Very Merry Merger Guidelines
Happy holidays to any and all consumer advocates and financial regulation enthusiasts! One gift came in this week to ring in the season of family, togetherness and time off work. And those who celebrate Christmas might be surprised to see that it wasn’t from Santa, but instead from the Federal Trade Commission and Department of Justice: a set of robust, new merger guidelines ahead of the new year.
Said AFR’s Patrick Woodall:
“The new guidelines will start to address the anticompetitive effects of several common private equity strategies that have amassed consolidated market power–including widespread roll-ups via serial acquisitions, holding minority stakes in multiple companies, and wielding outsized buyer power in labor markets.”
Coming two years after a Biden administration manifesto on competition, these modernized safeguards represent a crucial step toward curbing consolidation fueled in large part by private equity leveraged buyouts. Private equity firms have been responsible for three-quarters of the mergers significant enough to be reportable to regulators. Their involvement typically results in worse outcomes for parties on the receiving end, from the business itself to the consumer and community. In healthcare, for example, its encroachment has meant increased probability of mortality, higher costs to patients, and hindered access.
A previous release from AFR highlights the particular dangers private equity’s tactics represent in regard to overconsolidation. In many cases, the firm might create a platform company, which it will use to purchase other companies in the same or similar sectors. Do this enough times, and you’ve got a “roll-up.” By that point, the firm may have cornered a local market, effectively creating a monopoly that it can leverage to drive up prices. That’s what happened among anesthesiology practices in Texas. Patients and the market at large paid for it.
FTC Chair Lina Khan, commented:
“Fair, open, competitive markets have been essential to America’s dynamic, thriving economy, and policing unlawful mergers is our front line of defense against harmful corporate consolidation…The 2023 Merger Guidelines reflect the new realities of how firms do business in the modern economy and ensure fidelity to statutory text and precedent.”
FINANCIAL STABILITY: Capital Requirements – AI and Stability – FERC and Investment Managers – Tensions in Treasurys – Commercial Real Estate – First Wells Fargo Union – Further to the Banking Crisis
CONSUMER: Overdraft Fees – Credit Card Late Fees – Clarifying “Abusive” – NFCU Mortgage Discrimination – Medical Debt – Not-So-Instant Payments – Trigger Lists – Enforcement Actions
CAPITAL MARKETS: Stock Buyback Disclosure – Accredited Investors
PRIVATE MARKETS: Private Credit – SEC Private Funds Suit – PE Owns Hawaiian Hotels – How Lucrative Can PE Be? – Alden Global Evil – Other Private Markets News
CRYPTO: The Revolving Door – Super PACs
HOUSING: FHLBs and Lobbying
CLIMATE AND FINANCE: Climate Disclosure – Florida Insurance – ESG
POLITICS AND MONEY: Clarence Thomas – Tax Cuts and Jobs Act
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Capital Requirements.
A group of Democratic representatives urged the heads of the Fed, FDIC and OCC to reconsider how incoming capital requirements would affect banks that make tax equity investments in clean energy projects, fearing that the system-stabilizing rules might “endanger the clean energy transition.”
AI and Stability.
Sens. Warner and Kennedy introduced the Financial Artificial Intelligence Risk Reduction Act, legislation intended to “require financial regulators to address uses of AI-generated content that could disrupt financial markets.” The move comes at a time when financial system watchdogs, such as the SEC and CFPB, grow increasingly concerned about the impacts artificial intelligence has on financial system safety and stability. Gensler and Chopra have both warned about the danger of multiple financial actors using the same AI-generated base models from opaque Big Tech creators to make decisions.
The bill would require the Financial Stability Oversight Council to oversee regulators’ response to threats posed by AI tools, from malicious deepfakes to run-of-course use of trading algorithms, as well as requiring the body to identify gaps in existing safeguards. It would also introduce penalties for uses of AI that violate SEC rules and vest the National Credit Union Administration and Federal Housing Finance Agency with the power to oversee AI service providers.
FERC and Investment Managers.
The Federal Energy Regulatory Commission launched an inquiry into Wall Street’s ownership of electric utilities. “The questions seek views on the Commission’s existing blanket authorization policy and whether it should be revised, whether the Commission should consider the size of an investment company in evaluating a request for blanket authorization, and what factors to consider when evaluating an investment company’s control over public utilities as part of a request for blanket authorization,” the agency wrote.
Tensions in Treasurys.
Treasurys, the “most important financial market in the world,” faced “critical levels of instability” this year, economist Adam Tooze wrote. Prices were volatile in such a way that provoked fears that these market jitters, as he puts it, would “self-amplify” in a cycle of repeated volatility and liquidity marked by dramatic swings. Regulators are worried, and they’d prefer traders to register and become subject to more stringent, safer requirements. Hedge funds, unsurprisingly, would rather not be subject to this kind of transparency, because of their penchant for risky basis trades that turn “huge leverage” into profit.
Commercial Real Estate.
A historic $1.5 trillion worth of commercial real estate loans will come due in the next three years, as office space becomes devalued and interest rates remain high. A working paper from the National Bureau of Economic Research finds that nearly 44% of these loans are experiencing “negative equity” – that’s when their value is less than the outstanding loan balance. Since $2.7trn of bank assets are tied up in CRE loans, if only 10% of these loans default, losses would total about $80bn. “Our analysis, reflecting market conditions up to 2023:Q3, reveals that CRE distress can induce anywhere from dozens to over 300 mainly smaller regional banks joining the ranks of banks at risk of solvency runs,” write the researchers.
And: Now, Washington, D.C., has a higher risk of defaults on these loans than the previous heavyweight San Francisco. “Loans of concern” in the area climbed to 72% in Q3 2023.
First Wells Fargo Union.
A fifth Wells Fargo branch in Albuquerque signaled they’d hold union elections. Then, ahead of its sister branches in Alaska, New Mexico, Florida and Iowa, their vote went through 5-3. If no one objects to the election in five days, WSJ reports, it’ll be the “first union inside a major U.S. lender since the dawn of the modern megabank.”
Further to the Banking Crisis.
A New Record. 2023’s bank collapses made it the “biggest year ever for bank failures,” American Banker notes. Before SVB went under, the country had gone 28 months without a collapse, the longest stint in over 15 years. AB recaps each bank’s fall above.
Blackstone Bids. Hancock JV Bidco, an entity indirectly owned by Blackstone, clinched the winning bid in the FDIC’s auction for Signature Bank’s commercial real estate loans.
The SVB Deposit Saga. SVB Financial, Silicon Valley Bank’s parent company, has been fighting for $2bn worth of seized deposits, and earlier this year, it sued the FDIC over the issue. Now, a judge says that the two parties will have to handle the dispute outside of bankruptcy court.
Also: Despite receiving bids from Anthony Scaramucci’s alternatives manager SkyBridge Capital and private equity firm Vector Capital, a group of SVB Financial’s creditors may instead be taking over the collapsed bank’s venture capital arm, SVB Capital.
CONSUMER
Overdraft Fees.
A report from the CFPB finds that many consumers continue to be subjected to unexpected overdraft and nonsufficient funds fees (NSF), “despite recent changes implemented by banks and credit unions that have eliminated billions of dollars in fees charged each year.” Some of the report’s key findings:
Low-Income Impact. The share of households charged an overdraft or NSF fee was three times higher among households making less than $65,000 than among those making over $175,000.
Financial Obligations. Households that regularly face these fees are more likely to have difficulty meeting financial obligations Over 81% of households that were charged overdraft or NSF fees had trouble paying a bill sometime in the past year. Only 25% of those that were not charged had the same trouble.
Unexpected Fees. Most consumers are surprised when they overdraft.
Credit. Most households that incurred overdraft fees still had available credit on a card.
Overdraft/NSF. The majority of consumers that were hit with one fee would also be charged with the other.
Credit Card Late Fees.
The CFPB’s plan to cap credit card late fees may come as early as January, CNBC reports, and is expected to save consumers nearly $12bn each year.
Clarifying “Abusive”
Rep. Andy Barr introduced a bill that would “clarify standards” for the CFPB’s Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) doctrine by requiring the agency to define, for financial institutions, what “abusive” means. Barr’s legislation has buy-in from bank lobbyists like the American Bankers Association, who assert it would “rein in the Bureau’s overly aggressive stance on ‘abusive’ acts.”
NFCU Mortgage Discrimination.
CNN finds that Navy Federal Credit Union, the largest credit union in the nation, “has the widest disparity in mortgage approval rates between White and Black borrowers of any major lender.” Providing service to 13 million members of the military and veterans, NFCU approved less than 50% of Black borrowers who applied for a conventional home mortgage. White borrowers, meanwhile, had an approval rate over 75%. CNN’s analysis determined that, with over a dozen variables – including debt-to-income ratio and neighborhood profile – holding the same between customers, Black applicants remained twice as likely to be denied compared to their white counterparts. Navy Federal’s disparity (a ~25 percentage point difference) is wider than other major lenders, such as Wells Fargo (19.5) or Bank of America (3.5). Notably, the Community Reinvestment Act doesn’t apply to NFCU, as credit unions aren’t held to the same standards as traditional banks.
Medical Debt.
In an op-ed, Community Catalyst’s Mona Shah urges debt collectors and loan providers not to block the CFPB’s plan to erase all medical debt from appearing on consumers’ credit reports, as any delay in the effort affects people’s ability to secure housing, transport or employment:
“The effect of medical debt is far-reaching and has resulted in the denial of necessary care by providers or delayed and forgone care by individuals, damaged or ruined credit upending families' financial stability, drained savings and bankruptcy, stress, anxiety and altered life trajectories.
Despite this, in order to keep the status quo and their sky-high profits, many corners of the financial industry are coming out in full force against this critical action by the CFPB.”
Not-So-Instant Payments.
Five months ago, the Fed launched FedNow, a system for real-time instant payments to rival similar private networks, like the Clearing House’s RTP. About 300 lenders are now on board, up from an early adopter count of 35. But, WSJ reports, officials believe “it will still take years before instant payments become widely available.” Some large U.S. banks have signed up, but not all, leading to a lag in universal operation. That lag means that the U.S. is behind other countries that already use instant payments, and that U.S. consumers have lost and are losing billions to banking fees.
Trigger Lists.
Sens. Reed and Hagerty proposed an amendment to the Fair Credit Reporting Act that U.S. PIRG says would provide consumers relief from “trigger lists.” When a consumer, for example, applies for a refinance and a hard inquiry appeared on their credit report, their personal information might end up on one of these lists, sold by credit bureaus. Once a third party gets its hands on the data, they and a litany of other companies might bombard the consumer with correspondence to market their own, separate product. The Senate bill would “prevent consumer reporting agencies from furnishing consumer reports under certain circumstances, and for other purposes.”
Enforcement Actions.
U.S. Bank. The CFPB ordered the lender to pay nearly $21mn for “keeping out-of-work consumers from accessing unemployment benefits” during the pandemic by freezing tens of thousands of customer accounts but failing to provide an easy way to regain access. It also “failed to provide provisional account credits, while investigating potentially unauthorized transfers.” The OCC separately fined the bank $15mn.
CAPITAL MARKETS
Stock Buyback Disclosure.
After having missed the deadline to amend it, the Fifth Circuit Court of Appeals has struck down the SEC’s stock buyback disclosure rule. AFR previously called for the Commission to re-propose the rule as soon as possible in light of the missed deadline.
Accredited Investors.
The SEC released a staff report reviewing Dodd-Frank’s definition of an accredited investor. Cooley LLP explains the tension behind the how accredited investors are defined: “Reg D and the definition of accredited investor have been contentious topics among the commissioners, triggered in part by the decline in the number of public companies and the rapid growth of the private markets: is excessive regulation of public companies a deterrent to going public or has deregulation of the private markets stoked their appeal, but sacrificed investor protection in the bargain?”
At present, an individual can become accredited if, among other criteria, they have a net worth over $1mn (ex-residence) and income over $200,000; an entity has to have $5mn in investments, and some require $5mn in assets, among other criteria. While the new report doesn’t lay out any new recommendations, it identifies older ones that never came to fruition, like whether to adjust the numbers in the criteria one time to reflect inflation. SEC staff welcomed public comment.
PRIVATE MARKETS
Private Credit.
Some private equity megafirms have sought to borrow as much money as they can from private credit funds and defer paying it back in what Bloomberg calls a “new way to defer M&A debt costs.” Recently, KKR requested this be done ahead of their 50% purchase of the healthcare analytics company Cotiviti, seeking $5-6bn worth of debt. “Any deal could serve as a model for other buyout firms with portfolio companies that are struggling with interest rate costs,” Bloomberg writes.
And: It may be a hot, new fad now – and a risky one, given the higher threat of defaults and bankruptcies – but Bloomberg chronicles how private credit got its start in ‘80s-era junk bond markets. Controversial high-yield bonds propped up the M&A activity of the decade, popularized by the investment bank Drexel Burnham Lambert. After the bank pled guilty to six felonies, accepted a fine, and collapsed in the ‘90s, the junk bond trade “froze up for a while.” Eventually, selling leveraged loans emerged as an emergency measure, before it caught fire and larger firms started to buy to finance enormous transactions. But smaller deals “wouldn’t get the attention of either bond investors or big leveraged loan buyers.” Enter: direct lenders, or private credit.
Plus: Bloomberg also explains what non-bank private credit is and why Wall Street banks want a cut. “Alternative lenders have been able to offer favorable terms for buyouts and line up larger deals, cutting into what has long been a profit-minting machine for Wall Street’s biggest banks,” and now those banks are rushing to do the same. Usually, a traditional lender will “make debt commitments first and then find clients” to buy; this time, they’re finding the buyers first.
SEC Private Funds Suit.
The SEC defended its private fund disclosure rules this week after a cadre of PE firms and hedge funds sued on the grounds that the regulator overstepped its mandate. In a filing, the Commission asserted that it followed proper procedure and was within its authority, Reuters reports. AFR celebrated the final rule in August as a means to protect retirees and savers by boosting transparency in the $25trn private fund industry.
PE Owns Hawaiian Hotels.
Private equity companies own almost 30% of all hotels in Hawai’i, Hawaii Business Magazine reports, up from only 4% in 2003. If you book a hotel room on one island, Maui, there’s a coin toss of a chance you’ll end up in a room owned by PE.
Local activists say that the increasing footprint of these megafirms have meant a greater interest in profit than in their long-term impacts on local communities at 33 of the state’s 144 hotels. Since their entry into the Hawai’ian hotel industry in the ‘90s, ownership by firms like these has resulted in higher workloads on fewer staff, resulting in a physical toll on many. Some, meanwhile, aren’t getting enough hours to maintain their health insurance. In one hotel, the private equity firm KSL “came in hard and started threatening people,” said former state Rep. Tina Wildberger. “They came in and were threatening if you don’t have 1,560 hours in annual that you worked, you’re getting your benefits dropped, your job is in jeopardy.”
Alden Global Evil.
The hedge fund that made its name looting newspapers down to the screws has found a new hustle: selling off intercity bus depots, notably ones previously owned by Greyhound, reports CNN. The result is fewer routes and worse service.
How Lucrative Can PE Be?
Very, according to a set of deals highlighted by FT. In 2010, 3G Capital invested $1.6bn to buy out Burger King. Afterward, the Burger King company, or what would become Restaurant Brands International, bought Tim Hortons for $12bn, Popeye’s for $1.8bn, and Firehouse for $1bn. Since then, 3G Capital has yielded $19bn.
Other Private Markets News.
Dry Powder Pressure. Private equity firms are hanging onto a record $2.59trn of dry powder – uninvested capital – “as a slow year in dealmaking closes with limited opportunities for firms to deploy capital raised in previous years.”
Brazilian Bribes. Last week, the Department of Justice handed down a $98mn penalty against Freepoint Commodities LLC, a trading company owned by the private equity firm Stone Point Capital. The charge stems from “the company’s involvement in a corrupt scheme to pay bribes to Brazilian government officials.” Freepoint and associates paid bribes to the state-run oil company Petrobras to suss out confidential information about pricing and bids from their competitors. The dealings netted the firm over $30mn.
CRYPTO
The Revolving Door.
Amid her push for stronger anti-money laundering controls in the crypto sector, Sen. Warren sent letters to Coinbase, the Blockchain Association, and Coin Center to scrutinize the extent to which they employ former military and civilian officials, as well as former members of Congress. Said the senator:
“This abuse of the revolving door is appalling, revealing that the crypto industry is spending millions to give itself a veneer of legitimacy while fighting tooth and nail to stonewall common sense rules designed to restrict the use of crypto for terror financing – rules that could cut into crypto company profits…It also reveals significant gaps in the nation’s ethics laws.”
Super PACs.
“A trio of super PACs backed by cryptocurrency executives and investors said Monday that they’ve raised $78 million as part of a major new push to influence the 2024 elections,” reports Politico. The PACs, Fairshake, Protect Progress and Defend American Jobs – with support from the venture capital firm Andreessen Horowitz, the crypto exchange Coinbase and the Winklevoss twins, who co-founded the crypto exchange Gemini – seek to back pro-crypto candidates as campaigning for the 2024 elections ramps up.
HOUSING
FHLBs Lobbying.
The $1.3trn Federal Home Loan Bank system has been lobbying to fight change, Bloomberg reports. Since the FHA released a roadmap to bring the Banks in line with a renewed vision for the lenders – which are meant to boost banks’ capacity to lend to prospective homebuyers, but, as this year’s banking turmoil illustrated, have been increasingly used as a lender of second-to-last resort – “lobbyists for financial institutions that borrow from the FHLBs said they plan to inundate the regulator with comments over minor rules to deter the agency from taking up more dramatic measures.”
CLIMATE and FINANCE
Climate Disclosure.
Bloomberg Law reports the SEC is weighing whether to water down its climate disclosure proposal in light of industry backlash. The most contentious part of the requirements, which would see companies publicize their emissions, are Scope 3 provisions – these are broader requirements that would require corporations to include emissions from their whole supply chain and other sources they indirectly affect. AFR has urged the Commission not to back down from Scope 3. Despite claims from the business lobby that this extension of the rules would be overreaching and onerous, an AFR report found that, for many major companies already covered by California’s disclosure rules earlier this year, there would be no additional costs to comply with Scope 3 requirements.
Florida Insurance.
In November, Sen. Whitehouse asked Florida Citizens, the state’s government-chartered insurance company, for information related to its ability to weather climate-related risks. This week, instead of answering any of the questions posed, Citizens’ CEO Timothy Cerio responded with a tenor that “suggests that Citizens does not plan to hand over any additional information,” Politico reports. Earlier this year, Gov. Ron DeSantis said that Citizens hasn’t “been solvent.” Cerio suggested the insurer, which controls about 17% of the market in Florida, could levy surcharges on policyholders and assessments on other policies if it couldn’t cover all claims. Reminder: Florida’s been in the throes of an insurance crisis as insurers pull back and premiums shoot up while homes continue to be buffeted by climate change-intensified natural disasters.
ESG.
Remember: You can get the truth about ESG investing at AFR’s new ESG-focused microsite! TL;DR: Allowing money managers to invest in environmental, social and governance causes is good for investors and companies.
House Judiciary took a shot in the dark by subpoenaing two large asset managers, BlackRock and State Street, as part of a Republican-led probe into whether their ESG goals violated antitrust laws. The two firms had already responded after the Committee requested the information in July, BlackRock having produced 91,000 pages worth of documentation.
And: Tennessee’s attorney general filed a lawsuit against BlackRock for supposedly violating consumer protection laws by failing to disclose its ESG investing activities, one of a series of attacks against the asset manager by Republican officials. The suit specifically argues that BlackRock’s membership in two groups – Climate Action 100+ and the Net Zero Asset Managers Initiative – somehow misleads investors. The AG calls them “activist groups,” but they’re really industry organizations with membership that includes the likes of Fidelity, JPMorgan and State Street.
POLITICS and MONEY
Clarence Thomas.
A ProPublica investigation finds that financial troubles sent Justice Clarence Thomas on a private campaign to squeeze the judiciary for more opportunities to make money. In June 2000, the Director of the Administrative Office of the United States Courts sent a confidential missive to Chief Justice Rehnquist. Thomas, in the midst of dire financial straits and with hundreds of thousands of dollars in debt, hinted at resignation if the justices didn’t and couldn’t earn more money, and pushed for higher salaries and the ability to take speaking fees. At the time, he was making about $174,000 a year, equivalent to over $300,000 today. Eventually, he’d cozy up to the likes of conservative billionaire and Republican megadonor Harlan Crow.
Tax Cuts and Jobs Act.
In 2017, the Trump-era Congress passed the Tax Cuts and Jobs Act (TCJA) which, among other provisions, set a static corporate tax rate of 21%. The Washington Center for Equitable Growth criticizes the Act, as evidence shows that the TCJA has benefited business owners and execs, not the average worker. The only workers that saw wage increases because of the tax cut were already well-paid. The top 10% of earners saw 80% of the benefit.