Trump Says He’s Prepared for Fight Over Cook’s Ouster From Fed

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2:21Plus, global business, finance, and tech news as it happens. The Bloomberg Business Week Daily podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. President Trump said he was prepared to for a legal fight with Federal Reserve Governor Lisa Cook after she after he moved to oust her from her post following allegations that she falsified mortgage documents. The Fed said it would abide by any court decision in Cook's legal challenge of her dismissal by Trump and has deferred any decision on Cook's current working status. We should remind everybody that her lawyer vowed to file a lawsuit over the president's maneuver to oust her for cause from the Fed Board of Governors, with Lisa Cook saying she would not resign and would continue to carry out her duties.

3:06For the legal side of this, I want to bring in Catherine Judge. She's the Harvey J. Goldschmidt Professor of Law at Columbia Law School, where she does research on banking, regulatory architecture, financial crises, and more. She's the author of Direct, The Rise of the Middleman Economy and the Power of Going to this source. Professor Judge, good to have you back on the program. Does the president have a legal basis at this point for firing Federal Reserve Governor Lisa Cook? It's dubious. I mean, the challenge is this notion of cause is not well developed in the law. No other president has actually tried to fire a governor for cause.

3:43There's some things that obviously would be justifiable basis for removing somebody if she was derelict in her duties or abusing her position. it would very easily justify this type of dismissal. Here, all we have are allegations. We don't actually have a fully developed record because there's been no due process. And there is a possibility that this is in that gray space where it's just not clear if the types of actions, even if true, would justify a firing. What legal arguments is Cook's team likely to make in defense of her position? What grounds does she and her legal team have under existing statutes?

4:19Yeah, I mean, so the statutory scheme provides that a governor of the Federal Reserve can only be removed for a cause. They otherwise have 14-year terms. And we actually have seen recently the Supreme Court shed a lot of light suggesting it's about to overrule earlier precedent, allowing other independent agencies to actually be independent. So we see this very broad reading of the president's executive authority. But the court said, well, the Fed is different. You know, the court went out of its way in a very short opinion to say the Fed is different, the different history. And we know that. And Congress has gone out its way to create these types of protections.

4:55So I think what she's going to argue is that this has nothing to do with mortgage fraud. This has everything to do with President Trump wanting to pack the Fed with his chosen appointees. And that's the one thing the law is clear that he's not allowed to do. He's not allowed to remove somebody just because of policy differences. But what if she did falsify mortgage documents? What if what Bill Pulte, who heads FHFA, has alleged that she did falsify mortgage documents? What if she did that? I mean, so the law here just isn't developed. Again, like this is a hard thing. So generally speaking, cause most of the time arises because of shortcomings and how somebody is performing their duties.

5:38This is something that happened before she joined the Fed. And we also don't know the intent, like whether the term mortgage fraud. Does intent matter with this? Yes, it does. Please explain, explain, explain how that works here, because maybe she made a mistake is what you're saying. Yeah, we just don't know. Again, intent, a core element of fraud, any type of fraud is a requirement that the person intended to defraud a party. And so that's again, it's an issue that we just don't know yet. But I think you're getting to a bigger issue, which is two different issues. One is, you know, what's really going on here?

6:12Is this a justified basis for removing her? But to like, let's look at the general context in which this is happening. I think the bigger point here is that President Trump clearly is not going to tolerate an independent Fed. I mean, this isn't coming out of the blue. This is coming less than a month after he similarly alleged that he was going to try to fire current chair Jay Powell because of cost overruns associated with the renovations. I think he realized there that his case was thin. And so ultimately he walked away on that. But this doesn't look like what he's really trying to do is just to make sure that he has a team of people that are fulfilling their duties under the law, but instead that he has his team in place.

6:56And so it's going to be hard for court to completely ignore the environment in which this is happening. And based on my understanding, establishing a for-cost removal usually requires some type of proceeding that would allow Cook to answer questions and answer the charges and present evidence. Cook's lawyer said that this lacks any factual or legal basis. By this, I mean the challenge to Trump's action. Do you agree with that? Yeah, so normally you would have to have some type of due process for that for cause protection to have any bite. If you say like they can only be removed for cause, but all you need are allegations and somebody's job can be terminated, then as a practical matter, you haven't given any teeth to that for cause requirement.

7:39And we can go back to 1935 when Congress created this particular version of the Federal Reserve. And throughout the debates, there is repeated references to the fact that they don't want the president to have too much ability to control the Federal Reserve. This was during FDR's reigns was another period where you had a very strong president that was trying to increase his control. And Congress refused to give FDR, really the proposal that FDR put forward, in the form that he wanted it to be passed because they were worried about too much presidential control. So congressional intent here is very clear that what they were trying to guard against was a president.

8:20And again, the reason they're worried about that is presidents consistently want slightly more accommodative monetary policy. And sometimes it's warranted, but allowing monetary policy to be more accommodative than is warranted does lead to a higher likelihood of inflation and other significant costs for the long term health of the economy. We're speaking with Catherine Judge. She's the Harvey J. Goldschmidt professor of law at Columbia Law School. She's the author of Direct, The Rise of the Middleman Economy and the Power of Going to the Source. She joins us right now from Oxford. You mentioned that it could be politically motivated.

8:55Why do you think it's Lisa Cook specifically? We know that her term doesn't expire until 2038. So, again, I think that you might have just been looking for any of the Biden appointees where there happened to be something colorable. And it is important to acknowledge that there's at least a colorable claim here. Right. We do want Federal Reserve governors to be credible individuals who are respected and who are doing their utmost to fully comply with the law. And so it could be and it looks like this might be the case that they were looking around for dirt on any of the current governors. I mean, another aspect of this that is really disturbing is just the government has all kinds of information about all of us.

9:36Right. So we have all the mortgage documents. You have tax filings. Banks file suspicious activity reports and you don't even know one's been filed about you. And so the Treasury is just this boatload of information that banks have provided about transactions our customers have engaged in. And so there's also this real question over, does all of that information suddenly become available for partisan purposes? And so that's a separate issue that seems related. What's the position that the Federal Reserve finds itself in right now? The full statement from the Federal Reserve, it's five paragraphs.

10:14And the Federal Reserve said, as always, the Federal Reserve will abide by any court decision. It seems like the Fed is actually threading this needle pretty well and saying, look, we'll do whatever the courts tell us to do. But the courts haven't spoken yet. Yeah, I think it's prudent in some ways. They're trying very hard, I think, not to alienate the president more than necessary. On the other hand, it is it is a somewhat weak position because, again, there hasn't been any due process yet. And they know that there hasn't been any due process yet. So there was a question of, like, do they even allow this decision to stand and wait for the courts?

10:57Or do the opposite and say, look, until there's been some due process, we're still going to treat her as Governor Cook with all of the rights associated with that position. But once a court has spoken, then we're going to defer to that decision. So even though I think the Fed is very careful here, they did take a posture that was more deferential to the president than the one they might have taken. Based on all the facts at hand and given your really impressive background, what is your best guess on how this situation will end up being? I mean, so I think the biggest lesson here is it's not about Governor Cook, it's about Fed independence.

11:36And so when I look at what's happening right now, I think the days of Fed independence are numbered. It's already been whittled down meaningfully through the repeated attacks on Powell. But I think we see something much more pernicious going on, where it's not just these individual attacks, but a president signaling fundamental discomfort with there being such a powerful arm of government that he doesn't have control over. And so if he's willing to whip out every stop imaginable until the Fed is really willing to do his biting, that's going to be a very different world than the one that we've lived in for the past five or six decades.

12:15So in your view, what should Congress do? I think Congress ideally should uniformly come out and condemn the decision as inconsistent with a statutory scheme that was created. And again, it's hard. They didn't specify any procedures or process, but inherent in that term, cause suggests there has to be something more than a mere allegation. So I think the most heartening thing would be to say, look, look, the president does have the ability to make these allegations, and perhaps there's even the possibility that there should be some type of hearing on these allegations. But I think Congress ideally should stand by the statutory language that they put into place in 1935 that said, look, it's really important for the Fed to remain independent.

13:05And that's because, again, there can be meaningful short-term economic gains from more accommodative monetary policy. So there's reasons the president wants to do this. It's a very smart move, a shrewd move on his part. That doesn't mean it's the long term best health of the interests of the economy or the country. You clerked for Justice Stephen Breyer on the Supreme Court. Just we have five seconds. Yes or no. Does it go to the Supreme Court? Yes. All right. There it is. Catherine Judge. Always good when you join us on a Bloomberg Businessweek Daily. Thank you so much for taking the time. Catherine Judge of Columbia University, where she's the Harvey J.

13:40Goldschmidt Professor of Law. This is Bloomberg. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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17:19Whatever your goal, 4imprint makes it easy to find your perfect promo match. Explore the possibilities today at 4imprint.com. 4imprint, 4certain. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube. A lot of headlines crossing Bloomberg Terminal just in the last couple of minutes. I want to bring some of them in. Elon Musk's Starlink and T-Mobile. I echo stars spectrum. That's according to Semaphore. Also, the Trump administration is reviewing options to influence Fed banks.

17:59The Trump administration aims to scrutinize Fed president's selection. And then there's this one crossing from the Wall Street Journal, the journal reporting that Trump weighs quickly announcing a replacement for the Fed's Lisa Cook. That's the backdrop for the trade after hours and heading into tomorrow. I want to bring in Bailey Lipschultz. He's Bloomberg News equities reporter. He joins us here in the Bloomberg Interactive Brokers Studio. I bring up everything that's happening right now, Bailey, because that's what traders and investors are going to have on their radar tomorrow. Today, the trade was surprising to me because I thought there would be a bigger reaction to a threat of the Fed's independence.

18:40But maybe it's not over until it's over. And the market's saying we don't really see that being a reality anytime soon. I think the big thing, Tim, when you talk to investors is that if you are looking for a reason to sell in this market, you've been wrong. So if you're saying that these latest headlines are a reason to take chips off the table, tidy up your portfolio, maybe that is a smart move given the low volume and low volatility we've been seeing. But the broader kind of backdrop is this is a market that has been trying to find reasons to go higher. So to your point, if there's no actual kind of decision that is fundamentally being implemented, it's a lot of headline risk.

19:18We've seen a market, whether you want to say taco trade, really shrug off reasons or threats or or realize kind of actions from the White House to kind of dial back exposure. And one thing I just want to call out is we did see volumes down about 25 to 30 percent relative to a normal trading day in the last month. And when we do look at using the terminal factors to watch, that function is FTW, momentum outperforming, as was growth, as was highly shorted names, underperformers, dividend and low volatility stocks. So this is a market that whether you're kind of covering some of your shorts or leaning into momentum, that's kind of been the backdrop with DC aside.

19:57We have JP Morgan's Michael Faroli. He's an economist there saying that if the president were successful, the outcome would be momentous. And he also said that given all the above risk, this would be an upside inflation risk. What are you hearing from your sources? Are they I know many of them might not be short term traders, but are they thinking of shifting their allocations? How are they positioning? What are they watching? It's new, but it's not new to an extent. We've seen Trump time and time again kind of browbeating, whether it's Jay Powell or someone else kind of pushing for the Fed to cut.

20:29When you look at what's being implied right now, we're at 89 percent chance of the Fed cut next month. Is that a lot different than what it was on Thursday? It was worth 100 a little while ago. What? So it's come back. So it comes back to kind of this debate of what's actually baked in. You look back August 13th, we were at 106 % chance of a Fed cut. So - Well, hold on. I was taught by my math teacher. I'm not joking. Fred Coleman. Okay. What grade is this? This was freshman year of high school. And he's a coach. We called him Durf. It's Fred backwards. And he would get very angry with anyone who said, I'm giving it 110%.

21:13He said, there's no such thing as more than 100%. Now that we cover equity markets, we do sometimes have stocks that go up more than 100%. But my math teacher always reminded us, and coach said, you can only give 100%. How can there be more than 100 % chance of a rate cut? It's just the number of cuts baked in. So it's not necessarily 108 % chance, though. The terminal will show that. It's more that the swaps market is implying were there to be a decision. Now investors are betting that they're pricing in 1.08 rate cuts. Again, though, there's no inter, like, rate cuts. You either cut 25, 50, et cetera, not 12 and a half basis points.

21:53Okay. So that's kind of the backdrop. We also have a story from your team, I think, that says, Goldman Sachs says a Goldilocks summer is all but over and mounting concern about the U.S. economy is yanking markets from their seasonal slumber. But you made a point earlier that this is a market that almost threatens you to sell, but investors still don't. What are you hearing on your end from traders and portfolio managers? What are their reasons for still believing in the U.S. market when we have international portfolio managers earlier saying that, you know, this is why we're international trade.

22:25I will say this is it feels to me when I talk to investors short term long onlys. This is the most hated bull market in quite some time. This is a market that fundamental investors are saying we're trading it nosebleed valuations, but yet we keep going higher. We see the market finally taking what would be seen as a healthy correction. And then investors step in and buy the dip. One and a half percent is not really a dip in my view. When you look at a gauge like the VIX sitting below 15, you look at the dispersion between market volatility being low and single stock volatility being high, whether that's momentum or some of these heavily shorted or growthier names, investors are picking their spots.

23:04But the thing that has been learned or the thing that's been playing out so far this summer, especially when you look at kind of how quickly the market snapped back from those April lows, is that the promise of earnings growth tomorrow is is still stronger than the fears of missing. So you still are dealing with, I don't want to call it a FOMO trade, but you're still dealing with that. This is the perfect segue to talk about a story that I've wanted to speak to you about for more than a week at this point. It's about your story last week on Chamath Palihapitiya. It's one of the most read on the Bloomberg terminal last week.

23:38He is, who calls him the SPAC king? Does he call himself the SPAC king? He was known as that? I feel like he's just known as that. He was known as the SPAC king. The origins are debated. You might know him as a podcaster these days. He's the all-in podcaster. According to the terminal, he's not a millionaire, at least according to Rich Go. He's not one. As far as our data are concerned, as of the time of publication. Okay, well, maybe that will change once he gets back into SPACs. What's he doing? He filed, so you file 15-day lag before you can actually raise an IPO, but he filed to raise$250 million SPAC, targeting pretty much everything that's been working in the SPAC market.

24:15I'm talking about AI, clean energy, DeFi, aka crypto and defense. So kind of all of the buzzwords. But in that filing, the most interesting thing was he warned outright retail investors that you can lose all of your money. And that was the big critique back in 21. This is a guy who compared himself to Warren Buffett years ago. How has it turned out? Of his six SPACs, I haven't looked at it today. Five of them are below the$10. So IPO is priced at$10. So far is up more than doubled, but the median loss, I want to say, was north of 70 percent, 75 ish percent. So if you bought and held, you lost money.

24:54The thing that also is interesting, this is a financier, if you want to call him that, that wanted to have a SPAC for every letter of the alphabet. So he wanted 26 SPACs. He had SPACs, they priced at$10 that were trading north of$20. So people were paying$20 for a$10 piece of paper back in the zero interest rate mania SPAC craze. and had quite a reckoning. Can you remind our viewers and listeners, why does he prefer a SPAC? I feel like this is a pandemic story. We've written tons and tons of stories about him and the SPAC craze, but why SPACs? The main argument is that capital markets are inefficient.

25:30Depending who you talk to, IPOs are not the best way to take a company public. You leave money on the table for kind of investors flippers. So if you price an IPO at$20, it opens at$25. You left money on the table, you made hedge funds money. So the argument is that there is a more efficient way to go public. Also an argument from SPAC backers that if you're going to use a SPAC deal, there's specialist kind of flavor. So you're partnering with an experienced management team who will strike a good deal. They have a vested interest in this new company, newly listed company, performing well, and they're going to stick in it for the long haul.