More Capital, More Safety
One thing very much on the mind of both financial reformers and bank lobbyists is surely the Basel Endgame. It’s the Fed proposal that would shore up the financial system by requiring the largest banks to maintain a larger capital buffer. If something bad or even catastrophic happens – say, a bank in Silicon Valley collapses and triggers a systemic crisis – that capital protects banks and the system as a whole.
The big-bank lobby does not want that. Their noisemaking about bigger capital buffers exploded last year – that’s what money buys in Washington – when the Fed, FDIC and OCC unveiled a 1,087-page document on the proposal.
Rana Foroohar of the Financial Times makes a strong case for the rules: “The financial system needs more capital and less complexity.” Ultimately, the simplest and most effective solution to head off instability is strong equity capital buffers, writes Foroohar:
“To me, the core lesson is that too much debt and leverage, combined with too little high-quality capital on hand, always ends in tears. And yet, as the massive lobbying by US banks pushing back against the Fed’s attempt to implement Basel III rules shows, we are still arguing about the basics of what makes the financial system safer.”
Indeed, the bank-friendly camp has been able to rope in well-meaning groups of Democratic lawmakers and community advocates, who oppose the rule on narrow grounds – like mortgage access, or clean energy financing. There are solutions to their worries, in some cases. But big banks and their allies in Congress are seizing the moment to throw the baby – the whole proposal – out with the bathwater. Says Foroohar:
The more troubling and, quite frankly, cynical argument, is that asking large banks to hold more capital will hurt vulnerable individuals, impacting mortgage lending to minorities, for example. Let’s start with the fact, pointed out by Americans for Financial Reform, that 70 per cent of the mortgage market (and the vast majority of loans to minorities) is government-backed and wouldn’t fall under the new rules. Plus, non-banks make far more loans to black and Latino families, albeit with higher fees (which is a topic regulators should pursue).
The big banks are swamping the Fed with comments in opposition: 97 percent of the 356 letters opposed all or part of the rule. Jeremy Kress, professor of law, provided some vital context: "Analyses like these are very misleading. Financial stability is a public good, but the cost of capital is borne directly by bank shareholders and executives. No surprise that banks (and their astroturfed allies) are more motivated to comment."
Saying the quiet part out loud, Morgan Stanley calls the possibility that the capital rules might be “lightened up” as a chance to increase buybacks – which bumps up share prices and executive pay linked to them. That is what this is all about – the rest is just noise.
FINANCIAL STABILITY: Bank Merger Reviews – Commercial Real Estate – Banking and Monopolies – Wells Fargo Fake Job Interviews – Further to the Banking Crisis
CONSUMER: Overdraft – Save the Post Office – Payment Apps – Arbitration – Earned Wage Access – Tribal Lending – Rent-a-Bank
CAPITAL MARKETS: Gag Rule – SEC Lawsuits
PRIVATE MARKETS: Private Funds Lawsuit – Private Funds and Cliamte – Private Equity and a New Mother’s Death – Private Equity and Home Health – Other Private Markets News
CRYPTO: Stablecoins – FTX – PAC Action – Legislation ≠ Legitimacy – A Crypto Bill
HOUSING: The Federal Home Loan Banks – Rent-Burdened – Senate Pressure – Heirs Property
CLIMATE AND FINANCE: California Climate – Vanguard – Meat and Deforestation on the Menu – ExxonMobil
POLITICS AND MONEY: Billionaires and Universities
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Bank Merger Reviews.
In a statement, the OCC’s Hsu suggested plans to more closely scrutinize bank mergers and acquisitions with a roster of new regulations to boost transparency. Politico indicates the Acting Comptroller will toss out long-standing rules that allow mergers to proceed by default if the OCC simply doesn’t take action. Though, the system is still without finalized merger guidelines. Said AFR’s Carter Dougherty:
“[Hsu is] only taking baby steps away from the decades-long approach of rubber stamping most bank mergers. His remarks gave short shrift to the harms of bank mergers to disadvantaged communities, and the new policy statement is a poor substitute for finalizing updated merger guidelines.”
Sen. Warren also urged Hsu’s agency to do more to regulate the mergers that make big banks bigger: “Under Acting Comptroller Hsu, the OCC has approved mergers that have worsened consolidation in the banking sector — including with its approval of JPMorgan’s purchase of First Republic last year that made America’s biggest bank even bigger … We need regulators to crack down on bank mergers and to finally release stronger bank merger review guidelines.”
Commercial Real Estate.
The stock value of regional bank New York Community Bancorp, which purchased a portion of Signature Bank last year, plummeted 46% last Wednesday, causing the KBW Regional Banking Index to suffer its worst day since SVB’s collapse. The cause: an increase in its loan loss provisions, owing in part to troubled commercial real estate loans.
Banking and Monopolies
Saule Omarova and Graham Steele offer up a framework about thinking through problems with banking through the lens of antimonopoly activism. “Embracing the embedded antimonopoly spirit of bank regulation can fundamentally reset policymakers’ priorities and expand their options,” they write.
Wells Fargo Fake Job Interviews.
Guidelines issued in 2020 required all $100,000+ job postings at Wells Fargo to have interview pools that comprised at least 50% people from disadvantaged groups. An investor-led class action lawsuit would come to allege that the bank conducted sham interviews, in which Black or female candidates, for example, would be interviewed even after a candidate had been selected. Wells Fargo would win a motion to dismiss the suit in 2022. Now, the plaintiffs have returned with a potentially stronger case, and Wells Fargo wants another dismissal.
Further to the Banking Crisis.
Silicon Valley Bank. TIAA sued a group of the bank’s former directors and executives for “failing to take the necessary steps to prevent massive losses on its investments,” which allegedly resulted in losses for the financial services company.
First Citizens. The North Carolina-based bank, which bought a sizable portion of SVB’s operations, says it’s been able to hang onto some of the failed bank’s former clients and stabilize the deposit base. But a drag on PE and VC activity and fundraising, coupled with a “modest decline” in tech and healthcare banking, means there are “headwinds” ahead.
Midsize Banks. They’re still recovering from the system shock of last year, leaning more heavily on their customers’ deposits to make loans as they work to stem their outflow. Plus, they remain exposed to the commercial real estate sector, which has helped bring a handful of their credit ratings down.
Though competition for depositors reportedly remains high, there’s relatively less “pressure on deposit costs” and lightened pressure to keep depositors from departing.
CONSUMER
Overdraft.
The Center for Responsible Lending’s David Silbeman rebuffs an argument that suggested the fees reaped by banks helped pay for free checking or that capping overdraft fees could hurt vulnerable families:
“Overdraft programs today are hugely profitable. If banks were to bring their overdraft fees down to the level required to cover costs, they would forgo these profits. To challenge the CFPB proposal on that ground is to argue that the financially vulnerable should be expected to subsidize the costs of providing checking accounts to the rest of us.”
Sen. Elizabeth Warren explains the CFPB’s push for overdraft reform on Twitter. “Why should we let banks make billions from junk fees when [the] majority of people pay that money back within 3 days?” she wrote. “This is a big win for the 23 million households that deal with overdraft fees.”
Save the Post Office.
AFR and 35 other public interest groups endorsed a call by House Democrats to nominate two public-service-minded members to the USPS Board of Governors to “work to expand into the post office of the future and leave behind slash-and-burn management” that current Postmaster General Dejoy set in motion.
Payment Apps.
In a letter, Sens. Warren, Brown and Reed support a new CFPB rule that seeks to “expand oversight and supervisory authority over big tech companies that offer digital peer-to-peer mobile payment systems and digital wallet services.” As services like CashApp, Venmo, and Zelle, among others, become more popular, so does the incidence of fraud and scams in a market with a low bar of consumer protection.
Arbitration.
It’s getting more expensive to take on corporate offenders, since the American Arbitration Association, the world’s largest private provider of arbitration services, raised its mass arbitration fees this January. They’re up to $3,125 from $125, a 25-fold increase.
Many consumers are forced into arbitration when they agree to use a company’s services. (Ever pressed “I Agree” on the terms and conditions without reading them? Of course you have.) When they have a grievance, they might be forced into an expensive, private and binding judgment process that typically favors the corporation. A mass arbitration is like an unfair class-action lawsuit – a large number of arbitrations undertaken at once. If a case has over 25 claimants, the group will have to cough up thousands of dollars.
Earned Wage Access.
Some earned wage access (EWA) programs, which may charge an employee high fees to receive a portion of their paycheck early, are “payday lending on steroids,” says New York Community Bank’s Marshall Lux. In 2020, $9.5bn in wages were accessed early through EWA providers. While some are offered through the employer and are relatively safer or more transparent, third-party EWA servicers bear similarities to high-cost lenders, like predatory payday loan companies. Overuse of the latter, coupled with high fees, can translate to an annual interest rate in the triple-digits, as high as 400%.
Tribal Lending.
Minnesota Attorney General Keith Ellison filed a lawsuit against the Fort Belknap Indian Community in Montana over their operation of a predatory online lending business, which charges consumers exorbitant interest rates – sometimes in the three-digit range – for “easy-to-access credit,” the Star Tribune reports. Tribes are often able to invoke their governmental sovereignty for immunity from outside lawsuits. Occasionally, however, non-tribal companies try to associate with tribes in order to gain the same shield. This might allow a predatory lender to prey on vulnerable populations; Ellison’s suit alleges the Fort Belknap lenders charged Minnesotans between 474% and 795%, and offers up over 40 examples of consumers caught in debt traps.
Rent-a-Bank.
In a “rent-a-bank” arrangement, a state-chartered bank will partner with a nonbank to disburse loans at higher rates than the former’s state law would allow. Last year, Colorado’s legislature passed a bill that would allow the state to opt out of a federal law which enabled these predatory schemes. More recently, the Center for Responsible Lending called on other states to follow Colorado’s example. CRL’s research has uncovered loss rates at nonbank lenders like OppFi, Enova and Elevate over 50%; the average annual loss rate with a bank credit card in 2022 was 2%.
CAPITAL MARKETS
Gag Rule.
The SEC has a lifetime gag rule: If you’ve settled with the agency over charges of wrongdoing, you can’t come around later to deny the allegations. The New Civil Liberties Alliance (a right-wing, industry-friendly group) will sue the SEC, after the agency rejected its petition to amend the rule.
SEC Lawsuits
Politico gives oxygen to the myriad industry groups angling to overturn SEC regulations. One notable nugget: the mutual fund industry lobby group has followed the lead of the private fund sector in creating a Texas-based affiliate for the purpose of bringing lawsuits in the right-wing, industry-friendly Fifth Circuit.
PRIVATE MARKETS
Private Funds Lawsuit.
On Feb. 5, the Fifth Circuit Court of Appeals, the conservative court stocked with Trump-appointed judges who have a history of ruling against regulation, will hear oral arguments in a group of industry lobbyists’ case against the SEC’s private-funds rule. The rule would require private funds (like private equity firms and hedge funds) to disclose their fees, expenses, and returns more transparently for investors, many of whom manage retirees’ and other savers’ money. AFR and allies supported the rule when the agency rolled it out in August and more recently filed an amicus brief in support.
Private Funds and Climate.
A report from the Carbon Tracker Initiative highlights the risks that private equity investors face from further investment in upstream oil and gas operations – that’s oil wells and the like. CTI suggests that the energy transition will begin to upend the demand for oil, gas and coal.
Private Equity and a New Mother’s Death.
A mother checked in to give birth at St. Elizabeth’s Medical Center in Brighton, Massachusetts, a hospital owned by for-profit medical company Steward Healthcare. She bled to death when doctors found a bleed in her liver, then discovered that the device they needed to treat it had been repossessed by the manufacturer weeks prior.
Steward Health Care had been owned by private equity firm Cerberus Capital Management, which “extracted more than $800 million in excess of its investment out of the hospitals, then left during the pandemic.” After Cerberus left it high and dry, the company’s founder continued to drain its funds. Dozens of companies would come to sue Steward for failing to pay its bills. One would ultimately repossess the inventory of devices that could have saved the mother’s life.
AFR issued a news release highlighting the terrible role of private equity in Steward’s decline. “The ill effects of being owned by Wall Street private equity firms can haunt hospitals years later,” said Robert Seifert, senior fellow at AFR.
Private Equity and Home Health.
At-home healthcare typically offers high payouts and low regulatory hurdles. That makes it a prime target for private equity, already creeping further into the sector. When Help at Home, owned by private equity firms Centerbridge Partners and Vistria Group, pulled out of Alabama, the state lost almost 800 caregivers for 1,100 patients. They cited the state’s “reimbursement and regulatory environment.” Help at Home is still expanding aggressively in other states.
Much of the company’s revenue in Alabama came from Medicare and Medicaid. When a business is burdened by debt from a private equity buyout, however, low reimbursement rates can make it harder to make money. Since profit is private equity’s bottom line, Home at Health took the nuclear option by pulling out of the state altogether.
Other Private Markets News.
Exempt Offerings. AFR sent a letter urging action on “exempt offerings” in order to gain insight into the $5trn private markets sector.
Getting Old. Private equity used to be Wall Street’s “disruptors” – now, they’re the old dogs: “Private equity has outrun both its roots and its name. Faster-growing corners of investing, like credit and infrastructure, and faster-growing regions, like the Middle East and Asia, are pushing Wall Street and City veterans beyond their LBO origins. So are their customers: Pension funds want a handful of investing superstores rather than a sea of boutiques, and are offering bigger checks to fewer managers.”
Brainiacs. Quantitative analysts are “being deployed” by Wall Street asset managers to claim ground in the $10trn private equity and private credit markets. Data science is the name of the game for “systematic players” who want to suss out esoteric patterns and dislocations.
Morgan Stanley. The investment bank’s asset management arm will double down on its private credit portfolio, bringing its commitment up to $50bn.
Oak Hill Advisors & Private Credit. The credit investment arm of T. Rowe Price is “raising its first fund to lend to large private equity-owned businesses to fill a gap left by withdrawal of banks from the financing market.”
Sharing with Workers? Private equity megafirm KKR “pioneered a model of granting ownership stakes to employees at portfolio companies,” whereby the employees earn a share of equity on which they’ll potentially benefit when the private equity firm sells. Some would like to see it spread, but PE firms have lately struggled to exit companies or take them public, punting any possible reward further into the future.
CRYPTO
Stablecoins.
A working paper from the Bank for International Settlements analyzes how the value of stablecoins, crypto tokens pegged to the value of the U.S. dollar, can fluctuate according to public disclosure and perceptions. Stablecoin issuers typically carry a reserve of collateral assets to ensure that tokens are consistently tied to the dollar. BIS researchers find that more transparency about issuers’ collateral can improve token stability if the public believes the reserve to be quality and strong. That same transparency, however, can translate to volatility if they perceive the reserve quality to be low or the “transaction costs of conversion to fiat are low.”
FTX.
The failed crypto exchange FTX, previously headed up by convicted fraudster Sam Bankman-Fried, has announced it would stop its efforts to restart its exchange. Instead, it’ll pursue liquidation, which it expects will repay its customers in full.
PAC Action.
Fairshake, Protect Progress and Defend American Jobs – the triple-threat band of super-PACs that’s been gearing up to support crypto-friendly candidates – has already raised at least $85mn in their 2024 election season push. Crypto firms Coinbase and Ripple, both of which have come under fire by the SEC in the past year, and venture capital firm Andreessen Horowitz have each given $20mn in contributions.
Legislation ≠ Legitimacy.
Just because rules and regulations have come down on the crypto sector doesn’t mean the industry has an implicit seal of legitimacy from regulators, CFTC Chair Rostin Benham argued in a somewhat debatable point. Crypto commodities remain a “speculative and volatile asset, [wrapped] in a thin layer of indirect regulation.” Benham has been urging lawmakers to give his agency more oversight over the industry. Meanwhile, the debate rages over whether crypto tokens are considered securities or commodities.
A Crypto Bill.
Sometime in the coming months, Republicans will unveil an updated version of their digital asset market regulation bill, which would split regulatory authority over the crypto sector between the SEC and CFTC. One of the latest versions contains language around anti-money laundering protections.
HOUSING
The Federal Home Loan Banks.
The Consumer Federation of America calls for greater transparency and better financial reporting within the Federal Home Loan Banks system, the network of banks intended to provide capacity for financial institutions to make home loans and promote housing affordability. FDIC-member banks have to file quarterly call reports with the FDIC, which are made available to the general public. By comparison, while the FHLBs file “periodic disclosures” to the SEC, each bank approaches its disclosures differently and aren’t compiled in an easily accessible way.
Rent-Burdened.
More than 22.4mn households across the country are rent-burdened, meaning they spend nearly a third of their income on rent. That’s half of all renters, more than at any point in history. 12.1mn spend over half of their income. “Struggling with rising food costs, renters skipped meals, drove less to save gas money or eliminated social activities. While some renters put basic expenses on their credit cards, others borrowed money from friends and family or tapped their retirement funds,” NYT reports.
Senate Pressure.
The pressure to do something about the housing crisis is bipartisan and is “growing exponentially,” Senate Finance Chair Ron Wyden told Politico. Added Sen. Mike Rounds, a Republican: “It comes up every time we’re at home. That said, the solutions on hand do not appear to be as bipartisan as the pressure.
Heirs Property.
The National Consumer Law Center explores ways to “slow the rate of home loss in communities of color” when heirs property issues arise. An heirs property occurs when multiple beneficiaries inherit a home but haven’t gone through probate to clarify the title. Across generations, this can result in an exponential number of inheritors with fractional equity in a home. It’s an issue that disproportionately impacts Black families, who in these cases may be left without access to property tax relief programs, disaster relief funds, homeowners insurance and home repair grants.
CLIMATE and FINANCE
California Climate.
Two coalitions of businesses have sued to overturn California’s first-of-its-kind climate disclosure law, which would require companies that pull in at least $1bn in annual revenue to publicly report their greenhouse gas emissions. AFR and allies have supported California’s law, hoping it provides a blueprint for the SEC’s own inbound climate disclosure rule.
Vanguard.
A new ad from the Sunrise Project blasts the investment adviser Vanguard for pulling out of the Net Zero Asset Managers group, following “climate marching orders” from right-wing politicians. The ad and more can be found on a new site called Vanguard S.O.S, which details the asset manager’s record of “destructive investments” that put savers’ money at risk.
Meat and Deforestation on the Menu.
The world’s largest meat producer, a Brazilian company called JBS, wants to join the New York Stock Exchange. A group of senators, environmentalists and others want the SEC to block it, since it would offer funding for the “scandal-plagued” company that’s been tied to deforestation in the Amazon Rainforest. A letter from senators, including Warren, Booker and Brown, flags the company’s “track record of corruption, human rights abuses, monopolization of the meatpacking market, as well as environmental risks.” The SEC’s authority might be limited, however, so long as JBS is forthcoming to its investors about its projected climate impact. Opponents of the polluting company argue that it isn’t telling the whole story about the risks.”
ExxonMobil.
The oil giant for the first time resorted to the courts to stop a shareholder proposal, and it succeeded. The Dutch group Follow This had hoped to compel ExxonMobil to set targets for greenhouse gas emission reductions.
POLITICS and MONEY
Billionaires and Universities.
Private equity billionaire Marc Rowan continues to use his wealth and status as a major donor to undertake his “hostile takeover of the core academic functions” of the University of Pennsylvania. Professors have begun to organize under the banner of academic freedom, kicking off with a rally last week to speak out against Rowan. Said Amy Offner, president of Penn’s chapter of the American Association of University Professors: the school’s become a “ground zero of a coordinated national assault on higher education, an assault organized by billionaires, lobbying organizations, and politicians who would like to control what can be studied and taught in the United States.”