; and 5) ban any participant without the ability to take direct physical possession of a commodity; and significantly increase CFTC funding. Bob Stallman, president, American Farm Bureau Federation (AFBF), said the AFBF supports the CFTC’s regulation of commodity futures, and opposes any efforts to weaken the CFTC by transferring or decreasing its authorities, or combining the CFTC with the Securities and Exchange Commission (SEC).
Bills Introduced This Week
House Transportation and Infrastructure Chairman James Oberstar (D-MN) and Ranking Member John Mica (R-FL) introduced the Rail Infrastructure Development and Expansion Act for the 21st Century, or RIDE-21, which authorizes states to issue $12 billion in tax-exempt debt and $12 billion in tax-credit bonds to fund high-speed rail corridors over the next ten years. The bill (H.R.6004) authorizes the Secretary of Transportation to designate $1.2 billion per year (over ten years) in private-activity tax-exempt bonds and $1.2 billion per year (over ten years) in tax-credit bonds to fund qualified projects
Sen. Carl Levin (D-MI) and Sen. Dianne Feinstein (D-CA) introduced legislation (S.2995) which requires that any foreign exchange operating a trading terminal in the United States for trading a U.S. energy commodities meet comparable requirements to those that currently apply to U.S. exchanges regarding the daily publication of trading information and position limits or accountability levels for speculators. Under the Oil Trading Transparency Act, the Commodity Futures Trading Commission (CFTC) would be required to obtain information from the foreign exchange to determine how much trading in U.S. energy commodities is due to speculation.
The Free Way Act of 2008 (H.R.6002) introduced by Rep. George Miller (D-CA), would prohibit the collection of certain tolls on existing carpool lanes built with federal taxpayer money.
Rep. Stephanie Tubbs-Jones (D-OH) and Rep. Phil English (R-PA) introduced the Retirement Security for Life Act (H.R.2205), which would provide a tax incentive for retirees who elect to receive a guaranteed stream of income for life from an annuity. Under the bill, up to 50 percent of the income (up to $20,000) generated by the annuity would be excluded from income tax.
The Week Ahead
- The Senate Banking Committee is expected to continue its markup of the Federal Housing Finance Regulatory Reform Act of 2008.
Tuesday, May 20
- On Tuesday, May 20, the Senate Energy and Natural Resources Committee will hold a hearing on the economic impact of climate change legislation.
- The House Financial Services Committee will examine the Credit Monitoring Clarification Act (H.R.2885) on Tuesday, May 20.
- Also on May 20, the Senate Banking Committee will consider the nomination of Steven Preston to be the Secretary of Housing and Urban Development.
- The Senate Homeland Security and Governmental Affairs Committee will examine commodity speculation and rising food prices on Tuesday, May 20.
Wednesday, May 21
- The House Foreign Affairs Committee will hold a hearing on the impact of sovereign wealth funds on Wednesday, May 21.
- Also on May 21, the House Energy and Commerce Subcommittee on Oversight and Investigations will hold a hearing on speculation in the energy markets.
- The House Oversight and Government Reform Subcommittee on Domestic Policy will hold a two-part hearing on the impact of the mortgage crisis on neighborhoods on Wednesday, May 21, and Thursday, May 22.
Thursday, May 22
- SIFMA will testify before the House Financial Services Committee hearing on the increase in the conforming loan limits on Thursday, May 22.