The House passed Senate-passed legislation funding historically black colleges and universities, the National Defense Authorization Act and a comprehensive bill to reform prescription drug pricing (see below). The Senate confirmed Stephen Hahn to serve as the commissioner of the Food and Drug Administration.
The House will vote on two articles of impeachment against President Trump and on the US-Mexico-Canada Trade Agreement (USMCA). Both the House and Senate will also pass a comprehensive $1.3 trillion bill to fund government agencies and departments for the remainder of fiscal year 2020.
Financial Services Issues
GSE Reform Efforts.
With Congress unable to move forward with broader housing reform, the administration continues its efforts to prepare for an eventual release of Fannie Mae and Freddie Mac, the government sponsored entities (GSEs) that have long dominated the mortgage market, from the effective government control they’ve been under since the financial crisis. The administration outlined its plans for housing finance reform in September. Later that month, the Treasury Department and the Federal Housing Finance Agency (FHFA), which regulates the two GSEs, began allowing Fannie and Freddie to build up their capital positions with an eye toward eventual release. The FHFA is expected to issue a proposal on the level of capital that the GSEs will need to hold in the next few months. These are initial steps to position the GSEs for raising capital from private investors, though it remains to be seen what the level of interest from investors will be as capital requirements rise and Congress is unable to provide certainty of broader housing finance reform. FHFA Director Mark Calabria has acknowledged that a capital raise wouldn’t happen until 2021 at the earliest. While Director Calabria’s term extends into 2024, the trajectory of reform efforts inevitably will be shaped by the results of next November’s elections.
Other Issues in Play
Impeachment. The House Judiciary Committee approved two articles of impeachment against President Trump, setting the stage for a historic vote next week in the full House to impeach the President. At this point, a majority vote for impeachment seems certain. We have heard that only a few of the 233 House Democrats will vote against impeachment, while none of the 197 Republicans will vote for it. Given that, we expect impeachment to prevail by close to a 30-vote margin. Almost 21 years ago – on December 19, 1998 – the House voted to impeach President Clinton on two charges on what will be a similar margin (228-206). Whatever you think of this vote, this impeachment won't be a high point in US history. The Senate impeachment trial will begin in January and likely consume most of the month. We don't expect the trial to feature witnesses. As most everyone knows by now, the President will be acquitted in the Senate and resume his tenure in office.
US-China Trade Agreement or Confusion?
More details will emerge later today, but reports circulated last night of a phase one agreement "in principle." This would be the second time an agreement "in principle" has been reached. While we believe a phase one agreement will be reached, the exact text of commitments made is still being written and may still be contentious. Nonetheless, this new enthusiasm over a first step deal is positive. The deal, as described to us, contains the provisions we have expected – more Chinese purchases of US agricultural products, more Chinese purchases of US oil and gas and targeted manufactured goods, the easing of some US tariffs (but not all), a postponement of tariffs on Chinese consumer goods scheduled to go into effect this weekend, a strengthening of US intellectual property rights in China, and greater US access to the Chinese financial services sector. This all sounds positive and represents a welcomed pause in the tension between the two countries during the holiday season. We are doubtful that this will lead to a phase two agreement next year, but let's celebrate the phase one deal for now.
US-Mexico-Canada Agreement (USMCA).
Final terms of the USMCA were agreed to by congressional Democrats and President Trump’s trade negotiators and hailed by both business and labor officials. The House will pass the USMCA next week, while the Senate likely will take it up after the impeachment trial. The agreement is another accomplishment that President Trump will be able to tout on the campaign trail, but it also is a win for House Speaker Nancy Pelosi (D-CA). She succeeded in adding Democratic priorities on enforcement to the agreement, while also demonstrating that she can juggle impeachment with other pressing policy priorities. Most importantly, USMCA expands trade opportunities between the three countries involved and reminds the world that the Americas region is committed to strong trade integration and expansion. Though financial markets have been rattled this year by signs of global trade disruptions, the upcoming passage of USMCA, which may not be completed until February, is a reminder that good trade deals can be made and that the US's embrace of higher tariffs is more of a negotiating tactic than an overriding trade philosophy.
Deductibility of State and Local Taxes.
House Democrats unveiled their plan to repeal the $10,000 cap on the state and local tax deduction (SALT) for two years. This would be offset by a return to a top tax rate of 39.6% for the highest individual earners. Addressing the SALT cap is a priority for Democrats from high-tax states like New York, New Jersey and Illinois. However, the reality is that the benefits of such a change would skew toward high-income earners, which makes many Democrats less enthusiastic about the change. While the bill is likely to pass the House next week, there is no path forward in the Senate to enact such a plan, meaning the SALT cap will remain in place for the foreseeable future.
Next week will be an important week for retirement savings legislation called the SECURE Act. Negotiators are trying to reach a deal to package this retirement bill with various tax issues. While progress has been made, we are somewhat pessimistic about a deal materializing by year's end. Hanging in the balance are dozens of provisions that would impact retirement savings, most notably an increase of the required minimum distribution age to 72 and an effective end to stretch IRAs. Our optimism from earlier this year has faded over the last few months, but a deal is not yet out of the question. Next week will be pivotal as lawmakers wrap up the year and try to recess by week's end.
Prescription Drug Reforms.
The full House and a key Senate committee advanced major prescription drug reform legislation over the last week in an effort to respond to voter concerns over the high cost of prescription drugs. The House passed its bill on a party line vote. Meanwhile, the Senate Finance Committee unveiled a new version of a bipartisan bill it already had passed last month. The House and Senate bills take different approaches to capping drug prices and lowering out-of-pocket costs for prescription drug coverage under Medicare's Part D. This week’s developments may be this issue’s high water mark, however. The House bill is a non-starter in the Senate, and the Senate bill, as currently written, is unacceptable to most Republicans. As long as that dynamic remains, Senate Majority Leader Mitch McConnell (R-KY) will not bring it up for a vote. President Trump can be a wild card here – he supports many aspects of the current Senate bill and could twist the arms of reluctant Senate Republicans to support it, but we don’t think that will be successful.
Medical Surprise Billing Moving.
A bipartisan bill to prevent health insurers from billing emergency room patients at “out-of-network” prices was agreed to in practice and will likely be sent to the full House and Senate for a final vote as early as next week. The compromise bill also raises the age of tobacco use nationally from 18 to 21, a priority of Senate Leader McConnell. While it does not constitute major health care reform, it is a helpful provision for all of us who have had the misfortune of visiting hospital emergency rooms and nearly fainting at the subsequent bills we receive.
The Final Word
A Path for Bloomberg?
Many readers were disappointed with our assessment a few weeks ago that Michael Bloomberg had little chance to win the Democratic nomination for president. Out of respect for him, however, we will outline what he believes is his path to the nomination. Since entering the race last month, Bloomberg has spent over $100 million on advertising, an average of $3.72 million per a day. This blitz includes spending at least $50,000 on advertising in 100 television markets, blanketing the 25 states that have their primary elections in March. This is a funding luxury that none of his opponents can match. While conventional wisdom dictates that the nominee must perform well in the first four states (Iowa, New Hampshire, South Carolina and Nevada), Bloomberg will not be on the ballot for those contests, nor will he participate in the Iowa caucuses. If no candidate emerges from the early state primaries as a strong frontrunner and if voters doubt any of them can beat President Trump, Bloomberg could be well positioned for the March primary elections, which account for more than 60% of the pledged delegates in the Democratic primary. Bloomberg, considering his vast wealth, is perhaps the only candidate who could pursue this unconventional strategy. Even if this scenario evolves, will Democratic voters turn to a wealthy, Wall Street, ex-Republican who touted strong law enforcement and school choice as primary accomplishments while he served as mayor of New York City? Bloomberg's profile is better suited for a general election, not a Democratic primary election.