A top banking regulator who recently warned about the danger of Republican reform proposals and “a notable uptick in risk appetites” is stepping down.
Federal Reserve Vice Chair Stanley Fischer wrote to President Trump on Wednesday, announcing his resignation “effective on or around October 13.” In his letter, released the same day by the central bank, Fisher said he was motivated to quit by “personal reasons.”
“During my time on the Board [of Governors], the economy has continued to strengthen, providing millions of additional jobs for working Americans,” Fischer told Trump, praising the tenure of Chair Janet Yellen.
“Informed by the lessons of the recent financial crisis, we have built upon earlier steps to make the financial system stronger and more resilient,” he added.
Fischer was nominated by President Obama. His four-year term started in 2014, the same year Yellen started as Fed Chair.
In recent months, Fischer had lamented the trajectory of the economy since the election of Donald Trump—a time that has seen bullish behavior in the stock market, with major gains largely on the promise of relaxed regulation and less stringent enforcement from federal agencies.
The Dow Jones Industrial Average, the NASDAQ Composite Index and the S&P 500 are all up by about 20 percent since the election of Trump, despite any lack of major legislative accomplishment and only a modest 0.4-percent reduction in unemployment.
“[T]he corporate business sector appears to be notably leveraged, with the current aggregate corporate-sector leverage standing near 20-year highs,” Fischer warned in a June 27 speech on financial stability.
He said that such borrowing “leaves the corporate sector vulnerable to other shocks, such as earnings shocks.”
“The general rise in valuation pressures may be partly explained by a generally brighter economic outlook,” Fischer also said of the stock market, “but there are signs that risk appetite increased as well.”
He warned that regulators “still have limited insight into parts of the shadow banking system,” referring to financial activity that escapes officials scrutiny.
Confirming some of Fischer’s fears, The Wall Street Journal reported last week that banks are increasingly, once again, selling collateralized debt obligations (CDOs)–insurance like the junk products that helped banks mask risk in the run-up to the subprime mortgage crisis. This time around, however, the financial vehicles are based on corporate debt and not homeowners’ obligations.
Those selling the derivatives get a regular stream of income, if certain corporate debtors in a portfolio are current with their obligations. But that typically dries up “once 3 percent of the portfolio has been wiped out through defaults,” the Journal noted.
According to the paper, the largest 12 global investment banks saw a $2.6 billion annual increase in revenue from so-called structured credit products–CDOs and other derivatives. Critics note that investors can rely on CDOs to make risky gambles, as they did last decade.
Fischer cited the 2008 subprime mortgage crisis, in an interview last month with The Financial Times decrying Republican efforts to reverse reforms passed in the wake of the calamity–one that saw the battering of investment banks, insurance giants and retail banks alike, as the stock market cratered.
In the interview, he hit out at Trump administration proposals to relax rules on stress-tests, liquidity and the Volcker Rule, which seeks to prohibit speculative investments with publicly-insured savings.
“It took almost 80 years after 1930 to have another financial crisis that could have been of that magnitude,” Fisher told FT. “And now after 10 years everybody wants to go back to a status quo before the great financial crisis.”
“I find that really, extremely dangerous and extremely short-sighted,” he added.
