Silicon Valley Bank Musical to Top Hamilton?

Jun 27, 2023

If you read that headline thinking nothing could top Lin-Manuel Miranda’s legendary Hamilton, well, you’re probably right. But the collapse of Silicon Valley Bank has inspired the creation of a new musical about the foibles of finance. You’ll just have to follow Miranda’s musical advice and Wait for It.

A Silicon Valley techie-turned-musical-composer is whipping up a musical comedy of his own, inspired by Miranda. In Mauricio Costa’s The Valley, theater-goers will experience the Silicon Valley Bank saga, and maybe even get a glimpse into the Room Where it Happened before its infamous fall in March.

Costa was inspired to create the musical, which blends churchy gospel and contemporary hip-hop, when he saw the “entire hero’s journey and the hero’s life cycle” in CEO Greg Becker and his bankers. Venture capitalists will be “preachers” and startups are the “naïve churchgoers” in an allegory for the troubled bank that couldn’t survive amid mismanagement, supervisory missteps and regulatory shortcomings.

He already has six songs on the lineup (you can listen to them here!) with titles like, “The Valley Is Great” and “We Are Gonna Die” and lyrics like, “We praise thee O Greg in all its awe and grace.” After all, the former SVB CEO assured us that his and other banks that size do “not present systemic risks” with the rollback of Dodd-Frank provisions.

It is true that History Has Its Eyes on Silicon Valley Bank now, even if it can’t hold a candle to Hamilton. Here’s hoping the musical coda to the SVB-inspired becomes the soundtrack to stronger regulation for a financial system that desperately needs it.

FINANCIAL STABILITY

Bank Mergers.

Warren has a message for Yellen: Stop letting big banks get bigger, according to Politico. In a letter to regulators, the senator took aim at both the Treasury Secretary and the OCC’s Hsu for taking “the wrong lessons” from the banking crisis. Says Warren:

“Allowing additional bank consolidation would be a dereliction of your responsibilities, hurting American consumers and small businesses, betraying President Biden’s commitment to promoting competition in the economy, and threatening the stability of the financial system and the economy.”

51 Dangerous Riders.

The House Appropriations Subcommittee approved a funding bill for the financial year 2024 with 51 “poison pill” riders that would roll back financial reform and undermine consumer and investor protections. Some would block federal employees from making ESG investments, leash the CFPB to annual appropriations, launch attacks on the CFPB, SEC and FTC, among other dangerous provisions. AFR issued a news release in opposition. Says AFR’s Renita Marcellin:

“These policy provisions set up a dangerous dynamic where lawmakers are pressured to accept dangerous provisions in order to fund an agency or a program. The riders would dramatically weaken oversight of Wall Street and predatory lenders, and threaten the economic security of families, communities, and businesses across the country.
Members of Congress should focus on funding a robust government that can sufficiently monitor the marketplace, protect consumers, and create a resilient financial system that works for everyone. Instead, the Republican majority is choosing to play these games whenever it’s time to keep on the lights at the expense of their constituents who need these agencies and programs running at full speed.”

Commercial Real Estate.

A forecast from Capital Economics signals commercial real estate values won’t bounce back to their pre-pandemic highs until at least 2040. By the end of 2025, they’ll have plummeted 35% from peak and take 15 years to recover, the firm predicts.

Capital Requirements.

Politico outlines the staunch opposition to higher capital requirements that regulators are now drawing up. Michelle Bowman, a Trump-appointed member of the Fed Board, has been outspoken in opposition, though she’s ostensibly the community bank representative at the Fed, and the new requirements involve large banks.

Regulators are working toward a “Basel III endgame,” which would toughen capital requirements for banks. The Financial Stability Board has called the rules “fundamental to a sound and properly functioning banking system.” EU negotiators on Tuesday, after nearly 14 hours of talks, closed on a deal to introduce Basel III reforms to their bloc.

The Biggest Backstopped.

When the FDIC decided to cover all accounts at Silicon Valley Bank over $250,000, in a rush to aid the tech sector, the benefit extended to the largest companies on SVB’s balance sheet. According to Bloomberg, Sequoia Capital, a big venture capital firm, and Kanzhun Ltd., a Chinese tech company, had $1bn and $900mn in their deposits backstopped, respectively. Other companies, like the Blackstone-owned deposit broker IntraFi and the crypto company Circle, had many millions, even billions, of dollars at SVB.

Banking Conditions.

The Dallas Fed released its Banking Conditions Survey for June 2023. Among the banks in the region – all of Texas, northern Louisiana and southern New Mexico – outlooks “remained pessimistic…expecting a further contraction in business activity and an increase in nonperforming loans over the next six months.” Loan demand and volume fell, particularly in the consumer lending market, as well as CRE loans; residential real estate lending remained steady.

Auditing the Auditor.

The Big Four audit firm KPMG, the largest U.S. auditor in terms of its financial institution clientele, gave each Silicon Valley Bank, Signature and First Republic clean bills of health. Then, they collapsed. Bloomberg examines the firm, now facing congressional heat and shareholder lawsuits, and its failure to raise the right flags before the crisis. Auditors aren’t expected to predict bank runs, says Bloomberg, but their analyses should consider how market moves and changes in the financial landscape can threaten a bank’s stability. With their clients in the banking sector representing near $6tn in assets, some – like Loyola Prof. Tony Menendez – wonders if they’re “too big to fail or is the profession too big to change”?

CONSUMER

Paying for Financial Services.

The Financial Health Network published their 2023 FinHealth Spend Report, diving into the cost to consumers accessing financial services. In 2022, Americans spent about $347bn on fees and interest on financial products and services, up by $40bn from 2022. A substantial majority of that figure came from interest and fees on non-mortgage credit services (~$310bn), with the remainder coming from fees on transactions and account services. Other notable finds: the costs to access these services typically weigh greater on Black, Latine and “financially vulnerable households”; consumer debts are piling up with increasing moves toward high-cost credit options and defaults on existing balances; but, a drop in the rates of unbanked.

Payday Lending and Native American Tribes.

An exploitative payday lender, Lendgreen, used a loophole in Native sovereign immunity exceptions in order to escape state- or federal-level oversight over their predatory lending practices. In an 8-1 decision, SCOTUS declared that businesses “nominally affiliated with Native tribes” can’t avoid applicable laws, including one that prevents them from continuing to harass customers after they declare bankruptcy, as was the case with Lendgreen. The lender’s parent company’s website gave no clear indication of its location, nor its tribal affiliation, according to the American Prospect. But the “rent-a-tribe scheme,” as AP calls it, let some payday lenders open shell companies on tribal lands to evade state rules.

Unauthorized Mortgage Payments.

The Consumer Financial Protection Bureau has hit ACI Worldwide and ACI Payments with a $25mn penalty for initiating an estimated $2.3bn in illegal mortgage payment transactions. The Bureau’s investigation found that withdrawals would hit consumer accounts for payments they didn’t authorize, and uncovered the improper handling of sensitive data.

CAPITAL MARKETS

Beneficial Ownership Reporting.

AFREF, the AFL-CIO, Communications Workers of America, the Interfaith Center on Corporate Responsibility, and Public Citizen submitted a comment letter in support of the SEC’s proposal to modernize beneficial ownership reporting in response to a new memorandum by the Division of Economic and Risk Analysis.

PRIVATE MARKETS

Private Equity, Built on Myth.

Uppsala University’s Prof. Brett Christophers says “the economy runs on narratives.” One of the grand ones that’s funneled pension funds into private equity is that investment in alternatives is a boon to the everyperson, low-to-middle class workers. But that’s a myth, one contradicted by the overall underperformance of these funds. Says Christophers:

To sum up, the narrative of “supporting a better retirement for teachers, nurses and firefighters” plainly flatters to deceive. It is time, therefore, for a new narrative – one cleaving more closely to the realities of the alternatives investment business. Not only do ordinary workers like teachers, nurses, and firefighters frequently suffer very real disbenefits as users of the real-estate and infrastructure assets held in the portfolios of alternatives investors, but the benefits they derive from such investments as investors are considerably smaller than those in the business suggest. On balance, those ordinary workers clearly lose.

“Dangerous to Patients”.

That’s how Dr. Ming Lin describes private equity’s encroachment into medicine. The past decade has seen the enormous asset managers take over providers and “cut corners in dangerous ways” to squeeze out profit. In an interview with the Institute for New Economic Thinking, Dr. Lin describes the “moral dilemma” of operating under private equity:

[Interviewer]: So you feel you’re being asked to go against your value system, your medical ethics?
[Dr. Lin]: Yes, it’s a real moral dilemma for a lot of people, including myself. I’ve had to tell patients I feel should be admitted that their hospitalization may cost 10k as their insurance may not authorize their stay. Or I’ve been asked to let mentally unstable, suicidal patients leave because we were not authorized to detain them for a more thorough evaluation. Over the years I have had more and more patients tell me about the exorbitant bills they have received on visits to the emergency room – we’re talking several thousand dollars for the application of some glue to a half inch wound.
Disturbingly, this exorbitant billing was done unbeknown to me. Unlike hospitals and insurance companies, private equity companies can hide behind the physician and not absorb any of the outcry over such fraudulent profiteering.

Restrictions on Investing in China.

WSJ reports that the Biden administration is preparing an executive order that would rein in investment by venture capitalists and private equity managers in Chinese and other extranational companies. AFR’s Andrew Park, also the chair of the SEC’s market-structure committee, suggested the government may require more transparency from firms investing overseas, by way of disclosures. Concerns fall on lines of losses should China receive sanctions, or that investment could help China develop its high-tech industries. California teachers’ pension head Christopher Ailman thinks a more useful approach would be clarity from the government on what countries and types of technologies it perceives as a threat.

Retail Private Credit.

Private equity megafirm BlackRock will unveil its Private Credit Fund this month, according to Bloomberg, trying to capture the business of retail investors looking to buy into private assets. The Fund will be ready to accept investments from retail clients by the beginning of July, playing into the PE giant’s goal to double its revenue from private markets to $2bn. With a possible downturn in the coming year or two, retail investors have been increasingly interested in less-risky investments, but some managers expect private credit to make up larger portions of investor portfolios.

Related: regional lender PacWest sold $3.5bn worth of asset-backed loans to private equity firm Ares’ Alternative Credit arm. Bloomberg notes that private equity and private credit are “among the few firms with the capital and appetite” needed to take on consumer assets like this.

And: FT reports that private equity firms are “increasingly financing blue-chip companies” in bids to reach larger, more stable companies with private credit. The $1.4tn market has typically made loans to smaller, riskier companies.

M&A Activity Flat.

Mergers and acquisitions activity by private equity has hit a four-year low, suppressed by high interest rates, recession concerns and a “weak outlook for corporate earnings,” reports Reuters. They’ve had trouble raising debt, forcing them to dip into their own funds.

CRYPTO

Stablecoin Bill.

Democrat Rep. Jim Himes says the digital assets subcommittee is “very close” to an agreement on a stablecoin bill, according to Politico. There’s been bipartisan engagement on the project, per Rep. Hill. House Financial’s McHenry wants to hold a vote on crypto legislation after the July 4 Congressional recess.

Investors at Risk?

Harvard Law prof. Hal Scott – director of the Committee on Capital Markets Regulation, backed by the U.S. Chamber of Commerce – writes that the crackdown on digital assets led by the SEC’s Gensler is dangerous to investors in lieu of “an adequate regulatory framework.” Under current Commission regulations, Scott claims it’s “impossible” for crypto exchanges to register as securities. Scott sounds oddly like crypto companies, such as Coinbase …

HOUSING

Mortgage Pricing.

Under the guise of “Middle Class Borrower Protection,” the House Housing and Insurance Subcommittee Chairman Rep. Warren Davidson introduced H.R.3564 seeking to roll back changes to the Loan Level Price Adjustment mortgage fees charged by Fannie Mae and Freddie Mac, as well as restrict future adjustments to these fees. The changes, announced earlier this year, would raise fees for some borrowers but lower fees for others, especially those with poorer credit scores.

The Center for Responsible Lending opposes the measure due to its impact on affordable and equitable housing. CRL also released a fact sheet to highlight that the bill actually undermines middle class borrowers, makes it more difficult for Americans to enter the middle class, and exposes taxpayers to greater vulnerability by weakening Fannie’s and Freddie’s regulation. Likewise, the White House opposes the bill.

Florida Insurance Backstop.

The Florida Insurance Guaranty Association is selling municipal bonds to boost its liquidity so it can “backstop the state’s homeowner’s insurance industry after a surge of claims and litigation drove some insurers to shutter,” per Bloomberg. Since 2019, 10 insurers in the state closed after a litany of lawsuits, and after Hurricane Ian’s devastation provoked a rise in claims. Large insurers have pulled back from climate-threatened markets, leaving smaller, local firms exposed to greater vulnerability.

Related: WashPost has a piece on how the climate catastrophe is creating an insurance crisis. Some proposed solutions: allow insurance companies to use wildfire models to adjust rates, an unpopular move with consumer advocates; subsidize policies for low-income persons; encourage “managed retreat,” essentially incentivizing people to vacate their climate-threatened homes and move elsewhere.

A Hot Home Market.

The housing market is strong despite interest rates sitting at a 15-year high. Mortgage rates are at their highest since 2007, but the competition over them is hot, perhaps due to limited available housing supply. Plus, housing prices are up, a rebound from their dip in late 2022. Between this surge, a strong labor market and healthy consumer spending, economic growth is accelerating. But that may be a problem for the Fed, reports NYT, whose officials believe the growth needs to be at controlled levels somewhere under its “full potential” to knock down inflation.

CLIMATE and FINANCE

Climate-Related Insurer Risk.

Americans for Financial Reform Education Fund and Public Citizen issued a news release about the Treasury’s Federal Insurance Office (FIO)’s report on climate-related regulation and insurer supervision. AFR-EF and Public Citizen view it as a welcome move in the right direction, but urges the FIO to evaluate how a growing coverage gap may contribute to systemic risk. Says AFR-EF’s Alex Martin:

“Insurance disruptions are the canary in the coal mine of climate financial risk, and climate shocks are already making parts of America uninsurable, with negative impacts disproportionately falling on underserved communities and communities of color. The stakes are huge and federal and state regulators need to use all tools available to understand and mitigate these risks.”

Republicans’ ESG Month.

Politico previews July’s barrage of anti-ESG efforts by Republicans and some moderate Democrats with a brief primer. Trying to keep investors from being able to make climate-, social- and governance-related considerations in their investments, lawmakers in the House plan to pepper firms with a series of bills and hearings. A Q&A with Rep. Huizenga sees him cast it as a fiduciary issue, and dives into a forthcoming report from his working group on the E(nvironmental) of ESG.

In 2022, Huizenga received $32,950 from the oil and gas sector. House Financial’s McHenry, who’s been outspoken on the issue, received $67,900 in the same period.

Financial Justice

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