In this Coloring Book, P is for "Private Equity"

Jul 07, 2023

Private equity, the Wall Street behemoths that are the spearhead of financialization, can come in many colors. It bleeds out the red cross of medicine, wilts the green of the grocery store veggie aisle, and spews a sickly black from the smokestacks of its fossil fuel investments. It’s in the clear water flowing from the taps, in the brown earth broken for housing construction, in the blue sky and beyond. Private equity controls a vast rainbow of assets but really only values one color: green.

Tracing its influence may not be as easy as reciting the alphabet, but a new digital coloring book released by AFR has made it a little easier. “The ABCs of PE” takes the reader on an alphabetical journey through the myriad ways that private equity has bought into or bought out parts of everyday life. From A for Ambulance to Z for Zamboni. Color your way through private equity with your own copy here.

FINANCIAL STABILITY

Bank Mergers.

“Bank executives [say] the industry is poised to consolidate at a pace unseen in years,” writes WSJ. External pressures – recovering bank stocks, recession risk, sky-high paper losses from high rates – may delay potential mergers for a couple of years, but earnings reports in July may reignite a frenzy to merge. Although having fewer, bigger banks is not the answer, as AFR has written, Yellen has expressed an openness to new mergers, and she’s come under some pressure:

Peter Orszag, the former Obama administration official and incoming CEO of Lazard, has privately urged Yellen and her staff to pave the way for more bank deals, people familiar with the matter said.

Rates and Recession.

Powell expressed an openness on the part of Fed officials to two more interest rate hikes in a row.

Institutions are still “borrowing heavily” under the Fed’s Bank Term Funding Program, created in the wake of SVB’s collapse. An analyst from CFRA says unrealized losses should return to end-of-2022 normals, but “it still feels like there’s some liquidity pressure on the banks,” per the WSJ.

According to WashPost, a recession could undo the tremendous progress in Black unemployment garnered over the past few years. Since the pandemic, Black workers, especially women, have found higher-pay jobs with better benefits.

Higher Rates and Community Banks

WSJ deep dive on the impacts. Short version: less profit, more challenges:

When the Fed started raising interest rates to fight inflation, the conventional wisdom was that it would be a boon for Main Street banks. They were expected to increase the rates they charged on loans faster than those paid to depositors, pocketing the difference … Instead, the opposite is happening. The Fed’s hikes and the failures of a trio of midsize banks are prompting once-loyal customers to pull their money out of checking accounts that pay no interest

Stress Tests and Commercial Real Estate.

Last week, the Fed released the results of its annual stress test. This year, the hypothetical scenario featured a “severe global recession” and marked stress in the corporate debt and commercial and residential real estate markets. While the tested institutions, which hold about 20% of bank-held CRE loans, would suffer heavy losses, “they would still be able to continue lending.” Even so, while these large financial institutions may be on solid footing, it’s regional banks that are especially vulnerable to such shocks. They’re 4.4 times more exposed to CRE loans than their larger counterparts.

Related: regulators issued guidance to lenders “to work out loan accommodations with commercial real estate borrowers in distress.”

American Bankers Association Pres. Nichols tries to use stress tests as a reason to water down capital requirements in the Basel endgame. Even before the banking crisis, AFR advised policymakers to ignore bank lobby misdirection of this sort.

Misused Pandemic Aid.

The Small Business Administration undertook a review to determine the extent of fraud in the $1.2tn disbursed under the Paycheck Protection Program and Economic Injury Disaster Loan program and found about $200bn may have been fraudulently claimed.

Also: A report authored by Republican Rep. French Hill, found the Treasury Department circumvented CARES Act rules to loan $700mn to a trucking company, Yellow. The Treasury claimed the firm, then called YRC Worldwide, was considered critical to national security, but it wasn’t. AFR pointed out at the time that Yellow got its loan through political connections, not on the merits.

Deposit Insurance.

The Roosevelt Institute released a brief exploring the main options for deposit insurance reform, summed up in a nice graphic:

Related: Jesse Van Tol, president of the National Community Reinvestment Coalition, writes about the need for “more social accountability” on the part of banks before any increase in deposit insurance.

Federal Home Loan Bank Borrowing.

All four lenders at the heart of the banking crisis – SVB, Signature, First Republic and Silvergate – borrowed billions from the Federal Home Loan Banks before their collapse. Bloomberg reports regulators are considering limiting access for big banks and requiring banks which borrow from an FHLB to hold a certain percent of their assets in mortgages.

FedSoon.

The Fed is soon to roll out its real time payment system, FedNow, expected by next summer. The Brookings Institution’s Aaron Klein noted that the delay in setting up the service, a project that’s been ongoing for more than seven years, has cost consumers hundreds of billions in overdraft, check-cashing and late fees. It’ll have 57 early adopters.

Twitter, the Fintech.

FT reports that Twitter has applied for regulatory licenses in order to implement a payment-sending feature through the site. Musk has previously expressed interest in the social media platform offering a range of fintech services – P2P transactions, savings accounts and debit cards among them. He wants it to be an “everything app.”

CONSUMER

Credit Card Fees.

Small Business Rising, a coalition representing more than a quarter-million independent businesses, wrote a letter urging lawmakers to pass the Credit Card Competition Act. The Act, co-sponsored by a bipartisan coalition of senators and representatives, seeks to cut into excess credit card swipe fees by taking on the “Visa/Mastercard duopoly.” (The Institute for Local Self-Reliance notes that Visa controls 60% of credit/debit transactions, and Mastercard another 25%.) SBR’s letter notes that swipe fees cost an average family $1,000 per year.

Fintech EWAs.

Some fintech companies are offering earned wage access (EWA), in which the user can access the money from their paycheck early. But, while some providers market themselves as a better alternative to payday loans, Bloomberg warns that “the market has morphed into a wild west of services with different terms, finance charges and models.” EWAs exist in a “gray area” in terms of consumer protection. Some firms charge APRs as high as payday loans, others come at the cost of high fees, leaving some consumers trapped in a “cycle of borrowing.”

Illegal Fees to Eliminate Student Loans.

In 2020, the Consumer Financial Protection Bureau settled with Timemark, Inc., after it collected illegal advance fees from more than 7,100 consumers to “renegotiate, settle, reduce, or alter the terms of their loans.” Now, the Bureau will distribute more than $3.5mn in relief to the affected parties.

AI Protections.

Brown and a group of other Democratic senators sent a letter to the CFPB urging the agency to protect consumers from AI-driven scams. The lawmakers highlighted the threat of “voice cloning” in the perpetration of over-the-phone financial scams.

CAPITAL MARKETS

SEC In-House Courts.

SCOTUS has agreed to take up SEC v. Jarkesy, a case to determine whether the regulator’s “ability to pursue administrative enforcement proceedings” for civil cases violate the constitutional right to a trial by jury, according to Politico.

Related: Daniel A. Hanley, a senior legal analyst at the Open Markets Institute, says SCOTUS is “leading the conservative assault on federal administrative agencies” in what amounts to “attacks on responsive and democratic government.” So far this year, the Court has ruled against the EPA’s and the FTC’s regulatory authorities, and will hear in the next term cases related to the Natural Resources Defense Council and Consumer Financial Protection Bureau.

Under the guise of protecting fundamental liberties, conservative judges have manufactured several legal tools that the courts can unilaterally and arbitrarily wield to restrict agencies’ enforcement activities. Two particularly influential arguments have emerged: the “nondelegation doctrine,” which restricts an agency’s structure and how much authority it can receive from Congress, and the “major questions doctrine,” which limits the kinds of regulations an agency can enact.

PRIVATE MARKETS

Private Equity, USA.

San Diego State Prof. Valerie Stahl tackles how the American city is being increasingly private equity-owned and asks, “What happens when your home, doctor’s office, or favorite local restaurant gets bought up by private equity?” Using examples, the outcomes tend to be worse. FirstKey Homes, a single-family rental company owned by Cerberus, was responsible for two times as many eviction filings than any other property manager in Memphis, while also being the worst in terms of building code violations. After private equity takes up a nursing home, there’s a “coherent, consistent picture of patients doing worse,” according to University of Pennsylvania Prof. Atul Gupta.

Count Back from 330.

The private equity firm Welsh, Carson, Anderson & Stowe swallowed up anesthesiology groups in Colorado until it had, at one point, 330 practitioners under its belt and the largest practice in the state. Then, with a solid command of the market and contracts at 10 of the region’s 15 largest hospitals, it raised its prices several times over the years according to WashPost. The consumer cost of one of its services shot up by nearly 30% in the group’s first year in Colorado. Patient bills and insurance rates jumped high, then 1 in 3 physicians jumped ship in a three-year period. A study published in JAMA Internal Medicine found, across six years of data, that PE acquisition of anesthesia companies was followed by, on average, price hikes of 26% more than facilities serviced by independent providers.

Merger Reviews.

FT reports that the Hart-Scott-Rodino (HSR) form, which companies fill out to inform the FTC and DoJ of incoming mergers past a certain threshold, would change under proposals from regulators. The tweaks would require PE and other “buyout groups” to “disclose significantly more information in the early stages of a transaction and potentially lead to more deals being blocked.” Originally, this bulk of information would come out in the second stage of the approval process.

PE and Investment Banking.

Over the past decade, private equity’s been behind a significant portion of the investment banking sector’s revenue. But the slowdown in private equity activity , writes Bloomberg, slows investment banking.

CRYPTO

The Future of Digital Asset Regulation.

Responding to House Financial’s June 13 hearing, “The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem,” Americans for Financial Reform, Duke Prof. Lee Reiners and American University Prof. Hilary Allen released a statement for the record to oppose draft legislation ostensibly intended to provide a new framework for regulating digital assets.

We believe this would be rash and would introduce a policy “cure” that would likely be worse than the disease when it comes to providing crypto consumers and investors with sound protection. Regulators already have extensive existing powers to regulate this industry, the same way other financial products and services are regulated. What regulatory gaps may exist would at the very last require a targeted, measured approach – yet this bill is sweeping in scope, and should it become law it would profoundly undermine the SEC’s ability to support orderly markets and protect investors from harm.

Related: The SEC informed Nasdaq and Cboe that its applications for spot Bitcoin ETFs filed on behalf of asset managers, such as BlackRock and Fidelity, were neither clear nor comprehensive. They refiled last Friday.

Sam Bankman-Fried.

Bankman-Fried, the founder of the collapsed crypto exchange FTX who stole billions from customers, will go to trial in October after a federal judge denied a request to dismiss the majority of his 13 criminal charges, reports WSJ. Binance is losing executives right and left.

HOUSING

Higher Eviction Fees, Fewer Evictions.

A report from the Eviction Lab explores the relationship between eviction filing costs and the incidence of eviction itself. It finds that in states with higher fees, including those with prohibitively high rent-burdens like Alabama, eviction occurs at lower rates.

“That’s half the national average (7.8%) and far below rates found in neighboring states like Mississippi (14.7%) and Georgia (18.8%)... When a landlord goes to court in Mississippi, they usually pay a filing fee of $65 to start the process. In Georgia, it’s $87, on average. But in Alabama the average fee is $276. That higher price changes landlords’ economic calculus and encourages them to work with their tenants rather than turning immediately to the courts.”

CLIMATE and FINANCE

Insurers on Climate Change.

In response to the Treasury’s Federal Insurance Office (FIO)’s report on climate-related risks to insurers (discussed in a previous edition; AFR agrees with the direction), the National Association of Insurance Companies wants a state-level approach to managing the risk.

Related: Harvard Prof. Ishita Sen has called for more accurately priced insurance premiums so that buyers may better understand their local risks. Currently, she writes, state-level regulation of premiums “creates persistent cross-subsidies and distorts pricing.” In more-regulated states, where insurers face more difficulty tweaking prices, the cost of premiums can poorly reflect risk. By contrast, in places where insurers can more easily hike prices, rates more closely follow risk.

Financial Justice

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