The Mega-Merger in Your Wallet
Americans for Financial Reform is out with a new analysis of the proposed Capital One-Discover merger, which would make the pair the largest credit card issuer and sixth largest bank in the country and would provide Capital One control of a credit and debit processing network. And, the merger threatens to…
…increase consumer prices. The four biggest credit card lenders already control 60% of outstanding credit card debt. Capital One (#2) and Discover (#5) would increase consolidation and harm consumers, many of whom would face higher interest rates almost immediately as Discover’s lower rates shoot up to meet Capital One’s higher ones.
…disadvantage Black and Latine subprime and near-prime cardholders. Near-prime (credit scores 620-659) and subprime (580-619) cardholders, who skew Black and Latine, carry a third of Capital One’s and one-fifth of Discover’s outstanding debt. Already a concentrated submarket, consumers with lower credit scores would have fewer options and higher prices when two of the larger near- and subprime credit card companies join forces.
…allow Cap One to harvest higher fees from merchants. Discover is its own debit and credit payment network, as well as its own issuer (Cap One CEO Richard Fairbank’s “Holy Grail”). Cap One would be able to boost fees payable by merchants whenever a customer swipes their debit card (and those higher merchant fees get passed onto consumers as higher prices).
…accumulate systemic risk. The merger would increase the asset concentration of credit card loans – extra risky in a time of economic stress or downturn. Capital One would assume a $100 billion pool of credit card debt, increase its outstanding loans by over 70% and raise the concentration of the credit loans in its assets to 40%.
Regulators should block this merger. And, as AFR has argued time and again, they need to update bank merger guidelines, unchanged for 30 years. The financial system doesn’t play the same game it did in ‘95. Regulators need to up theirs.
BANKING AND FINANCIAL STABILITY: Capital Rules Pushback – Stock Buybacks – New York Community Bancorp… – …And Other Regional Banks – Operational Risks – Who Owns What?
CONSUMER: The Minority Business Development Agency – Credit Card Late Fee Rule – Data Misuse
PRIVATE MARKETS: Private Equity and Autism Clinics – Private Equity Can’t Sell – Other Private Markets News
CRYPTO: The Courts and Crypto – Stablecoins and Shocks – CBDCs – Crypto Scams – Crypto and a Currency Crisis
HOUSING: The Uninsured – Ensuring Insurance – Junk Fees – High Costs, Few Options – A Fee to Save a Bank?
CLIMATE AND FINANCE: Climate Disclosure Rule
POLITICS AND MONEY: Crypto Targets – TikTok and Wall Street
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
Capital Rules Pushback.
A finalized version of the Basel III Endgame, the slate of rules intended to shore up financial stability by pushing the biggest banks to keep more capital on hand, is expected to arrive sometime later this year. In the meantime, the bank lobby is loud with calls against stronger rules (and a stronger, more stable financial system). The pushback is “unique,” said Fed General Counsel Mark Van Der Weide, citing a flood of negative comments drowning out the positive, coupled with big ad spends interrupting NFL football and The Wall Street Journal.
In a must-read, Peter Conti-Brown takes issue with Chair Powell’s manifest attempt to weaken Vice-Chair Barr’s proposals by calling for “broad support” on the Fed board when only a majority is required: “He has shifted the goal posts. Broad support inside the Fed is no legal standard; broad support outside the Fed is a deliberate political strategy.” Conti-Brown suggests that if Powell is making a good-faith attempt to preserve Fed independence and keep its hands clean of political confrontation over regulatory policy, he’s doing the opposite. “[T]hrowing away regulatory reforms preferred by the party that won the last national election does not preserve Fed independence. It makes a mockery of it.”
Stock Buybacks.
The Biden administration wants to quadruple a tax on stock buybacks – when a company uses excess profits to buy back its own shares instead of investing in its workers and infrastructure – that would drum up $166bn in tax revenue. Buybacks enrich shareholders at the expense of workers, and AFR has recently called for the SEC to re-propose a rule that would introduce transparency to the practice, after a federal court struck it down.
Related: Politico suggests that the push for executive accountability has faded and “Washington isn’t much closer to ratcheting up restrictions on financial executive pay.”
New York Community Bancorp…
After facing turbulence over the past two months from surprise losses on its earnings, largely from its commercial real estate exposure, NYCB secured a $1bn cash infusion from a group of investors that included Trump admin officials Joseph Otting and Steven Mnuchin. As part of the deal, Otting and Mnuchin were appointed as directors of the bank’s board, a body scaled back to ten members, with Otting also assuming the role of chief executive.
Analysts foresee a long road ahead for the regional bank, expecting profits to “remain under pressure from the lender’s efforts to boost reserves for potential bad loans in its commercial real estate portfolio.” Though the deal boosted shares 7.5% when it was announced two weeks ago, they sagged slightly last Monday. One shareholder noted: “[The] capital raise was significant and very expensive, but also necessary to strengthen the balance sheet and begin to restore investor confidence.”
What’s next for NYCB? KBW’s Chris McGratty suggests the bank will have to address the concentration of its commercial real estate loans. Panelists at MIPIM, an international exhibition bringing together real estate industry reps, believed the issues were still “manageable.”
…And Other Regional Banks.
WSJ sums up what regional banks are still dealing with, one year on from SVB’s failure: “Most regional banks are too small to reap the benefits of scale, diversification and implicit government support enjoyed by megabanks such as JPMorgan Chase and Bank of America. Yet they are too big to escape the scrutiny of investors and regulators. They now face difficult questions on profitability, business models and even their traditional role as the intermediary between depositors and borrowers.”
Operational Risks.
Acting Comptroller of the Currency Michael Hsu is pushing for the OCC and other financial regulators to introduce new requirements so that large banks may better weather future crises. Hsu stated that they may test banks on their financial resilience to see how they fare beyond just capital and liquidity. The new requirements come in the wake of a regional banking crisis and recent cyber attacks from China, along with the possibility of future unknown threats, such as fire in a data center.
Who Owns What?
Recently, AFR noted a court ruling from Alabama that is disrupting efforts by Congress and the Treasury Department to crack down anti-money laundering practices through the Corporate Transparency Act. Last week, the Biden administration said it would appeal the ruling, stating the law “plays a vital role in protecting the U.S. financial system, as well as people across the country, from illicit finance threats.”
CONSUMER
The Minority Business Development Agency.
A federal agency designed to promote the growth of minority-owned businesses must open its doors to everyone, including white business owners, a federal judge in Texas ruled last week. The Minority Business Development Agency was created to provide services and programs to support what it calls minority business enterprises, or companies owned and operated by “socially or economically disadvantaged individuals.” In the 2022 fiscal year, the agency helped Black-owned businesses secure $680 million in contracts, Hispanic-owned businesses $526 million. But the Trump-appointed U.S. District Judge Mark T. Pittman ruled that the charter was unconstitutional and consequently barred any of the agency’s 90 business centers from providing services based on an applicant’s race.
Credit Card Late Fee Rule.
Last week, banking trade groups asked a Texas federal court for an injunction that would block the CFPB’s new credit card late fee rule, which seeks to cap these fees at $8. The agency fired back with a brief opposing the request for an injunction
Data Misuse
Argus Information, a company under the consumer credit reporting firm TransUnion, has been fined $37mn as punishment for its misuse of consumer’s data. The company misused anonymous credit card data while carrying out contracts for several federal agencies, including the Federal Reserve and CFPB. TransUnion is owned by Advent International and Goldman Sachs, who use it to gather data on Americans.
PRIVATE MARKETS
Private Equity and Autism Clinics.
In 2018, Blackstone acquired the growing Center for Autism and Related Disorders (CARD) and its 265 clinics. CARD specializes in programs that teach children with autism skills to learn, cope, and communicate. However, according to patients, bad staffing changes and management began soon after the Blackstone acquisition. The Louisiana Behavior Analyst Board found that staff had mistreated several patients. By 2023, over 100 locations were closed and CARD had to declare bankruptcy.
Private Equity Can’t Sell.
A report from Bain & Co. shows how much the private equity market has cooled off. The report shows that PE firms have 28,000 unsold companies worth more than $3 trillion. The combined value of the companies they have sold has fallen 44 percent since 2022, and the decline is even larger when one factors out sales to rival firms. One investor noted that this selling to rivals makes the industry look like a “pyramid scheme.” With lower returns, firms are finding it harder to pay investors who want out, which therefore makes it harder to gain new investors and buy more assets.
Other Private Markets News.
Music. KKR is heading up a financing package for HarbourView Equity Partners, an asset manager “known for acquiring music rights of famous artists.”
Family Offices. Across the world, the number of family offices have tripled since 2019 and now manage at least $6trn. Private equity, venture capital and hedge funds all want a piece. PE firms are aggressively pushing to tap family wealth; Blackstone is ramping up its Private Capital Group, which serves family offices, billionaires and other individual investors.
Goldman Sachs. The investment bank wants to dip deeper into private credit, intending to expand its portfolio to $300bn in the next five years.
CRYPTO
The Courts and Crypto.
The Roosevelt Institute argues that decisions on whether cryptocurrencies are securities or commodities need to be made in the legislative, not judicial, branch. They call on Congress to codify what it means to be a security and push toward a “regulatory regime” for crypto assets that are commodities so the distinction is clear.
Related: Last week, Coinbase has accused the SEC of breaking the law when it rejected the crypto exchange’s petition for rulemaking in December.
Stablecoins and Shocks.
The NY Fed found that investors in stablecoins, crypto tokens typically pegged to the US Dollar or other fiat currency, fled from risky stablecoins to safer, more stable ones when a shock occurred in the crypto ecosystem. The researchers identified four types of stablecoin issuers: U.S.-based and asset-backed, tied to a portfolio of regular dollar-backed assets in the United States, like Treasury securities; offshore and asset-backed, also tied to U.S.-pegged assets but based outside of the country; crypto-backed, tied to other crypto tokens and fairly volatile; and algorithmic, not tied to any collateral but pegged to an algorithm that negotiates a match between supply and demand.
CBDCs.
Central Bank Digital Currency: a virtual, digital, form of the money backed and issued by a central bank. The idea is that as the world becomes increasingly cashless, governments should begin digitizing their currency. Nineteen of the twenty G20 countries are in advanced stages of development or in pilot programs. It is done by issuing electronic coins, but unlike decentralized cryptocurrencies and stablecoins, they are centralized and the government verifies the accuracy of the transaction.
Fed Chair Powell has previously spoken favorably of the idea, saying, “You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies, if you had a digital U.S. currency.” However, he also more recently stated that the Fed was “nowhere near recommending or adopting” such an idea.
Crypto Scams.
According to the FBI’s 2023 Internet Crime Report, losses from crypto investment scams ballooned to nearly $4bn last year, with crypto representing the most significant share of all types of investment fraud.
Related: In the first two months of 2024, victims lost $104mn worth of crypto to phishing incidents. Most of the stolen funds could be siphoned because users unknowingly signed phishing signatures, like ERC20 Permit and increaseAllowance. When used maliciously, the former allows a bad actor to use a victim’s funds, while the latter allows the scamster to transact a certain amount from the victim into their own wallet.
And: “Chinese crime syndicates are using crypto currencies to launder billions of dollars, including money raised from helping to supply drugs to the U.S. or scamming American victims,” WSJ reports.
Crypto and a Currency Crisis.
Nigerian authorities arrested two execs from the crypto exchange Binance, one of them a former IRS agent, and accused the exchange of contributing to the country’s currency crisis. Faced with an almost 30% inflation rate, Nigerian citizens began to sink their savings into cryptocurrencies. The country now has the second-highest adoption of crypto in the world, with $60bn flowing toward Nigerian citizens in the year through June 2023. Many are drawn to U.S.-backed stablecoins, due to their government’s control over who can exchange the Nigerian naira for the dollar and at what rates.
HOUSING
The Uninsured.
A report from the Consumer Federation of America finds that there is around $1.6 trillion in uninsured property, including $339 billion in uninsured Hispanic-owned homes and $206 billion uninsured Black-owned homes. Overall, 1 in 13 homeowners are uninsured. This shortcoming reflects both the injustice in the insurance system, with rising premiums and the increased risk homes are at today due to factors such as climate change, which has led to insurers pulling out of certain states.
Among other findings, the report also notes that homeowners making under $50,000 a year are twice as likely to not have insurance, 22% of Native American homeowners have no insurance, and older adults, except white ones, are less likely to have insurance. The CFA further notes that more data is needed to protect these vulnerable groups, yet the insurance industry has resisted efforts to become more transparent and provide information.
Ensuring Insurance.
The Center for American Progress offers a set of principles for insurers to address climate risks. They encourage insurers to be more transparent and accountable in how they manage climate risk, regulators to monitor for bluelining and push firms to manage risks and policymakers to “mitigate systemic risk before it threatens financial and economic stability.”
Junk Fees.
The Consumer Financial Protection Bureau analyzes how junk fees – the extraneous, sometimes unexplained costs that pile onto a transaction when a consumer makes a purchase – are making housing more expensive. Borrowers paid a median $6,000 in closing costs on their home purchase loans in 2022. Since these fees are fixed and don’t fluctuate with interest rates, they can “have an outsized impact on borrowers with smaller mortgages, such as lower income borrowers, first-time homebuyers, and borrowers living in Black and Hispanic communities.” Often, borrowers have little choice in who provides certain closing services, such as lender’s title insurance, resulting in higher prices from a lack of competition.
High Costs, Few Options.
Senate Banking Chair Brown called for solutions in order to lower housing costs and expand options at a hearing related to housing affordability. One aspect he addressed: all-cash Wall Street buyers descending upon homes, decreasing available supply and driving up costs.
On that note: Accountable.US analysis reveals that the country’s largest single-family rental companies, Invitation Homes and American Homes 4 Rent, made nearly $954mn in profit in 2023, up 37% from 2022. The owner of 80,000 homes across the country, Invitation has been found to have “engaged in abusive tactics” to evict tenants during the pandemic, skirting permits to make “shoddy repairs” and engaged in “fee-stacking” while raising rents. Meanwhile, American Homes 4 Rent, the owner of 59,000 homes, lobbied against legislation that would address the affordability crisis.
A Fee to Save a Bank?
U.S. regulators that were trying to deal with the failure of Silicon Valley Bank were faced with $285mn in fees to Federal Home Loan Banks, a report recently revealed. The fee is the largest since the 2008 crisis, and has sparked debate on how the FHLB is used along with other Depression-era mechanisms. When SVB began to fail, the FHLB in San Francisco began lending more to SVB, and when the bank failed, the penalty fees paid in return helped boost its profit. SVB was sold by the government, thus the government covered the cost.
CLIMATE and FINANCE
Climate Disclosure Rule.
Last Friday, the Firth Circuit Court of Appeals sided with two fracking companies when it issued an emergency stay to stop the SEC’s already watered-down climate disclosure rule. The two oil and gas companies, Liberty Energy and Nomad Proppant Services, challenged the SEC’s authority and called the rule “arbitrary”.
Separately: The Sierra Club, represented by Earthjustice, has sued the SEC over its rule, which AFR argues falls short of both protecting investors and keeping companies fully accountable for their environmental impacts. Since the Sierra Club itself manages investments, like employee 401Ks, they argue their investors “cannot adequately manage their investments without complete information on publicly-traded companies’ vulnerability to climate-related risks.”
On disclosures: The Net-Zero Banking Alliance, a UN-backed coalition of financial institutions, will require its members to make more disclosures about how they plan to cut emissions, including from their capital markets activities, Reuters reports.
POLITICS and MONEY
Crypto Targets.
The crypto industry continues to make noise in the upcoming elections, with crypto backed super PACs likely targeting crypto skeptical Democratic Senators Jon Tester of Montana and Sherrod Brown of Ohio. Both are in vulnerable seats and Brown’s Trump-endorsed possible opponent is a major crypto advocate. The primary elections in Maryland and Michigan are also being targeted. The super PACs tied to crypto have raised more than $80 million in their first major effort to influence electoral outcomes. A spokesperson for the super PACs said: “We’ll have the resources to affect races and the make up of institutions at every level.”
TikTok and Wall Street.
This whole thing about banning TikTok, the flip-flop by Trump, and now a possible purchase by Steve Mnuchin is all about Wall Street money if you scratch the surface. Jeff Yass, the owner who’d be forced to divest his share (lotsa money, even for him) if the bill approved by the House last week became law, is super-rich thanks to Susquehanna International Group, a capital-markets player. Mnuchin is rich thanks to a government-assisted ownership of OneWest and then thanks to the connections he made as Trump’s Treasury secretary that let him raise Middle Eastern money for a private equity fund. Trump flipped on the issue, from wanting to ban TikTok to opposing it. And as it turns out, Yass money flows into the Club for Growth, an old Republican money-funneling operation, to support Trump and hire former Trump advisor Kellyanne Conway as a lobbyist for TikTok. And now we see Yass being mooted as a possible Treasury secretary. The Nation has a nice run-down.