Big Bank Wind-Down
At their meeting this week, the FDIC took several actions to shore up financial institutions’ capacity to safely wind down in the event of their failures:
Long-Term Debt Requirements. In a 5-0 vote, the Board introduced a proposal which would require banks with $100bn in assets or more – the threshold for what they’re calling “large banks” – to keep greater reserves of long-term debt. The agency hopes the measure would make it easier for a failing bank to absorb losses and increase resolution options, while lessening the hypothetical impact to the Deposit Insurance Fund. The proposal also would keep these banks from complicating their resolution plans with risky activities and “disincentivize” them from holding long-term debt from other banks.
While similar rules already apply to megabanks, Politico notes, this would extend the untested guardrail to midsize and regional lenders, like SVB and the other banks that failed earlier this year. In all, large regionals will have to issue about $70bn in debt.
Living Wills. With a 3-2 vote, a second proposal revises resolution planning requirements, first adopted in 2011. FDIC-insured banks with over $50bn in assets would “periodically” submit resolution plans to the FDIC that outline how they’d be resolved if taken into receivership. The proposal splits these institutions into two groups: Group A, banks with $100bn or more in assets, would have to submit “more robust” plans than Group B, banks with between $50bn and $100bn in assets. Group A would also have to submit a plan detailing either their liquidation or return to the private sector post-failure, a requirement intended to ensure access to deposits, maximize asset value, minimize losses, and address potential sources of systemic risk.
Jointly with the Fed Board, the FDIC in a 4-1 vote also proposed guidance relating to how bank holding companies and foreign banks with over $250bn in assets but “are not the largest and more complex” develop their living wills. These banks submit plans once every three years.
The FDIC’s Role. A 2-3 vote declined to approve a proposal from Republican director McKernan which would see the FDIC Board play a direct role in approving the sale of midsize and large failed banks. Meanwhile, a 4-1 vote sent through a recommendation to require banks with $50bn or more in assets to enter a “consultative process” on “least cost resolution transaction” in the event of failure.
CONSUMER: SCOTUS Fight – DeJoy’s USPS Plan – Medicare Drug Price Negotiations – Student Borrower Discharge – CFPB Credit Repair Settlement
CAPITAL MARKETS: Leveraged Loans – Executive Excess – Wells Fargo Penalty
CRYPTO: Fed Stablecoin Rules – Crypto Treasury Rules, Finally – NFT Enforcement Action – Crypto, Equities, Monetary Policy – Grayscale vs. SEC
FINANCIAL STABILITY: Capital Requirements – Small & Regional Banks – The Economic Response to COVID – A Secret Tesla Project – BlackRock
PRIVATE MARKETS: SEC Private Funds Rule – Neiman Marcus – Blackstone – PE & Radiology
HOUSING: Public Housing – Housing Stats – Chicago Sues Rent-to-Own
POLITICS AND MONEY: Ron DeSantis & Insurers
Feedback? Reach us at afrnews@ourfinancialsecurity.org
CONSUMER
SCOTUS Fight.
There are less than five weeks before oral arguments are heard in CFSA v. CFPB, the SCOTUS case that threatens the CFPB’s funding mechanism and capacity to serve and defend consumers.
A Supreme Threat. Georgetown Law’s Adam Levitin published an op-ed in FT in defense of the Bureau, with an eye toward the housing market. A threat against the CFPB, he argues, is a threat against regulatory safe harbors. Housing lenders wouldn’t know “what rules apply” and whether they’d still be shielded from liability by these safe harbors. Writes Levitin:
For example, virtually all lenders use the CFPB’s model disclosure forms because they are deemed to be in compliance with Truth-in-Lending Act requirements. Without the CFPB, there is no deemed compliance, so every lender’s disclosure forms are vulnerable to legal challenge…
Another safe harbour deems certain home mortgages in compliance with the statutory requirement of verifying the borrower’s ability to repay. Most of the mortgage market depends on this safe harbour instead of attempting to actually verify borrowers’ repayment capacity. Without the CFPB’s safe harbours, reputable lenders will pull back on consumer lending because of concern about their exposure to litigation. With borrowers finding it harder to get mortgages, housing prices could crater, triggering a recession and impairing the value of the mortgages on banks’ books, resulting in bank lending further contracting.
Levitin notes that the challenge by CFSA, which represents payday lenders, has already been rejected by eleven courts, including two federal appeals courts). And he highlights an amicus brief from the Mortgage Bankers Association, National Association of Home Builders and National Association of Realtors predicting that “chaos would ensue” if SCOTUS rules against the CFPB.
Republican AGs. Last week, SCOTUS rejected an attempt by 27 Republican attorneys general to raise their own challenges against the CFPB. An Accountable.US review exposed $7.7mn in contributions from “anti-CFPB industry and conservative groups since April 2018” to the Republican Attorneys General Association (RAGA). CFPB-regulated industries that oppose the agency’s rulemaking have given $3.2mn, nearly half of the total. Payday and other high-cost lenders gave $1.3mn, and large banks $900,000.
DeJoy’s USPS Plan.
Earlier this month, AFR’s Annie Norman wrote about Postmaster General Louis DeJoy’s plan to gut the Postal Service. The 10-year plan, which would effectively kneecap local post offices’ capacity to perform mail services, has been met with sharp criticism by advocates. Just last week, the Government Accountability Office (GAO), a federal watchdog and auditor, released an evaluation harshly critiquing the plan’s management. Postal Service higher-ups insist the GAO has a “fundamental misunderstanding” about their agency. Meanwhile, the Postal Service hasn’t collected enough revenue to cover its expenses and debt in 15 years. As it currently stands, DeJoy’s plan isn’t helping.
Student Borrower Discharge.
The Biden administration approved $72mn in borrower defense to repayment discharges for over 2,300 borrowers who attended the online for-profit school Ashford University. A U.S. Department of Education investigation concluded that from Mar. 2009 to Apr 2020, Ashford and parent company Zovio “made numerous substantial misrepresentations…that borrowers relied upon to their detriment.”
CFPB Credit Repair Settlement.
The CFPB reached a settlement with a conglomerate comprising some of the nation’s largest credit repair brands, such as Lexington Law and CreditRepair.com, after a Bureau-originated lawsuit to stop a “years long scheme to illegally harvest billions in fees.” A district court ruled that the “companies collected illegal fees for telemarketing in violation of federal law.” The settlement would levy a $2.7bn judgment against the companies and bar them from telemarketing their credit repair services for a decade.
CAPITAL MARKETS
Leveraged Loans.
Leveraged loans or “syndicated loans,” through which banks can often harvest fees for organizing said loans on behalf of distressed companies, are not securities, according to a federal court ruling that Bloomberg calls a “victory for banks [and] private equity.” AFR rails against the decision, warning that it means banks are not liable for clear misstatements and omissions when they sell to investors. AFR’s Andrew Park calls for immediate regulation:
“This decision leaves investors, many of whom manage money on behalf of retirees and other savers, unnecessarily exposed to the risk of losses with little recourse available to them. The shocking circumstances…at the center of this case has reminded everyone what can happen to investors when there are no securities laws and since then we have seen similar such instances around misleading and incomplete disclosures. Given that, we can expect there will continue to be a debate around what the appropriate policy solutions still are.”
Previously, AFR has called on regulators to ensure that the disruption and losses in the $2.5trn syndicated loans and securitized markets don’t spill over into the economy at large, resulting in further bankruptcies and job losses. International financial regulators have flagged the growing risk in the leveraged loan market. An amicus brief filed by AFR argued that these loans should be considered securities, as they pose “significant economic implications for families and communities.”
Executive Excess.
A new report from the Institute for Policy Studies calls them the “Low-Wage 100,” the one hundred S&P 500 companies who had the lowest median worker pay levels in 2022. Titled Executive Excess, the report dives into how executives at these companies enrich themselves while kicking away the ladder for their workers. Some key stats:
Between Jan. 2020 and May 2023, these companies spent more than $340bn on stock buybacks, a maneuver which “artificially inflates executive stock-based pay and siphons funds from wages.” These buybacks caused their CEOs’ personal stock holdings to balloon more than three times as fast as their median worker pay. These holdings jumped 33% to an average of $184.7mn. At the same time, median pay rose 10% to an average of $31,972.
The average CEO-worker pay gap averaged 603 to 1 – that means, on average, the highest-level executives made 603 times more than the median worker. The worst offender was Live Nation Entertainment, whose CEO raked in 5,414 times more than workers.
Over half of these Low-Wage 100 companies receive taxpayer-backed federal contracts, totalling a combined $24.1bn over the course of 2020-23.
Says report author Sarah Anderson: “Policymakers could do much more to narrow the divides — including through executive action. President Biden should wield the power of the public purse to push all corporate recipients of taxpayer money to narrow their pay gaps, stop wasting money on buybacks, and respect worker rights.”
On the topic of buybacks: A tax which took effect on Jan. 1 (one percent on share buybacks) is expected to increase companies’ tax burdens by over $3.5bn for the first half of the year. All said, “companies are largely shrugging off the tax,” reports WSJ.
Wells Fargo Penalty.
The too-big-to-manage Wells Fargo has agreed to a $35mn civil penalty to settle SEC charges that the bank overcharged its near-11,000 investment advisory accounts more than $26.8mn in advisory fees. Certain financial advisers from Wells Fargo agreed to reduce fees, making changes on clients’ investment agreements, but account processors failed to make good on the edits, often handwritten or typed-in.
CRYPTO
Fed Stablecoin Rules.
Republican Reps. McHenry, Hill and Huizenga sent a letter to Fed Chair Powell expressing their disapproval of the regulator’s guidance on “novel activities” on tech-driven crypto and blockchain offerings, including especially crypto. The Fed mandated banks prove they had the requisite guardrails to minimize risk before they could issue, hold or transact stablecoin tokens. And they’d have to get explicit “nonobjection” from the Fed to do it. The lawmakers disagree with the safety framework, believing they’d deter banks from taking part of the “digital asset ecosystem” and issuing payment stablecoins. It has not yet been two years since TerraUSD, a dollar-backed crypto token, collapsed and took with it $40bn in market valuation.
Crypto Treasury Rules, Finally.
Long-awaited crypto tax rules have come, years after the Treasury got the go-ahead to finalize them in 2021. Digital asset brokers will be subject to the same reporting rules as securities brokers, says the Treasury. Politico sums it up: Exchanges will provide forms to aid taxpayers in determining whether they owe taxes and will have to report crypto sales to the IRS, while miners and stakers would be exempt from being considered “brokers” if they don’t trade. Crypto wallet providers would also have to report information to the IRS if they provide access to trading platforms. The rules won’t take effect until 2025, with taxpayers filing in 2026.
NFT Enforcement Action.
In what’s considered to be the first NFT enforcement case – that’s non-fungible tokens, the digital works of art and property that live on the blockchain – the SEC has sued the media company Impact Theory for their unregistered offering of these digital asset tokens. The Commission says the company raised about $30mn from hundreds of investors between October to December 2021 through the sale of so-called “Founder’s Keys.” Impact Theory consented to a cease-and-desist and will pay more than $6.1mn in “disgorgement, prejudgement interest, and a civil penalty.” A fund will be created to return funds to investors.
Crypto, Equities, Monetary Policy.
A working paper from the International Monetary Fund explores the relationship between fluctuations in the crypto market and global equity markets and U.S. monetary policy. A price component they call the “crypto factor” explains 80% of crypto price variations, and the authors demonstrate “its increasing correlation with equity markets coincided with the entry of institutional investors into crypto markets.”
Grayscale vs. SEC.
Last year, Grayscale Investments, which currently manages the world’s largest crypto fund, sued the SEC after the regulator rejected its application to transform its Bitcoin fund into an ETF. This week, the D.C. Circuit Court of Appeals ruled in favor of Grayscale, opening the door for their ETF and the floodgates for other companies looking to do the same.
FINANCIAL STABILITY
Capital Requirements.
A month after the Fed, FDIC and OCC unveiled a proposal to implement the Basel III endgame suite of bank capital standards, Sen. Warren sent a letter to Fed Chair Powell urging him to “resist industry pressure to weaken the proposal and finalize the rules as quickly as possible.” Warren fears that Powell’s desire to seek “potential modifications” would result in a watered-down version of the much-needed, stronger rules.
Small & Regional Banks.
This year, 11% of bank mergers and acquisitions have involved private investors or private equity, the highest rate since 2012, according to American Banker. Many of these have been for small banks with less than $2bn in assets, which “have emerged as the most likely targets of bank acquisitions.” American Banker highlights six acquisitions in the works announced this year.
And: In late July, PacWest Bancorp was acquired in a private equity-backed purchase. Recent SEC filings, interpreted here by Bank Reg Blog, provide a timeline and more detailed information about Warburg Pincus’ and Centerbridge Partners’ $400mn equity investment.
The Economic Response to COVID.
A paper from University of Pennsylvania’s David T. Zaring dissects how the U.S. government responded economically to the COVID-19 pandemic, calling it an “economic, as well as a public health, disaster.” Cheap credit lines extended to institutions through the Fed forced it to act as a “backstop for the entire economy,” Zaring argues. He calls for the “unprecedented steps” taken by the central bank to be legislatively clarified, the same for the Treasury’s role, and for both to be given safeguards, as their actions generally benefited firms over individuals.
A Secret Tesla Project.
The Department of Justice and SEC have launched an investigation into an effort known internally as “Project 42,” which called for the construction of a glass house in Austin, Texas. Both agencies want information about “personal benefits paid to Musk, how much Tesla spent on the project…and what it was for,” reports WSJ.
PRIVATE MARKETS
SEC Private Funds Rule.
Last week, the SEC approved a slate of rules mandating greater transparency from the gargantuan $20 trillion private fund sector, requiring quarterly disclosures, standardized reporting, rules on special agreements that may harm small investors, prohibitions from passing the cost of investigations onto investors, and more. Today, several organizations including AFR-EF commended the SEC for the rules.
Neiman Marcus.
Dallas News questions whether luxury retailer Meiman Marcus will once again go on the market after it’s been owned by private equity for 18 years. It’s bounced around PE, hedge funds and other massive asset managers for years; it’s been sold three times in 15 years in two leveraged buyouts and the last time when it emerged from bankruptcy reorganization in 2020. Right now, it’s owned by PIMCO, Davidson Kempner Capital and Sixth Street, with a minority investment from Farfetch. And recently, it was reported that Neiman Marcus is considering a sale to Hudson Bay, parent company of Saks Fifth Avenue.
Blackstone.
Private equity giant Blackstone plans to “launch a private equity equity fund for wealthy individuals” soon, reports FT, in its attempts to reach beyond its usual institutional clients – usually public pensions, and the like. What they’re calling the Blackstone Private Equity Strategies Fund, or BXPE, will start accepting subscriptions later this year. Investors will be made to accept “limited liquidity rights” in order to prevent asset fire sales.
PE & Radiology.
Akumin, a radiology and oncology provider acquired by private equity firm Stonepeak in 2021, has suffered a credit rating downgrade to CCC by S&P as it faces “significant headwinds.” It reported a $7.5 deficit in 2022 and holds a $451mn loan from Stonepeak.
HOUSING
Public Housing.
Montgomery County, Maryland, a suburb of the nation’s capital, requires real estate developers to reserve about 15% of the units in new projects for households making less than two-thirds of AMI (area median income). In complexes like the Laureate, a high-cost apartment development, a government agency – the Housing Opportunities Commission of Montgomery County – owns a significant stake, so the Laureate sets aside 30% of its units for affordable housing purposes. Some residents can pay as little as half the going rate. NYT calls it, “Public housing, other words – just not the way most people think of it.” There’s a private equity angle too: typically, when a developer wants to start construction, a private equity firm will finance about a third of the cost, but a county council voted to create a Housing Production Fund, hoping to “replace private equity as developers’ main source of investment.” At a 5% return, developers save on millions.
Housing Stats.
Some quick housing stats from the past week:
Home Prices. The Case-Shiller Home Price Index tracking prices ending June 2023 came out this week. The National Composite is up 4.7%, “slightly above the median full calendar year increase in more than 35 years of data,” per Craig Lazzara.
Bailing on Home Insurance. More homeowners have decided to forgo home insurance, unable to afford the cost of rising premiums. The national average on a $250,000 home is $1,428 a year, up 20% from 2022. It’s a gamble, as “few people can financially withstand the loss of an uninsured home.” The Consumer Financial Protection Bureau issued a consumer advisory about how to take action when home insurance costs surge.
Not Enough Multifamily Homes. In 2022, only about 1% of new housing units were multifamily homes, most developers building single-family units instead. With multifamily (middle-housing like duplexes and triplexes, not apartments) supply near record-lows, the yearly construction rate having tanked and never recovered after the 2008 recession, some states are trying to reverse course. Places like Oregon, California and Maine have “effectively ended single-family zoning.”
Chicago Sues Rent-to-Own.
The city of Chicago has sued two rent-to-own housing entities whose business models are unfair to low-income households on the city’s South Side. The suit alleges the two defendants, Vision Property Management LLC and FTE Networks, targeted Black communities by purchasing bulks of homes in “the same historically underserved neighborhoods that the City has prioritized for equitable investment and neighborhood revitalization.”
CLIMATE and FINANCE
BlackRock.
Private asset manager BlackRock’s support for environmental and social resolutions dropped sharply for the second year in a row, reports FT. The stat comes not long after a month-long onslaught by Republicans trying to undermine ESG investment practices and associated protections. BlackRock, wielding $9.4tn AUM, only voted in favor of 7% of proposals at “companies’ annual meetings” in the 12 months ending June. The asset manager claims that the “declining support” for corporate social responsibility is the result of a “broader pullback among investors.”
POLITICS and MONEY
Ron DeSantis & Insurers
At a time when Florida’s residents suffer from a home insurance crisis as more insurers pull back from the region, Republican Gov. Ron DeSantis has worked to adjust the state’s insurance laws to benefit companies while harming consumers. A set of changes enacted in Dec. 2022 made it more difficult for homeowners to sue their insurers for acting in “bad faith” and, if they take the companies to court, they can’t recoup their attorney’s fees even if they win. Plus, the companies can create new policies that include arbitration agreements in exchange for lower premiums. Mother Jones reports DeSantis accepted millions from insurers.