Scrutinize This Bank Merger, Regulators
You may not like what you see in Capital One’s plan to take over Discover.
Americans for Financial Reform, the National Community Reinvestment Coalition, Public Citizen, and the American Economic Liberties Project – and nearly 30 other groups – have called on bank regulators to observe a thorough and transparent review process. Key points:
The two key banking regulators, the Federal Reserve and the Office of the Comptroller of the Currency (OCC) should prohibit a streamlined application or expedited review for the proposed merger
They should extend the public comment period to at least sixty days, hold public hearings on the proposed merger, and disclose the content of any pre-filing meetings with the merging parties to the public
The Department of Justice should fully evaluate the proposed merger under the 2023 merger guidelines, not the outdated 1995 bank merger guidelines
The Department of Justice should make its competitive factors report, a legally required review of the merger, available to the public
As luck would have it, Jonathan Kanter, the assistant attorney general for antitrust, made clear at an event yesterday that his mind is on #3 above, namely the 2023 merger guidelines, and their relevance for a transaction like Capital One-Discover. One important point here: this proposed merger isn’t only about banks but about vertical integration of what would become another too-big-to-fail bank ($650bn in assets) with a payment network, a business squarely within DOJ’s jurisdiction.
The FDIC, though not an approving agency for Capital One (an OCC- and Fed-regulated bank), also fired a shot across the bow of banks who want to merge into big-ness. It laid out a new policy statement on mergers that reflects today’s realities and doesn't rely on the old 1995 bank merger guidelines. Said AFR’s Alexa Philo:
“The FDIC is, thankfully, breaking new ground in its scrutiny of big-bank mergers here by considering all sorts of factors that are relevant in 21st-century transactions and moving beyond solely considering deposits. Now, the other bank regulators need to follow suit and update their own outdated approaches.”
(Reminder: bank regulators still need to update those merger guidelines!)
Also, CFPB Director Rohit Chopra made remarks alongside Kanter outlining the harms that have accrued as a result of consolidation. His conclusion is best summed up by one subheading within the speech: “The Rubber Stamp is Out of Ink.”
Finally, the game is – formally – afoot. Capital One formally filed to merge with Discover this week.
BANKING AND FINANCIAL STABILITY: IMF on Big Banks – Capital Rules Debate
CONSUMER: Combating Consumer Loans – Zero APR Promo Trap – Last Second Recusal – Standing Issues – Medical Debt – Lump of Profit
CAPITAL MARKETS: SEC AI
PRIVATE MARKETS: Another Steward Problem – Steward Deep-Dive – Rhode Island Too – Methadone Clinics – PE’s Oil Cash-In – PE and Banks – Pension Fund Bets – Private Equity & Music – Shadow Banking
CRYPTO: Crypto “Expert”? – Stablecoin Legislation
HOUSING: Realtors Settlement – Title Insurance Fees
CLIMATE AND FINANCE: Climate Law – NAIC Roadblock
POLITICS AND MONEY: Big Tent Donors
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
IMF on Big Banks
A blog from the IMF urges more efforts to supervise “too big to fail” banks in the wake of the failures of Credit Suisse, SVB, First Republic, and Signature banks. They urge “intrusive supervision” and note that early intervention is critical to protect taxpayers.
Capital Rules Debate
The debate around the proposed Basel III Endgame rolls on, and NYT’s DealBook asked for input on what the debate is missing. AFR’s Carter Dougherty noted something that should get more attention: “With executive compensation linked to bank share prices, you realize the incredibly self-interested case that the bank lobby makes against more equity/capital: it lowers banker compensation.”
CONSUMER
Combating Consumer Loans
In 2021, Illinois enacted the “Predatory Loan Prevention Act”, which capped interest rates for consumer loans at 36%, including fees. Since the law’s enactment, affordable installment lenders have grown in Illinois, while previous predatory lenders have closed.
Zero APR Promo Trap
A report from the Philadelphia Fed has found that almost a quarter of credit card debt can be traced to promotional offers from card companies, especially those promising zero APR as an introductory offer. They also found that, at the end of the introductory period, rates jumped 16 percent on average, leading to consumers to switch to another card with zero APR, transferring the debt when that offer expires. Debt and fees can then accumulate.
Last Second Recusal
Last week, industry groups including the Chamber of Commerce sued the CFPB in a bank-friendly Texas federal court over the proposed credit card late fees rule. Judge Reed O'Connor was to preside over the case before recusing himself. His recusal comes after a watchdog group uncovered that O’Connor has personal ties to card-issuing companies involved that are members of the plaintiff’s group.
Standing Issues
Trump appointee Judge Mark T. Pittman, who is replacing O’Connor in the case, asked the Chamber and CFPB for briefs explaining why the case should be heard in the Northern District of Texas, stating he has “concerns” about whether the court is the proper place to hear the case. The request for briefs from Pittman comes after the CFPB questioned the venue.
Medical Debt
Senate Banking Chair Brown is leading a group of Democratic senators in urging the CFPB to remove medical debt from credit reports. This debt is often subject to predatory collection, as medical debt can often arise from unexpected or unplanned expenses.
Lump of Profit
Economist Hal Singer highlights how banks use misleading claims in an attempt to hit back at the recently proposed credit card late fees rule from the CFPB. They claim banks will simply recoup the fees through other means, which he calls the “Lump of Profit Fallacy.” These companies should have to work more for their profits instead of enjoying a “predetermined profit level,” Singer argues.
CAPITAL MARKETS
SEC AI
SEC Chair Gensler is warning against growing dependence on AI that augments human decision-making in the financial sector. He stated that if a small number of AI knowledge bases controlled a large number of systems, and the AI had “hallucinations” (errors in judgment), it could create a “doomsday” scenario. The SEC has already cracked down on firms that make misleading statements about their AI usage. Gensler called on regulators to craft regulations to more specifically contain any threats presented by AI.
PRIVATE MARKETS
Another Steward Problem
Steward Healthcare’s troubles have now spread to a Louisiana hospital, where supply and staffing issues at Glenwood Regional Medical Center, owned by Steward, have restricted it to one-third of its capacity. Steward made national headlines earlier this month due to its longtime former PE owners bringing the system in Massachusetts to its knees over mismanagement. Louisiana has the second highest rate of PE-backed hospitals in the nation, and state officials are on high alert after an inspector’s report found the hospital had put patients in “immediate jeopardy.”
Steward Deep-Dive
Steward’s troubles go beyond the crisis in Massachusetts and the incident in Louisiana. A deep dive in The Wall Street Journal finds that there are even more incidents across several more states. In a Florida ICU, 3,000 bats were found, and Steward was then sued by the bat removal company for almost $1 million in unpaid bills. Vendors then cut Steward off, and suppliers demanded payment upfront. Even garbage collectors cut them off, leading to a trash pile up outside one hospital.
Rhode Island Too
An out-of-state private equity-backed group in Rhode Island has brought on a similar crisis. Prospect Medical Holdings owns two safety net hospitals in the state. The state attorney general issued a report noting that one hospital was even forced to close because of mismanagement.
Methadone Clinics
PE firms have now acquired about one-third of all methadone clinics in the U.S. Methadone is used to treat opioid addictions, and has become vital in recent years amidst the opioid epidemic. The current PE-backed system can sometimes restrict access, and as PE firms attempt to expand their foothold in the market, there is concern over a growing number of firms influencing health policy despite not having the proper expertise in it.
PE’s Oil Cash-In
The industry sold $30.55 billion worth of shale assets last year, with several firms seeing record returns. Several firms have engaged in mergers and acquisitions with PE firms in recent years after almost a decade of inactivity following the 2008 recession. Sales by PE firms are up 10 percent compared to the year before.
PE and Banks
With the recent regional banking crisis, a window has opened up for PE firms looking to cash in. Banking is usually a difficult sector for PE due to federal limits on PE (24.9 percent ownership), the expertise needed, and low-profit margins. Last week a fund controlled by Trump Treasury Secretary Steve Mnuchin bought into crisis-ridden NYCB.
Pension Fund Bets
CalPERS, California’s public employees pension fund that is the largest in the U.S., is seeking higher returns by putting $34 billion into riskier private equity investments. The board also approved raising the amount invested into private credit. The new goal is another increase in the level PE holds in CalPERS portfolio, and has been criticized by unions across the state.
Private Equity & Music
Private Equity continues to extend its reach and the music industry is not immune. Music critics are finding that this has led to blander music and less creativity, with a NYT music critic noting that a music publisher backed by two PE companies bought the rights to a Whitney Houston song and then spun it into a movie about Houston, which helped boost profits along with the sales of movie-related merchandise. But moves like using older content prioritize short-term profit and ignore long-term creativity.
Shadow Banking
Asset managers are playing a larger role in lending than they had previously. The attention being paid to this sector, a branch that can include private equity, hedge funds, and other firms, has triggered lobbying by the industry in an attempt to curb potential regulation, the Financial Times reports in a deep dive on the subject.
CRYPTO
Crypto “Expert”?
Want to become a “Certified Cryptocurrency Expert”? Eleven Hours and $229 are all that is needed. Or if that’s too much, you can get a certificate after studying four hours for a 20-question, $795 exam. Who is a professional in the crypto industry, and the qualifications of those offering advice in the industry? The SEC has started a crackdown on those who claim to be experts, such as the “American Bitcoin Academy,” which scammed students out of $1 million.
Stablecoin Legislation
Rep. McHenry said this week that he can win passage of stablecoin legislation, as there is a bipartisan consensus to win over the Biden administration after previous talks fell through over concerns about the role of the Fed. Progress has already been made in addressing congressional Democrats’ concerns about the legislation, McHenry says. They just need to agree on a text to use. There has been no word from the Democrats yet.
HOUSING
Realtors Settlement
The National Association of Realtors has reached a settlement after a barrage of lawsuits from home sellers and antitrust litigators. The NAR previously had a rule about commissions being five to six percent, split between the seller’s broker and the buyer’s broker, much higher than the one to two percent found in other countries. After the settlement, sellers will be able to compete to find lower commissions, which should bring down the total cost of housing. Americans could save up to $50 billion according to the Consumer Federation of America.
Title Insurance Fees
President Biden announced a plan to curb fees for title insurance, which protects homebuyers in the event of a dispute over ownership. It could save Americans $1,500 when refinancing their homes. Critics also say it could endanger the home-buying process and expose consumers to more risk, while the administration says that many of the fees, which generated $21 billion in premiums for the industry in 2022, are unnecessarily driving up housing costs.
CLIMATE and FINANCE
Climate Law
The Treasury Department released a report this week showing that the IRS has logged more than 500 companies registering a total of 45,500 new clean-energy projects that have come from the 2022 Inflation Reduction Act. The law offers tax credits to firms investing in emissions-reducing technologies and those that manufacture them. Sectors such as solar panels have seen production costs drop to the point where firms can now compete. The report is among the first set of data to come out about the Inflation Reduction Act.
NAIC Roadblock
A plan to gain more data on homeowners insurance by the National Association of Insurance Commissioners, an organization of state insurance commissioners, has hit a bump after several states signaled they may not cooperate. The NAIC is trying to pinpoint where homeowners face the highest risk and higher living costs. However, states dominated by Republicans such as Louisiana, Texas, and Florida, which have seen insurance companies pull out due to climate risk, may opt-out.
POLITICS and MONEY
Big Tent Donors
President Biden is making a push to bring in former Nikki Haley donors as part of his plan to defeat Donald Trump. Many Wall St. donors had supported Haley. With her out of the race, the campaign is looking to pad its war chest or at least block those donors from going to Trump. A group of former Haley donors is also making a push to bring other GOP-aligned business leaders to get behind the president, who already has a cash advantage over the former president.