Another Dimon Tantrum on Bank Capital
JPMorgan Chase’s CEO has been whining about capital requirements for years, from jibes about “gold plating” by smart American regulators to this week’s tantrum about the Basel Endgame proposals from Fed Vice Chair Michael Barr. Tougher capital requirements make the system stable and bankers less wealthy, though they do make existing bank stocks less valuable. What exactly is wrong with that? Nothing.
Ever since the Fed, FDIC and OCC unveiled their Basel III “endgame” proposals, the bank lobby has subjected regulators to a barrage of complaints that channel Dimon’s tantrum. Here, they claim the proposal violates administrative procedure by requiring nonpublic information. Here, BPI shelled out for a custom domain to convince everyday people to push back against the Basel requirements. (It is hard to imagine anyone atop a barricade screaming: “Stop The Basel Endgame!”)
Here, JPMorgan’s Dimon asks whether regulators “want banks ever to be investable again?” Which gives away the game. Dimon wants a higher share price – something that drives compensation – for his bank. Alexa Philo, AFR’s senior policy analyst and a former Fed examiner herself, explains in her testimony before the House Financial Services Committee tomorrow:
[S]enior business executives and their teams profit from weaker capital rules. Looser capital standards make it easier for executives and bankers to take on excessive risk to increase short-term profits — and their own compensation even when that makes failures with potentially grave public costs more likely. More adequate capital requirements also limit the ability of banks to pursue financial engineering like stock-buybacks and dividend payouts that also increase senior executives compensation.
Some other reminders, so you’re not swept up in the whirlwind of bank lobby misinformation: this op-ed from Sheila Bair rebuking many of the industry’s misleading talking points, and this notice not to give into the bank lobby smokescreen.
Roll on, Basel Endgame!
FINANCIAL STABILITY: Further to the Banking Crisis – Hedge Funds Treasury Exposure – Rates and Recession
CONSUMER: CFPB Anti-Discrimination – SCOTUS Fight – CFPB Enforcement Actions – Consumer Stats
CAPITAL MARKETS: Gensler on the Hill – Virtu
PRIVATE MARKETS: Simon & Schuster – Healthcare – Cardiology – The Rebellion Against Blackstone – Sports and PE – Teen Vogue on PE – Other PE Hits
CRYPTO: The Barr on Innovation – Gemini and DCG
HOUSING: Wisconsin Eviction History – Tokyo Affordable Housing – Credit Score Requirements
CLIMATE AND FINANCE: Pushing Back against Anti-ESG – Louisiana Insurance Crisis
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Further to the Banking Crisis.
At the end of last week, the FDIC released a postmortem scrutinizing its supervision of First Republic ahead of the bank’s failure. The agency says it should have approached supervision more “holistically” and that its decision to signal the bank has “strong liquidity levels and well-developed funds management practices” with a high Liquidity rating in 2021 was “too generous and was inconsistent with [its] high level of uninsured deposits.” While the FDIC believes it unclear whether earlier supervisory action would have prevented the failure – caused by rapid growth and loan and funding concentrations, an overreliance on uninsured deposits and customer loyalty and a failure to accommodate for interest rate risk – the report’s authors believe “meaningful action to mitigate interest rate risk and address funding concentrations” would have made the bank less vulnerable to the toppling effect of 2023’s instability.
The crisis, writes American Banker, has benefited reciprocal deposit firms – the ones that spread the bulk of bank’s uninsured deposits around to accounts at other banks in-network to ensure that they’re all covered by the $250,000 insurance limit. Since February, one firm called R&T has had 78% more reciprocal deposits under management. Meanwhile, WSJ reports that banks have been piling up $1.2trn in “hot” deposits. These are “brokered” deposits, which, by way of a broker, allows people to invest in the bank’s high-yielding CDs. And they’re fairly risky, “prone to disappear when a bank hits a rough patch, since these yield-seeking customers don’t tend to be loyal.”
And, what’s in a name? WSJ catches up with Republic First – not First Republic, mind you – a Philadelphia lender with $6bn in assets that’s in “financial purgatory.” Right now, it faces similar problems to its inverse namesake: unaccounted losses and a failure to raise capital. But, its depositors, 60% of whom are uninsured, have remained more or less loyal even as its investors have fled.
Hedge Funds Treasury Exposure.
Research from the Fed indicates that hedge funds’ exposures to U.S. Treasury markets are “large and highly concentrated,” creating possible “financial stability vulnerabilities.” The analysis examines how a floor on repo haircuts – a “haircut” is the difference between an asset’s initial market price and its purchase price at the start of a repo – would impact hedge funds’ activity in these markets. At a hypothetical 200 basis points repo floor, funds would need about $12bn more in capital to maintain their current borrowing levels ($553bn collateralized by Treasuries as of Dec. 2022, with $9.9bn in capital). Currently, hedge funds work with “large dealers” and only face very low or no haircuts at all, contributing to “elevated leverage.”
Rates and Recession.
A rapid-fire rates and recession review for the past week:
The Fed’s considering a pause in rate hikes this September. Then they’ll “take a harder look at whether more are needed.”
The odds of a “soft landing” have improved, but “recession risks remain.”
To get a handle on inflation, the Fed has to navigate a cost-of-housing crisis too, per American Banker.
CONSUMER
CFPB Anti-Discrimination.
Last year, the bank lobby filed suit with the Consumer Financial Protection Bureau alleging the agency was overstepping its bounds by taking action against racism by requiring financial institutions to submit “regular tests of how their treatment of customers may inadvertently disadvantage certain groups, including racial minorities.” It tacked “discrimination” and “disparate impact” to the categories assessed during examination. On Monday, a Trump-appointed federal judge in Texas ruled in favor of the bank lobby. Judge J. Campbell Barker suggested that state laws already provide protection from discrimination (Note: not all states have anti-discrimination laws) and that the agency’s Dodd-Frank charter never specified discrimination (Note: A CFPB spokesperson wrote that federal law prohibits “unfair acts and practices, stating that financial firms cannot subject consumers to substantial and unavoidable harm,” which to the agency includes discrimination). The case was originally brought by the U.S. Chamber of Commerce, American Bankers Association and Consumer Bankers Association, so the judgment applies only to companies represented by those groups.
SCOTUS Fight.
Only 20 days remain until oral arguments are heard in CFPB v. CFSA. Sen. Warren signals how the case is “extreme and could cause chaos” if the Fifth Circuit’s opinion is upheld in what would be a victory for predatory payday lenders. The Center for Responsible Lending raises that if the CFPB is undermined, “any American with a bank account, credit card, mortgage, auto loan, or any other consumer financial product” would be exposed to these predatory lenders. Providers of financial products and services, too, would “struggle to function in a market where the largest players had free reign.”
Director Chopra spoke at the Mortgage Collaborative National Conference and did not mince words about the chaos that would unfold in housing finance markets if SCOTUS upholds the Fifth Circuit’s decision against the CFPB. After 2008, it was the CFPB that recast mortgage rules, and “reverting to a system without those regulations would create uncertainty for the mortgage industry and the economy.”
CFPB Enforcement Actions.
The CFPB has ordered the leasing company Tempoe to pay $36mn in penalties and relief to customers at major retailers such as Sears and Kmart, who were “kept in the dark about costly contract terms.” Forty-one states and D.C. have entered a settlement addressing the same practices. The agency reports that Tempoe offered financing at point-of-sale but hid the true nature of the agreements, keeping customers beholden to their nonreturnable products and their “unexpectedly large payments.” The company will be permanently banned from offering consumer leases.
Consumer Stats.
A couple of consumer stats:
Overall, American households feel worse about their current and future financial situations, according to the NY Fed’s latest Survey of Consumer Expectations. That’s thanks to lower income growth expectations, higher job loss expectations, and deteriorating credit conditions and expectations. Inflation expectations, though, remained “largely stable,” only rising slightly for the short- and long-term and falling slightly in the medium-term.
According to the Fed, the amount of personal loans has reached $356bn, representing a tenth of nonrevolving consumer credit. A fourth of that is held by finance companies that usually lend to nonprime consumers. Full paper here.
CAPITAL MARKETS
Gensler on the Hill.
On Tuesday, SEC Chair Gary Gensler took to the Hill for Senate Banking’s “Oversight of the U.S. Securities and Exchange Commission” hearing. Read his prepared statement here, where he talks the SEC’s 90-year run, the 22 new rulemakings the agency’s seen through during his tenure, upholding competition in equity markets and private funds, and more. Much of the criticism came from Republicans on the committee, including Tim Scott “who accused him of hindering pro-growth initiatives.” Though Republican lawmakers balked at the SEC’s volume of rulemaking, Gensler pointed out that the agency had been enacting rules more slowly than his predecessors
In particular, Scott and other Republican allies raised the proposed climate disclosure rule, suggesting it may quadruple costs for public companies. Gensler defended it, saying that the majority of the “top thousand issuers” already make them and that investors, representing many trillions in assets, actively use them to make sound investment decisions. AFR has supported climate disclosures in investing.
Virtu.
The SEC has charged broker-dealer Virtu for making false and misleading disclosures related to “information barriers to prevent the misuse of sensitive customer information.” According to the complaint, Virtu America and affiliates ran two businesses claimed to have been “walled off” from one another. But they allegedly “failed to safeguard a database that contained all post-trade information” created when customer orders were routed to or executed by Virtu America, making the database accessible to “practically anyone” at the company.
PRIVATE MARKETS
Simon & Schuster.
About a month ago, the private equity megafirm KKR bought out beloved book publisher Simon & Schuster. AFR’s Carter Dougherty and Andrew analyzed the finances in an article for The Atlantic:
Ultimately, KKRmay not even need to solve the riddle of increased profitability. As is often the case with private equity, it can profit even if Simon & Schuster does not. The $620 million not covered by debt will come from a fund that KKR assembled from a collection of entities including a dozen state pension funds, a Chinese insurer, and a pilots’ union in Iceland. [T]he sliver from KKR itself could be 2 to 10 percent, or $12.4 million to $62 million … But the company can start harvesting cash immediately. Private-equity firms collect “management fees” from their own investors and “monitoring” or “advisory” fees from companies they purchase. KKR and its partners collected $185 million in advisory fees from Toys “R” Us before bankrupting it. With Simon & Schuster, fees alone could let KKR make its own money back in a few years.
Healthcare.
Politico reports that a “wall of debt” is approaching private equity-owned hospitals as higher borrowing costs eat at margins and bankruptcies at PE-owned businesses are on pace to reach decade highs. A salient threat to patients, lawmakers have increasingly undertaken efforts to mandate these firms to disclose more information about their ownership and the debt burdens they force healthcare providers to shoulder. House Energy and Commerce lawmakers passed a bill that mandates private equity-backed businesses to reveal more information about their operations and financing. Regulators, too: The Centers for Medicare & Medicaid Services has been working toward nursing home ownership disclosure rules, and the SEC recently finalized its slate of sweeping private funds transparency rules.
Cardiology.
Too many patients are subject to coronary stenting, a cardiology procedure in which a tube-like metal coil is inserted into an artery and expanded to clear a clot. They cost the healthcare system needless millions and make patients more vulnerable to blood clots, torn arteries, infections and other injuries. And they’re a prized procedure for private equity. In 2020, Medicare began to pay physicians to perform other processes to open clogged arteries in non-hospital, outpatient settings. Since then, private equity firms have been buying up cardiology practices and ramping up consolidation.
The Rebellion Against Blackstone.
By the end of last year, across a dizzying range of products and services, Blackstone had $881bn in assets. That’s more than twice the GDP of Denmark. But when Blackstone started purchasing its homes to convert into rentals, part of a rising trend of private landlordship across the world, it was Denmark that bit back against the gargantuan asset manager. Through a local partner called 360 North, Blackstone employed tactics known as “ryste bygningen” or “shake the building” in an effort to get tenants in units that the firm wanted out. The firm even eventually partnered with a man known to one Danish newspaper as “the man who sold ‘dog shit’,” one Nils Jansson who “was emblematic of the risks and excesses that had caused Denmark’s financial crisis.” It did not take long for Blackstone to become public enemy number one in the Scandinavian country, eliciting scorn from both sides of Denmark’s political aisle. And when the Social Democrats secured a parliamentary majority, they set to work on the Blackstone Law. Passed in 2020, it prevents new landlords from raising rents for five years, prohibits them from offering tenants cash to move out, and mandates them to increase the building’s energy efficiency before raising rents.
Sports and PE.
Football season’s back in high gear, this week marking the first of the NFL season. This writer doesn’t know much about football, but Google tells him that the Jets beat the Bills while Pitchbook tells him 63 North American major league sports teams have PE connections. That’s a team value of $204.6bn. Basketball and baseball are the top targets, 20 of 30 NBA teams touting a connection to private equity. Full interactive dashboard here if you want to search for your favorite team.
Related: How satirical is this Onion article, really, with a title like “Local Private Equity Firm Announces 2030 Goal Of Making Everything A Little Grayer, A Little Less Full Of Joy”?
Teen Vogue on PE.
AFR’s Carter Dougherty landed in a Teen Vogue explainer detailing the ins and outs of private equity. Writer Jacqui Germain hits the major questions for any savvy teen reader looking to brush up on their financial system knowledge: what PE firms are (“behind-closed-doors” trading, in Dougherty’s words), how they make their money (“looks a lot like looting”), and what federal-level policy solutions exist (like the Stop Wall Street Looting Act). The article also zeroes particularly in on PE’s influence on the healthcare and housing spaces, leading to “disastrous results with real human impacts.”
Other PE Hits.
And here’s a roundup of other PE news from this week so far:
WSJ covers a money-for-nothing lawsuit against private equity giants here.
A Reuters report on how wealthy families are buying into bonds and PE investments and dropping their stock exposures here.
Yahoo! Finance talks I Squared Capital’s foray into leasing 55,000 semi-trailers here.
CRYPTO
The Barr on Innovation.
Last week, Fed VC for Supervision Michael Barr delivered a speech at the Philly Fed’s fintech conference on the central bank’s role in “supporting responsible innovation.” His words here and the event here. Barr spoke on instant payments and other payment technology, highlighting the new FedNow, and digital assets like crypto, stablecoins and central bank digital currencies. He noted that the initiative launched last month supervising the risks of “novel, technology-driven activities” at banks will continue to expand and evolve. The Fed, he reports, has an interest in ensuring stablecoins “operate within an appropriate federal prudential oversight framework” so they don’t threaten financial stability.
Related: A forthcoming article from the St. Louis Fed further examines “Technological Change and Central Banking.” It describes how money that passes through a decentralized autonomous organization (DAO) is often a potentially “disruptive force” in the banking system. Due to their decentralized nature, they can be difficult to directly regulate. Thus, given their inherent systemic risks and the inability to adequately regulate them directly, the alternative strategy is to “offer a competing product.” In this case: a central bank digital currency as a way to mitigate the risks of other emerging stablecoin products, writes David Andolfatto.
And: There was a line in Barr’s speech about how the Fed used to move “bundles of checks around the country on trucks and trains.” Aaron Klein notes that once a law passed allowing them to be emailed, the Fed “never passed the savings” of faster processing to the people. It allows the banks to “sit on the money,” resulting in billions in overdraft fees.
Gemini and DCG.
The SEC and FBI are investigating claims of fraud made against Barry Silbert, founder of the crypto firm Digital Currency Group (DCG), by Gemini Trust co-founder Cameron Winklevoss. DCG has denied wrongdoing. Prosecutors recently interviewed Winklevoss about his claims. Authorities have made no accusations of misconduct. Reuters notes that investigations do not always result in charges.
HOUSING
Wisconsin Eviction History.
The Wisconsin Supreme Court is considering a petition that would change the record-keeping rules surrounding eviction, such that records would only need to be retained for one year in cases where no monetary judgment was levied against a tenant. After a year elapses, the record would disappear from the circuit court’s website. Local tenant advocates have spoken in favor of the petition, filed by Legal Action of Wisconsin, as it would help residents with their eviction histories “since many landlords rely solely on the statewide court website.” Such records rarely provide a complete picture. Cases with monetary judgements, however, would still be kept for 20 years.
Tokyo Affordable Housing.
Where’s the “Big City Where Housing is Still Affordable”? Tokyo! While housing prices have skyrocketed in other major cities, Tokyo’s investments in transit and its permission for development has “added more housing units than the total number of units in New York City.” How has it grown so large? NYT reports it’s because it stays affordable: two minimum-wage workers in Tokyo can “comfortably afford” the average rent for a two-bedroom apartment in six of the city’s 23 wards. Meanwhile, in the New York metropolitan area, that’s not possible in any of its 23 counties. There’s very little public or subsidized housing, however. “Instead, the government has focused on making it easy for developers to build,” and it comes at the cost of a proliferation of private enterprise and the destruction of unpreserved historic districts.
Credit Score Requirements.
In 2022, the Federal Housing Finance Agency announced it would change the credit score models and credit report requirements for loans acquired by Fannie Mae and Freddie Mac (“the Enterprises”). Both FICO 10T and VantageScore 4.0 credit models were approved for use after a lengthy review and “rigorous testing…for accuracy, reliability, and integrity.” It’s not happening yet, though. On Monday, the agency announced further “public engagement” opportunities, including “stakeholder forums and listener sessions” so they can catch the issues, opportunities and challenges that may arise as they look to implement.
CLIMATE and FINANCE
Pushing Back against Anti-ESG.
Americans for Financial Reform expressed opposition to a slate of four legislative proposals unveiled by the House Committee on Education and the Workforce:
These bills’ amendments to the Employee Retirement Income Security Act (ERISA) would undermine workers’ retirement security and are part of a broader political campaign [that] seeks to force financial actors to ignore a slew of financial risks regardless of the consequences for workers’ retirement security and the integrity of our financial system.
Louisiana Insurance Crisis.
Like other states that have been battered by climate change-intensified natural disasters (namely, California where insurers have pulled out because of wildfire risk and Florida where hurricanes have tested their diminished insurance system), Louisiana is facing its own “insurance crisis.” Hurricane damage has led insurers to “close their doors or hike rates, forcing some residents to move out of state” as they are unable to afford rising premiums that top as much as $600,000 among the wealthiest residents. The average premium rose 18.5% in 2022. People who live in coastal areas have “seen property increases far higher and faster…and that’s when they can get insurance at all.”