Blowing the Whistle on KKR’s Environmental Responsibility Gap
What do Canada, Texas and Louisiana have in common? They’re where private equity megafirm Kohlberg Kravis Roberts & Co. (KKR, if you’ve been wondering what that stands for) and its affiliates have made liquefied natural gas (LNG) investments that have run afoul of environmental protection regulations and the wishes of their local communities.
A new report authored by Americans for Financial Reform Education Fund, Global Energy Monitor and Private Equity Stakeholder Project, as part of their Private Equity Climate Risks project, uncovers how private equity bankrolls fossil fuel projects with proven records of environmental and community harm, including in low-income communities and communities of color. KKR has put at least $9 billion across 14 projects into LNG – that’s predominantly methane, a greenhouse gas responsible for 30% of the rise in global temperatures since the Industrial Revolution.
Says AFR-EF’s Oscar Valdés Viera:
“Even though communities have continually sounded the alarm, KKR has repeatedly decided to invest in polluting gas infrastructure, a choice at odds with its efforts to shed the ‘barbarians at the gate’ label since the 1980s. Not only do projects and choices like these continue to exacerbate our climate crisis, such investments form KKR and other private equity firms are also becoming increasingly risky, as the climate crisis worsens.”
The proposed Port Arthur LNG project in Texas has the potential to output 7.7 million tons of CO2 per year, the equivalent of 17 natural gas-fired power plants. In Louisiana, proposed expansions to the Cameron LNG project would make the facility, which has already been in violation of multiple EPA statutes for most of the past two years, particularly violating the Clean Water Act, one of the largest volume LNG exporters in the country.
Says activist and Louisiana resident Roishetta Ozane, who lives near Cameron LNG:
“KKR is choosing profits over people and refusing to consider the impacts of its investments on our communities…Our neighborhood is already ravaged by filthy polluting industries. Our air has been made toxic from cancer-causing chemicals. KKR is only concerned about getting richer, and refusing to consider the health, wellbeing, and futures of our children and grandchildren.”
FINANCIAL STABILITY: Like Europe Does It? – Fintechs & Usury Laws – Biden’s Fed Picks – Remaking the Financial System – Further Challenges, Says FSB – Anti-ESG – Cannabis Banking – Community Bank Priorities
CONSUMER: American Education Hurts Black Students – A People’s Prosperity – Big Tech in Mobile Payments – FTC to Ban Noncompete Clauses – CFPB Employee Discrimination Suit
CAPITAL MARKETS: The Market’s “Hubble Telescope”
PRIVATE MARKETS: Private Fund Rule Lawsuits – Capital Management and Wealth Inequality – Prime Group – Kroger & Albertsons
CRYPTO: Digital Cash, Culture Wars – FSB and IMF Roadmap – Texas Pays Bitcoin Miner – Fair Value Accounting – Visa Stablecoin Settlements
HOUSING: The Real Estate Industry and Segregation – Airbnb
CLIMATE AND FINANCE: Catastrophe Bonds – Bluelining
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Like Europe Does It?
Since banking regulators agreed to the Basel Committee for Banking Supervision in the wake of the 2008 global recession, policymakers in the EU and U.S. have been working separately to finalize their own versions of rules meant to safeguard against financial system catastrophe. Now, Politico reports, Wall Street banks are asking to be treated like their European counterparts after the Fed, OCC and FDIC announced the finalization of important Basel III “Endgame” capital requirements in late July. Across the pond, EU policymakers have “agreed to numerous carveouts,” as banks in their bloc have complained that they have not been able to compete with American lenders. American lobbyists are now using this discrepancy to argue for weaker rules.
Related: Sheila Blair, former FDIC chair and previous member of the Basel Committee herself, wrote in an op-ed about these new capital requirements that there’s been “misunderstanding around their purpose and effect, much of it fed by industry advocates.” These critics, she writes, have “misleadingly characterised the proposals as an overreaction” to this year’s banking crisis. In reality, they heavily target the largest, most complex institutions. She also rebukes the idea that the requirements “tie up money” that banks could lend, noting that they just regulate the equity vs. debt ratio. Plus, they slightly lower credit risk. Blair also raises an instance whereby regulators did opt for weaker standards, namely on U.S. Treasuries, with the result that Silicon Valley Bank went under because “big bets on Treasuries turned sour.”
Fintechs & Usury Laws.
A new Fed paper finds evidence that when fintech lenders strike up “strategic partnerships” with specialist banks, usually to crack open underserved markets, they can end up skirting usury laws. Traditional, mainstream banks shy away from high-risk consumers, while low interest rate ceilings give other lenders pause. Often, these partnerships “target marginal-risk, near-prime, and low-prime consumers” and “especially target marginal consumers in states with low interest rate ceilings.” This allows the partners to “take advantage of federal preemptions from state rate ceilings” and reap profit from lending to high-risk customers. In one example the researchers found, a “low fixed rate” personal loan with APRs from 6.95% up to 36% advertised by California-based Prosper would actually be made by the state-chartered, Utah-based WebBank.
Biden’s Fed Picks.
On Wednesday, the Senate voted 88-10 to promote Philip Jefferson to Fed Vice Chair, making him the second Black vice chair in the Fed’s history. A tighter 51-47 vote saw Fed Governor Lisa Cook get another term. And Adriana Kugler, who would be the first Latina to serve on the Board, succeeded in a 52-45 procedural vote.
Remaking the Financial System.
In 2021, Saule Omarova, now at Cornell Law, withdrew as Biden’s nominee for Comptroller of the Currency, to the delight of banking lobbyists and Republicans. Dissent Magazine imagines a system where Omarova’s most recent ideas had come to fruition and asks, “What would it look like if we subordinated finance to the public interest?” Lately, she’s been interested in maintaining what works for stability and tweaking the riskier parts, proposing policies such as a public banking option or a “National Investment Authority to provide for public projects” (these would have been beyond the OCC’s capabilities anyway, however). When four midsize banks collapsed earlier this year, Omarova’s ideas reemerged: private banks failed thanks to regulatory shortcomings and were propped up by publicly backed bank deposits. Omarova’s work suggests money is a public good and the financial system needs to be structured around that.
Further Challenges, Says FSB.
Chair of the Financial Stability Board Klaas Knot sent an update to G20 leaders before their New Delhi summit, warning them of “further challenges and shocks” ahead as high interest rate risk makes key sectors vulnerable. Knot flagged real estate as one such area that needs observation. He raises the need to implement bank capital rules and to more closely regulate shadow banks, such as private equity and hedge funds. The FSB flagged the risks inherent in hedge funds’ “very high levels of synthetic leverage,” which FT defines as the use of derivatives or other “complex financial instruments” that remains hidden from balance sheets. Hedge funds may have “hidden leverage” as a result of borrowing from prime brokers to “increase the size of their bets.” The Board warned that markets were exposed to “further liquidity strains” from nonbanks.
Related to real estate: A blog from the National Association of Realtors highlights tighter standards and weaker demand to secure commercial real estate loans. Vacancy rates have increased year-over-year in office, multifamily and industrial real estate, retail having been somewhat spared. More spaces are available to lease, and the number continues ticking up.
Anti-ESG.
Despite the conclusion of an “ESG Month” with attacks that have little buy-in from constituents, Republicans on the House Education and Workforce Committee unveiled four new bills that continue the assault on environmental, social and governance considerations in public retirement plans. One would require fiduciaries to make decisions based purely on economic factors, while another limits shareholders’ say, a third “bans consideration of race, color, religion, sex or nationality” and the last would require investors receive notices of “the risks of self-selecting investment products.”
And: A paper from Duke’s Nakita Cuttino titled Private Debt for Public Good suggests the “unique potential of corporate lenders” to address ESG shortcomings, often attributed to market failures and “negative externalities,” has been overlooked. Cuttino analyzes 125 sustainability-linked loan contracts to “explore the potential of lender monitoring for ESG outcomes.” The move toward corporate social responsibility implicit in the “ESG movement” can be harnessed through policies that shift the burdens of externalities to borrowers or lenders, Cuttino writes.
Cannabis Banking.
Senate Banking’s Brown says lawmakers will soon come to a bipartisan agreement on cannabis banking legislation that would extend protection to banks that want to serve cannabis-related businesses in legal states. Still at issue is Section 10, a provision that the National Consumer Law Center has signaled may “hinder efforts by bank regulators to address payment fraud,” as it outlines “onerous requirements” if a regulator discourages an institution from doing business with a specific customer or group of customers.
Community Bank Priorities.
Lee Wetherington, a corporate strategist for a fintech company, says that small businesses represent a $400bn opportunity for community banks. At a time when these small banks look to hold onto their deposits and attract new ones, they increasingly set their sights on small businesses, but are being beaten out by nonbank competitors. Some banks, according to an upcoming Technology Survey from Bank Director, have already lost business to fintechs like Square and PayPal, which have offered themselves up to small businesses.
CONSUMER
American Education Hurts Black Students.
In an op-ed for Education Week, Columbia University’s Bettina Love previews her book Punished for Dreaming, wherein she and a team of economists and policy experts estimates the total impact of what she calls “educational harm.” That’s harm inflicted by education policies that exacerbated vulnerability under the guise of “reform” over a period of forty years. In total, Love and team find that reparations for losses range between $1.5trn and $2trn. Two of their six categories of analysis deal with earnings losses; as a result of these “reforms” that negatively impact Black students, they’ve lost between $1.2 and $1.7trn in earnings, with another $209-$262bn lost due to having been “pushed out” of the system.
A People’s Prosperity.
Americans for Financial Reform’s Ericka Taylor, in collaboration with Dēmos’ Anoa Changa, published a piece interrogating capitalism’s “endless economic growth” and how it creates rampant inequality by putting the individual above their community. Taylor and Changa asks, “Who Gets to Grow?” in a system that seeks to expand with no heed toward the consequences of that growth, which has contributed to the degradation of communities belonging to predominantly low-income, Black, Indigenous and/or other communities of color. The two examine this country’s history of “more is better” and unsustainable growth, and look ahead to what is possible instead.
Reimagining prosperity demands a new economy that reflects shared values and a commitment to success and well-being that exists outside of an individual framework. This new prosperity also requires a grounded understanding of people and places, and a value alignment that sees the potential and possibility in something better.
Big Tech in Mobile Payments.
The CFPB tackles Big Tech companies’ restrictive tap-to-pay and mobile banking policies and their impact on innovation, consumer choice and decentralized banking in a new issue spotlight. The agency finds that tap-to-pay usage has skyrocketed in recent years, with nearly $300bn sent across Apple Pay, Samsung Pay and Google Pay, and some analysts predict 150% further growth by 2028. The playing field is often subject to varying regulations from each of the dominant Big Tech players – while Google allows third-party payment processors on their Android OS, Apple will only allow their users to transact with Apple Pay on iOS. These practices, writes the CFPB, “may reduce consumer choice and hamper innovation.”
FTC to Ban Noncompete Clauses.
The Federal Trade Commission has proposed a rule to ban noncompete clauses, those lines in workers’ contracts that prevent former employees from working for or starting a competing business within a certain area and for a certain amount of time. Prohibiting the tactic would increase workers’ earnings by nearly $300bn per year, the agency estimates. Says the FTC’s Elizabeth Wilkins:
“Research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages—even for those not subject to noncompetes, or subject to noncompetes that are unenforceable under state law…The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”
CFPB Employee Discrimination Suit.
The CFPB has agreed to pay $6mn to settle an employment discrimination lawsuit filed by a group of current and former Black and Hispanic who say they were paid less than their White colleagues and suffered retaliation when they spoke out about pay and working conditions.
CAPITAL MARKETS
The Market’s “Hubble Telescope.”
The SEC has its own version of the Hubble Telescope, the satellite that’s delivered humanity images from deep space. Except, instead of the final frontier, the Financial Industry Regulatory Authority’s (FINRA’s) “telescope,” called the Consolidated Audit Trail (CAT), looks into Wall Street and tracks “every order, cancellation, modification and trade execution for all exchange-listed equities and options across all U.S. markets.” Expected to cost $1bn to create and operate, the SEC voted on who would foot the bill and how. A 3-2 vote by SEC commissioners, reports Politico, would see Wall Street brokers help pay for it. Funding for the CAT will be “split into thirds between self-regulatory groups, the broker-dealer for the buyer in a trade and the broker-dealer for the seller in the trade.”
PRIVATE MARKETS
Private Fund Rule Lawsuits.
Since the SEC finalized a set of pathbreaking rules two weeks ago targeting the $20trn private fund sector, industry lobbyists representing private equity, hedge funds and other private asset managers have come litigiously out of the woodwork. The rules would introduce greater transparency into a largely opaque sector that has long benefited from high fees and overstated returns. Though industry lobbyists suggested that the rules were already watered down, a number of groups have signed onto a lawsuit that includes the American Investment Council, Loan Syndications and Trading Association, Managed Funds Association and others. They don’t want good regulation; they want no regulation.
Capital Management and Wealth Inequality.
An NY Fed report investigates how the current capital management landscape tends to worsen wealth inequality. A small minority of the population wields a tremendous amount of capital that they manage “full time,” while the vast majority works and holds no capital. Thanks to “financial innovations or policies that reduce return differentials,” this inequity breeds further inequity. A “utilitarian planner,” they posit, “would instead instruct a few individuals to manage capital on behalf of society and transfer most of their income to the workers.”
Related: A new paper from University of Massachusetts’ Lenore Palladino explores how a public option for asset management “would shift the financial system toward serving the actual interests of the people and the social systems on which it depends.”
Prime Group.
The SEC has charged the private equity firm Prime Group $20.5mn for “failing to adequately disclose” nearly $18mn in real estate brokerage fees paid to a brokerage owned by Prime’s own CEO between 2017 and 2021. Without contest, the company ceded to the SEC’s charge that its activity violated a section of the Securities Act of 1933.
Kroger & Albertsons.
Kroger and Albertsons, the two grocery store chains at the center of a private equity-back buyout of the former that AFR has previously warned against, are reportedly getting closer to a deal that will see their $24.5bn merger through. It’ll involve the sell-off of more than 400 grocery stores, concentrated mostly in the Pacific Northwest and Mountain states to C&S Wholesale Grocers.
CRYPTO
Digital Cash, Culture Wars.
There have been a litany of conspiracies surrounding the introduction of CBDCs, or Central Bank Digital Currency, essentially a digital version of physical cash issued by central banks. FT explores how their rollout has been plagued by protests and paranoia from fringe groups. As CBDCs become more mainstream, with central banks like the Bank of England fearing private-owned alternatives to central bank cash, fears that they’re purely meant to surveil abound.
Related: A paper from Capital University’s Roxana Vatanparast inspects how digital money “affords diverse forms of democratic experimentation” and, if it uses public architecture rather than private, has the potential to serve the public interest more so than digital money “driven by profit and extractive motives.”
FSB and IMF Roadmap.
The Financial Stability Board and International Monetary Fund want global regulators to “adopt a ‘comprehensive’ approach to cryptocurrency risks that may pose a threat to the economy,” reports Politico. The “roadmap” on the table outlines the work that the two organizations are doing surrounding digital assets, which includes the FSB’s efforts to figure out if more regulations are needed to cover decentralized finance and the IMF’s work to create a system to track crypto payments.
Texas Pays Bitcoin Miner.
ERCOT, the state of Texas’ power grid operator, paid $31.7mn in energy credits to a Bitcoin miner Riot Platform to incentivize the company to limit its energy consumption “during a record-breaking heatwave.” In August, the company mined 333 Bitcoin tokens, worth about $8.9mn. That means Riot was paid 3.5 times by Texas to stop mining than they made from their operations in August. The deal plays into broader efforts by Texas to present itself as an ally to the industry, as ERCOT pays miners to halt and reduce the stress generated on the power grid.
Fair Value Accounting.
New rules from the Financial Accounting Standards Board will require companies that hold or invest in crypto to report their holdings at fair value, a “long-awaited” update that attempts to pin down their most up-to-date values. “While the new standard will inject volatility into the earnings of companies that are heavily invested in crypto, the ability to record recoveries will be an improvement over the current practice,” writes Bloomberg. The rules will take effect as soon as 2025, but companies will be able to apply them early if they choose.
Visa Stablecoin Settlements.
Visa has extended the ability to settle stablecoin transactions to two merchant acquirers, Worldpay and Nuvei, using the Solana blockchain. Previously, Visa’s stablecoin services were offered just to issuers. Now, expanded capabilities mean that merchants will be able to make these transactions.
HOUSING
The Real Estate Industry and Segregation.
Bloomberg’s CityLab dissects how the real estate industry laid the groundwork for housing discrimination and segregation, which were only deepened by policies like redlining. The National Association of Realtors, then known by a different name, lobbied and planted officials in the federal government to undercut Black ownership, weaponizing zoning policies and racial covenants to bar the door to ownership from Black Americans and later standing behind redlining and racial steering. CityLab wonders how the $80mn the NAR spent on lobbying in 2022 could have been put toward advocating for fair housing to make up for their historical, racist transgressions.
Airbnb.
New York City has moved to eliminate the vast majority of Airbnbs and other short-term rentals. Local Law 18 mandates that short-term rental hosts must register with the city. The caveat: only those who live in the place they’re renting out can qualify, and only up to two guests. Other cities are making similar moves to curb the influence of short-term rental platforms like Airbnb. Wired suggests that, of the 40,000 Airbnbs in New York (22,434 of which are short-term rentals that can be booked for fewer than 30 days), the law “could open these homes to local residents” as the city faces a housing shortage that “has increased rents and rates of homelessness.”
Gothamist examines what it’ll mean when the Airbnb offerings in Bed-Stuy disappear. The neighborhood was historically Black before being steamrolled by gentrification, and now contains more than 15% of the 10,000 in the city. Many of its original residents were forced out with eviction, foreclosure or other financial hardships. Now, as short-term rentals open up, they still may be out of reach for many New Yorkers due to higher property values.
CLIMATE and FINANCE
Catastrophe Bonds.
Catastrophe bonds have surged this year, up more than 14% through August, accelerated by the “mounting cost of extreme weather events,” reports WSJ. As these disasters happen more frequently, their issuance rate ramps up. “The wave of supply isn’t expected to break soon, as the need to protect against potential losses continues to grow. That should keep terms attractive, encouraging investors to enter the cat-bond market,” they write.
Bluelining.
As investors benefit from the chaos wrought by disasters, homeowners are losing out. Major insurers plan to cut damage caused by hurricanes, wind and hail from policies along coastlines and in wildfire-afflicted zones according to a survey from the National Association of Insurance Commissioners. Families will lose critical protections as disasters intensified by climate change continue to batter their homes.
The Greenlining Institute has issued a new report on what they call “bluelining,” the early signs of climate financial discrimination. As financial institutions raise prices or pull out of areas most affected by climate risk, they disproportionately impact communities of color and low-income communities, which are more likely to live in these areas. The report identifies a number of policy gaps and solutions, including: recommending that policymakers take active steps to understand how to address bluelining, engaging financial institutions to leverage the Community Reinvestment Act and financially support community efforts to deal with climate risk and impact, and improving accountability through policy and regulation.