The SEC, Investor Risk and the Climate Crisis
Left unchecked, climate change will kill at least 5 million people worldwide between 2030 and 2050 and run up $2 billion to $4 billion a year in health costs. From 2021 to 2026, it will have cost companies nearly $1.3 trillion in revenue losses.
This week, the Securities and Exchange Commission failed to drop the blinders on investors who want information about corporate carbon emissions with the release of a watered-down version of its climate disclosures rule. The finalized version falls far short of what investors need, Americans for Financial Reform argues. Said AFR’s Moonyoung Ko:
“The SEC failed to do all that was needed to protect investors despite its clear statutory authority to do so and clear investor demand. The final rule must be seen as a bare minimum that must be improved upon quickly. Without further action by the SEC and others, our most vulnerable investors—working people saving for retirement—who are the most susceptible to climate-related financial events, still face undisclosed risks.”
When originally proposed, the rule would have required public companies to report on Scope 1, Scope 2 and Scope 3 greenhouse gas emissions. Scopes 1 and 2 emissions come from sources owned by the company itself in the course of its operations – like burning gas to run delivery trucks (Scope 1) or accounting for the fuel burnt by the electricity provider that keeps the headquarters’ lights on (Scope 2).
Financial advocacy groups, including AFR, pushed for the inclusion of Scope 3, where nearly 75% of corporate emissions hide (88% if the company’s in the oil and gas sector). The most comprehensive account of an entity’s environmental footprint, this level would have included emissions from all along a company’s value chain or, in the case of private equity firms and other money managers, emissions from companies and assets in which they’ve invested.
Instead, the finalized SEC rule excludes Scope 3 and scales back reporting requirements for Scopes 1 and 2. Companies would only have to report on emissions they deem “material,” effectively relying on corporate discretion. Smaller companies would not have to report emissions at all. That said, Scope 3 reporting requirements in California and Europe mean global companies still likely have to disclose this information.
The rule drummed up few allies. Public interest groups and progressives find the rules too weak; conservatives and business interests find the rules too strong. And only hours after the SEC voted to approve, ten Republican-led states filed a lawsuit to vacate it. And several lawmakers vowed to overturn it in Congress. It’s not over.
BANKING AND FINANCIAL STABILITY: When Big Gets Bigger – What Merger Guidelines? – Heavy Leverage – New York Community Bancorp – Powell Bowing to Wall Street? – Commercial Real Estate – Community Reinvestment – Who Owns What? – SVB and Signature
CONSUMER: Credit Cards – Debit Cards
CAPITAL MARKETS: McHenry’s Rollbacks – Order Execution
PRIVATE MARKETS: Private Credit – Retail – Private Equity and Healthcare – Energy Agency Merger Block – Private Equity and Housing – Other Private Markets News
CRYPTO: Crypto’s Super Tuesday – Securities or Commodities
HOUSING: The FHLBs and the Crisis – Affordable Housing
CLIMATE AND FINANCE: Insurance – Climate and Financiers – John Kerry
POLITICS AND MONEY: Wall Street DEI
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
When Big Gets Bigger.
Politico’s Victoria Guida examines the question, “How big should American banks be, and how much financial power should be concentrated in the largest ones?” Despite some level of increasing scrutiny on too-big transactions these days, Guida argues it’s difficult to make “cogent decisions” without a clear idea of what the banking sector should look like. She writes:
“Without a clear strategy to promote healthy competition, we could end up with a system that is less safe or doesn’t serve Americans as well…Making the decisions to combine banks only after an institution fails might just allow the biggest firms to get even larger and let regional lenders balloon without necessarily getting more stable.”
What Merger Guidelines?
Now, there’s a reason why the Capital One-Discover merger presents such a challenge. The explosive growth of too-big-to-fail in the wake of the 2008 crisis continues, but a revision of the 30-year-old bank merger guidelines, for which AFR has advocated, is missing. AFR has urged regulators to promote “more small banks and fewer megabanks.”
But the Financial Times informs us that antitrust seems to matter not one iota to Wall Street; it still cooks up merger plans driven by the biggest banks. No less than JPMorgan Chase, the largest bank and credit card issuer in the country, spent a year figuring out how it could buy Discover, mainly to pursue vertical integration. “Most of the focus was on a deal for Discover’s Pulse debit and cash machine network, a pin-based network which processed about $285bn in payments last year,” the FT reports.
Related: Sen. Warren wrote an op-ed in the WSJ opposing the Capital One-Discover merger.
Heavy Leverage
Currently, fourteen banks are subject to the supplementary leverage ratio, which requires them to hold a certain amount of capital proportional to their leverage exposure. Five of those banks closed out 2023 with record leverage exposure, putting pressure on their capital reserves. One of those banks: Capital One.
New York Community Bancorp.
Former Trump administration officials Mnuchin and Otting have emerged as part of an investment group that’s pledged $1bn to assist NYCB, the regional lender shaken by turbulence after it posted surprise losses on its earnings at the end of January.
Some background on the pair: Back in the day, Mnuchin and Otting were execs at OneWest Bank, the institution that bought most of the assets of IndyMac, which failed during the 2008 financial crisis. Mnuchin made hundreds of millions thanks to massive government backing.
NYCB suggests it had more deposits at the beginning of February than it had at the end of last year. Previously, the bank said that most are insured and that it has resources to spare in case uninsured deposits begin to flee. After Moody’s again cut its credit rating this week, analysts worry that the bank may have to spend more to hang onto those deposits. As of Thursday, it reported a 7% deposit outflow over the past month. Reuters provides a flashback to how regulators allowed NYCB to balloon so much so quickly, even as it demonstrated worrying problems.
Powell Bowing to Wall Street?
Fed Chair Powell sounds like he wants to give in to the massive Wall Street campaign against the Basel Endgame. He predicts (or pushes for) “broad and material changes” to Vice Chair Barr’s proposal. “Powell promised the Senate when he was reconfirmed to the Fed that the vice chair of supervision has the lead on regulatory issues, which is the law, after all,” said Carter Dougherty of AFR. But it sure looks like he’s trying to push the debate in the direction of weakening the rules. Comptroller Hsu was more cagey, saying the OCC would “very seriously consider” changes to the proposal.
Commercial Real Estate.
Last month, NYCB pledged to scale back its exposure to commercial real estate, much of the source of its projected losses. A historic amount of CRE loans are coming due over the next few years, and most of these loans are tied up among regional banks. Now, “bond investors have punished” institutions with high CRE exposures, as bond spreads widen, reports Bloomberg.
Community Reinvestment.
Last month, a brigade of bank and business trade groups, including the American Bankers Association and Chamber of Commerce, sued regulators over updates to the Community Reinvestment Act (CRA), which included new tests to determine which banks would be subject to anti-discrimination-in-lending obligations. Now, amid legal proceedings, the banking groups want a preliminary injunction, a motion that would stay the final rule (and keep banks from complying) until the case is decided.
Capital Account spotlights Capital One, one of the banks at the forefront of the push against the CRA. Its proposed mega-merger with Discover could hurt the associations’ case: “Sources say that a number of BPI’s member banks and the group’s executives were concerned that big firms wouldn’t make the most sympathetic plaintiffs. A broader worry, the sources add, is that the court battle could prompt a public relations backlash – or, worse, aggravate the regulators.”
Who Owns What?
A federal judge in Alabama has struck down part of a law that requires small businesses to report details about “beneficial owners,” those who financially back the business or who have some level of power over business decisions. The Corporate Transparency Act, which passed Congress on bipartisan votes, was to help the Treasury Department fight money laundering by collecting data on these owners. The judge called it a “smart law” but said it goes too far. Its proponents are pushing for an appeal.
SVB and Signature
The GAO says the Fed and the FDIC still have more to do to rectify problems that led to the banking crisis last year. The GAO report includes the admonition that “both agencies should put in place firmer guidance to their examiners instructing them to bring formal enforcement actions when supervisory concerns aren’t addressed,” per Bloomberg. In other words, guard against go-easy-on-banks political appointees like former Fed vice chair Randal Quarles.
CONSUMER
Credit Cards.
Just in time for National Consumer Protection Week, the CFPB unveiled its long-awaited credit card late fee rule, which closes a loophole in the CARD Act and sets the cap on late credit payment charges at $8. Since 2010, credit card issuers have ramped up their late fees each year, up to an average of $32 by 2022 – the same year, they made over $14bn from these fees alone. Meanwhile, the agency anticipates the new rulemaking will save families more than $10bn a year. AFR applauds the CFPB and the finalized rule. Said AFR’s Amanda Jackson:
“This new protection will help all credit card users, especially Black, brown and low-income consumers who bear the brunt of these abusive practices. The CFPB’s ongoing efforts to mitigate financial harm that disproportionately affects vulnerable communities promote financial inclusion while creating transparency in pricing that allows borrowers to determine what products best serve them. It is a start to a path to where junk fees no longer trip consumers up like they do now.”
Surprise, surprise: The U.S. Chamber of Commerce was quick to say it’ll sue the CFPB over the rule. And then it did, in the Fifth Circuit, of course. Trump judges heart junk fees, no doubt.
Debit Cards.
In October, the Fed proposed a limit on debit card fees payable by merchants whenever a customer swipes their card. This week, Republican Rep. Luetkemeyer tried to forestall the Fed’s finalized rule with legislation to require the central bank to perform a related analysis and report its findings to Congress. Bank lobbyists support Luetkemyer’s bill.
CAPITAL MARKETS
McHenry’s Rollbacks.
The Biden administration opposes Rep. McHenry’s (R-NC) proposed rollback of SEC investment restrictions. The bill, according to the administration, “would disrupt longstanding and essential investor protections” by loosening restrictions on brokers, dealers, auditors and securities offerings. There are also concerns about its impact on “worker protections by preempting provisions of state laws designed to prevent the misclassification of employees as independent contractors” (which would deny them benefits, wages, and protections) according to the administration. The Republican-controlled House still passed the bill on a party-line vote.
Order Execution.
The SEC is updating Rule 605, which it has not done since 2000. The rule regulates the information disclosed when buying or selling in the market, and the update will require brokers with at least 100,000 customers to publicly disclose details about order execution. The SEC hopes to provide investors with more information so they can compare brokers' performance with each other, in addition to expanding the types of orders covered under the rule.
PRIVATE MARKETS
Private Credit.
A recent survey showed that the majority of respondents considered private credit and private loans safer than publicly traded high-yield bonds in the event of a U.S. economic downturn. There is nearly $2 trillion in private credit, but little transparency on who pays what when, and who defaults. Lenders can keep negotiating to keep borrowers afloat, mispricing is a risk, and a fear of a bubble burst has led calls to address the issue.
Retail.
From the 1990s to the 2010s, private equity made billions off of the retail industry, to the detriment of workers and consumers. Recently, though, large firms such as Carlyle and Warburg Pincus have been pulling out of the sector. An internal memo from Carlyle last year reported that the firm would lessen investments in consumer and retail buyout strategies. COVID-19, supply chain issues, and high interest rates with market volatility have driven the changes. Middle market and smaller buyout firms, often led by former big-firm execs, have filled the void.
Private Equity and Healthcare.
The FTC and Dept. of HHS are seeking public comments on private equity acquisitions in U.S. healthcare. Deals with a value of more than $119.5 million are subject to a 30-day wait period and antitrust review by federal authorities, but there is limited reporting on smaller transactions. The Biden Administration is concerned about smaller acquisitions by private equity, as they can accumulate and result in roll-ups, where a firm buys out all healthcare sites in an area to eliminate competition and then implements major price hikes.
The DoJ is targeting private equity firms Blackstone, Apollo, and KKR to crack down on these practices. Board members at these firms can sometimes have ties to the other firms, raising fears of cooperation instead of competition to keep prices up.
Related: Private equity ownership of radiology practices has skyrocketed in the last ten years, and there are warnings that the FTC should ramp up scrutiny in certain areas where firms have bought out most of the radiology practices in an area. Not only is this bad for consumers, but a study found that it’s bad for employees as well: these practices were less likely to employ female physicians.
And: A venture capital firm plans to buy a nonprofit hospital system in Ohio, in the first-of-its-kind move for a VC firm, which is now effectively a private equity firm. This would turn the non-profit into a for-profit, concerning Ohio residents, who want greater transparency in the process. One member of the Akron City Council said he has “moral objection to the use of Summa, its staff and its patients as ‘guinea pigs’ for venture capitalists.”
Energy Agency Merger Block.
The Federal Energy Regulatory Commission (FERC) blocked the merger of private equity firms Energy Capital Partners (ECP) and Bridgepoint. ECP holds indirect ownership of the public utility company Heartland Generation Ltd., a Canadian power provider, as well as many companies that themselves own public utilities. The merger application claimed that Bridgepoint’s only current interest in energy is an incoming purchase of a wind turbine component manufacturer. FERC asserted that the two firms failed to prove that the merger wouldn’t negatively impact competition; since the alternative asset manager Blue Owl Capital owns 15% of Bridgepoint’s stock, FERC requires information about the former as an affiliate of the latter, which the companies never provided.
Private Equity and Housing.
Liz Perlman, the executive director of AFSCME Local 3299, the University of California’s largest labor union, questions why private equity firms continue to receive public money despite their disparate impact on housing affordability. Private equity megafirms and hedge funds have swiped up housing units with cash, followed by “raising rents, evicting tenants and skimping on things like ordinary maintenance and pest control in order to maximize returns for shareholders” at the expense of renters. The UN has linked their financial instruments, such as Blackstone’s Real Estate Investment Trust (BREIT), to market distortions that have created a housing affordability crisis. In California, workers are priced out of homes near their jobs, forcing workers to commute longer distances or sleep in their cars. Even so, the University of California’s public pension fund continues to invest in private equity – including a $4.5bn investment in BREIT in recent years.
Other Private Markets News.
LBO → X: Don't forget that the Musk takeover of Twitter was effectively a leveraged buyout collateralized by Tesla shares. And the banks that couldn't unload the debt before demand dried up? Let's just say they have regrets.
CRYPTO
Crypto’s Super Tuesday.
Several super PACs backed by crypto or crypto advocates, and the candidates they support, fared well on Super Tuesday. The industry spent $10 million in attacks on Rep. Katie Porter in the California senate primary, which she ultimately lost. Crypto is backing Democrats and Republicans in an attempt to gain more influence in Washington, from $1.7 million backing Shomari Figures in the Democratic primary in Alabama to a Republican challenging consumer Sen. Warren in Massachusetts.
Securities or Commodities.
Crypto assets are securities even when they’re sold on a secondary market like Coinbase, the country’s largest crypto exchange, a federal judge ruled last Friday. The decision comes in a case pursued by the SEC against alleged insider traders. Context: The debate rages over whether crypto assets are securities or commodities. AFR has long pushed for crypto assets to be subject to securities laws under the SEC’s authority.
HOUSING
The FHLBs and the Crisis.
Ahead of their collapses, three of the banks that failed during last year’s banking crisis – Silicon Valley Bank, Signature and Silvergate – tapped the Federal Home Loan Banks for billions in loans. Despite its charter to promote affordable housing, the network of lenders has come under fire for acting as a lender of second-to-last resort for ailing banks. Due in part to their role in the banking crisis (by the end of March 2023, FHLB lending jumped 28%), the FHLBs earned $6.7bn at year-end last year, a 111% jump from a year earlier. Instead of lending for affordable housing, the system paid a record $3.4bn in dividends to its members, over double the amount paid out in 2022. Since the Home Loan banks are a government-sponsored enterprise, critics suggest that its debt has an “implicit guarantee that the government would step in in the event of default.”
Affordable Housing.
Pension fund investments in affordable housing are on the rise, raising questions about where the money is coming from, the affordability of such plans, and the impact of the investments on housing affordability, especially given pensions’ ties to private equity. A study of seven pension funds by the Federal Reserve Bank of NY found that they were investing more heavily in affordable housing due to the current high demand over other types of housing.
But there are warning signs that this is short-term investing which seeks to cash in on high returns as rents continue to increase but abandon affordable housing if returns begin to drop, even after leveraging public money to keep the rents low initially to create the boom. Concerns remain about what would happen if pension funds and other non-bank institutions stopped investing in affordable housing based on other economic factors, or if the pension funds lost retirees money.
CLIMATE and FINANCE
Insurance.
The Cambridge Institute for Sustainability Leadership’s Nina Seega says the insurance industry needs to “wake up to the harsh reality of climate change.” The true financial impact of climate risks goes underestimated, Seega suggests, due to underlying assumptions about how financial actors will react. Banks think of physical risks – like the ones present in areas prone to climate disaster – as insurable, since they assume insurers will cover losses. But what happens when insurers jack up premiums or withdraw from those areas entirely, like they’ve done in California and Florida? AFR’s Jessica Garcia describes how this practice, bluelining, occurs especially in areas that were previously redlined.
States’ “insurers of last resort,” also called residual insurers, are taking on trillions of dollars in risk. Bloomberg flags that many aren’t prepared for a looming insurance crisis. Thirty-six states have residual insurance plans to capture the newly uninsurable – the number of California’s residual policies has grown 170% since 2018 and it receives about a thousand new applications a day – but 21 of them don’t detail how they’d pay off losses that exceed their assets.
Related: Treasury and state insurance regulators will collect data on climate risk in U.S. insurance markets.
Climate and Financiers.
The conservative-led assault on ESG (environmental, social and governance) investing has led to a pullback in support for climate initiatives by large financial actors. The UN-backed Net-Zero Banking Alliance is hoping to preempt departures by “proposing its members disclose more information on their commitments to tackle climate change without requiring them to coordinate action,” Reuters reports. This comes after five major asset managers pulled out or scaled back from the ClimateAction 100+ group and more than 20 members left the Net Zero Asset Managers and Net Zero Insurance Alliance between 2022 and present.
Separately: JPMorgan, Citi, Bank of America and Wells Fargo, four of the country’s largest banks, are no longer signatories to the Equator Principles, a benchmark for “assessing environmental and social risks.”
Related: BlackRock got lip service in WSJ this week for doing what it calls “transition investing” – more or less ESG by a different name. But BlackRock, the world’s largest asset manager, invests heavily in climate destruction – fossil fuels, deforestation, community harms – according to a site called #BlackRocksBigProblem.
John Kerry.
John Kerry is stepping down as the country’s first envoy for climate. On his way out, he calls for “creativity” in creating “new financial instruments” to bolster climate finance. Kerry urged the deployment of larger sums with “confidence that the deal is bankable and we de-risked it sufficiently.” One of Kerry’s suggestions: financial guarantees from the government for investors to cover the possibility of projects failing.
POLITICS and MONEY
Wall Street DEI.
Bloomberg reports that Wall Street is rolling back its promises to center diversity, equity and inclusion from the executive level down. Bank of America has opened internal programs meant to serve the underserved to everyone. BNY Mellon’s lawyers have advised dropping diversity metrics. Although they make a show of their purported commitments, “many acknowledge that the high-profile campaign against DEI – amplified by billionaires including Elon Musk and Bill Ackman – threatens to set back what progress Wall Street has made.”