A Crypto Bill UnFIT for the 21st Century

An industry-friendly cryptocurrency bill in the House of Representatives could pave the way for the next major financial crisis. Amid a wave of industry cash (the real kind), House lawmakers just approved it. 

Joined by 71 Democrats, the Republican-majority House passed the Financial Innovation and Technology for the 21st Century Act (FIT21), or H.R.4763, in a 279-136 vote. The bill will now go to the Senate, where there is a slim chance of it being picked up this term, according to Politico. But, as AFR’s Mark Hays reminds us, it’s a very bad bill whose approval owes itself to some old-fashioned corruption:

“This bill, if enacted, would close the purported crypto regulatory gap with a wrecking ball instead of a modest patch, damaging financial regulatory safeguards for all Americans, not just crypto consumers. It should be seen not as a thoughtful piece of policy but a bill written by crypto lobbyists who have injected tens of millions of dollars into the political process and – for the moment – got the outcome they paid for.”

Hays also raised the alarm in an op-ed for The Hill by drawing a parallel to the derivatives debacle of the ‘90s:

“A buzzy new financial player, once thought invincible, nearly collapses due to poor management and reckless bets gone wrong. Congress holds hearings. Regulators offer measures to limit speculation and increase disclosures and oversight. But the industry calls this approach burdensome and harmful to investors. An industry champion [in government] makes a case for a lighter touch regulatory approach and succeeds.

This scenario, plucked from the 1990s derivatives industry, has eerie parallels to today, as the House considers cryptocurrency legislation…This bill could sow the seeds of a new financial crisis.”

Ahead of the vote on the bill, Americans for Financial Reform, Demand Progress and a number of labor unions, consumer and investor protection organizations and experts voiced opposition to the pending legislation. 

The bill would kneecap the Securities and Exchange Commission and vests crypto regulatory authority in the underfunded and understaffed Commodity Futures Trading Commission instead, working off of a muddled definition of crypto tech to legitimize risk-taking. Many digital asset investment products best classified as securities would be exempt from the SEC’s securities rules. And the bill would stall enforcement actions against bad crypto actors.

Among the yes-voting Democrats was Nancy Pelosi, who had previously received money from crypto figureheads via the House Majority PAC. Hers was a high-profile break from House leadership, who opposed the bill (but notably did not urge a “no” vote). House Financial Services Ranking Member Maxine Waters and Rep. David Scott strongly opposed the bill, with Waters calling it the “Not Fit for Purpose Act.” SEC Chair Gary Gensler issued a four-page warning about the bill. 

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BANKING AND FINANCIAL STABILITY: Synapse – Bank Clout and a Capital Rule Rout – Liquidity Rules – Bank Risk Review
CONSUMER: Buy Now, Pay Later – Not So EasyPay
CAPITAL MARKETS: Corporate Credit
PRIVATE MARKETS: Your Retirement Money – Private Equity Lock Up – Private Equity and Healthcare – Bankruptcies Up – Private Equity Afield –PE and Insurance – PE Returns Fall
CRYPTO: Bankers, Beware the Stablecoin Bill
HOUSING: Equity for Cash – Restoring Public Housing – Family Buyer Disadvantage
CLIMATE AND FINANCE: Climate Disclosure

Feedback? Reach us at afrnews@ourfinancialsecurity.org

BANKING AND FINANCIAL STABILITY

Synapse.

A middleman between fintechs and banks, the financial technology company Synapse abruptly shut down, freezing tens of thousands of accounts belonging to businesses and consumers. Part of its shutdown affected its banking partners, such as Evolve Bank & Trust, which has to ensure all deposits are accounted for. Evolve stressed that it is well-capitalized.

Bank Clout and a Capital Rule Rout.

As originally written, the Basel III Endgame proposal would have pushed the nation’s biggest banks to have a 20% larger capital buffer in order to create a strong cushion for the financial system. 

AFR and 30 allies are urging bank regulators to finalize strong Basel III Endgame capital rules, writing that “stronger capital standards are critically necessary to protect people from financial crises that harm individuals, households and communities across the country and have a disproportionately severe impact on Black, Latine, and lower-income people and communities.”

But, bending to the influence of megabank CEOs like JPMorgan’s Jaime Dimon, regulators are considering a plan that would “significantly lessen” the requirements, according to the WSJ. Last fall, Dimon told his fellow CEOs to sidestep Barr to appeal to other Fed governors to tweak the rules; they “hoped to capitalize on internal disagreement and concern.” 

Liquidity Rules.

According to Vice Chair Barr, the Fed may make “targeted adjustments” to the central bank’s liquidity framework, with an eye toward addressing 2023’s banking crisis. Banks may be pushed to hold a certain amount of liquidity with reserves and collateral for use at the discount window, which itself would be incorporated into readiness requirements. Held-to-maturity assets – like the ones that sank SVB – might hold less weight in calculating liquidity buffers. And the rules around deposit outflows may be reconfigured according to the type of depositor, particularly high-net-worth individuals and VC- or crypto-related businesses. 

Bank Risk Review.

The FDIC released its 2024 Risk Review of the banking sector in the previous year. Like the recent Fed overview, the agency noted resilience after the stress of the 2023 crisis: high net-income, good asset quality metrics and stable liquidity. Researchers noted several risks, however: market risks to do with higher interest rates, declining deposits, higher cost of funding and a squeeze on net interest margins; credit risks, including in commercial real estate and in corporate debt and leveraged lending; and operational and cyber-risks from ransomware and supply chain attacks. Importantly, the FDIC flagged climate-related financial risks, noting that 2023 saw the highest number of billion-dollar climate disasters since 1980, as well as “novel and complex” risks from the crypto sector. 

CONSUMER 

Buy Now, Pay Later.

An interpretive rule – one that clarifies existing laws or policies – from the CFPB is out. It reminds Buy Now, Pay Later lenders to give their customers some of the protections that apply to conventional credit cardholders, including the right to dispute charges, demand refunds, and receive billing statements. The National Consumer Law Center advises the agency to now further expand credit card protections to BNPL products. 

Not So EasyPay. 

Massachusetts AG Andrea Campbell reached a settlement with the nonbank lender EasyPay to exit the state after they charged interest rates as high as189 percent for short-term loans. The lender offered the loans online and at locations such as auto repair and pet shops, preying on low-income individuals who needed money right away. EasyPay will fork over $625,000 in restitution. 

CAPITAL MARKETS

Corporate Credit.

Some firms are tapping into bond markets for a greater share of their credit stack versus accessing bank loans. Firms are still, on average, more likely to tap into a bank loan, but the share of credit coming from banks has fallen for corporations that have access to both bank loans and corporate bonds, especially among smaller firms. A previous NY Fed study posited that “increases in leverage in the traditional banking sector” may lead to bonds in place of loans. 

PRIVATE MARKETS

Your Retirement Money. 

Private equity firms such as Apollo have been pushing to allow more investment for consumers in their retirement funds. But the conservative think tank Manhattan Institute writes that investors should eschew private equity investing, as the private markets aren’t as safe as PE makes it out to be. They note the lack of transparency in private markets compared to public ones, as well as the risk of group think. The think tank also cites research that found public pension portfolios did not perform as well after investing more in private assets. 

Private Equity Lock Up.

Private equity firms make kids pay to talk to their incarcerated parents. In the early 2000s, dozens of smaller companies were rolled-up into what are today industry giants: Securus, now backed by private equity firm Platinum Equity, and GTL, backed by private equity firm American Securities. In one Michigan county alone, after the jail got rid of in-person visits, call commissions – facilitated by companies like Securus and GTL – neared half a million dollars a year. Pushback has come from advocates who support a “right to hug,” i.e. in-person visits.

Private Equity and Healthcare. 

Professor Yashaswini Singh of Brown University finds that many practices vet their first PE boss, aiding doctor happiness will remain. However, firms tend to sell up to bigger PE firms –  and the influence doctors have on proper patient care goes down each time. 

Bankruptcies Up.

Since January, 34 companies backed by PE or VC have filed for bankruptcy, nearly the same number of filings for all of 2021 and 2022. These portfolio company failures make up about 16% of total U.S. bankruptcies so far this year and 16% of all bankruptcies last year, “the highest portion going back to at least 2010.” 

Private Equity Afield. 

College athletics has seen a wave of change over the last year, with new name, image, and likeness rules bringing a large influx of money into programs and changing how schools handle athletic money. Private equity is now looking to capitalize as schools seek help dealing with the new landscape. A new firm, RedBird Capital, is investing through its new business, Collegiate Athletic Solutions, in five to ten schools as a start, monetizing a school’s intellectual property by claiming to provide them with extra capital and advice.

There may be conflicts of interest, though. For example, RedBird is working with Weatherford Capital, founded by former Florida State University quarterback Drew Weatherford, who also sits on the board of trustees at FSU. Many schools allocate a portion of their portfolio to private equity to boost endowments. 

PE and Insurance

Mark Walters, CEO of the financial megafirm Guggenheim Partners and co-owner of the Los Angeles Dodgers is the subject of an investigation from Bloomberg on how he did business in India. The article cites an AFR study on private equity and insurance because Walters saddled insurers that Guggenheim had purchased with loans to companies in India that are now likely to go bankrupt. The failures have triggered  investigations in India. 

PE Returns Fall

Recent returns of many top private equity leveraged buyout funds in older vintages have barely beaten the stock market because some funds can’t sell huge chunks of their portfolio. Funds with $10 billion in commitments or more had barely outperformed the S&P 500, according to a study by Jeffrey Hooke, a senior finance lecturer at Johns Hopkins Carey Business School.

CRYPTO

Bankers, Beware the Stablecoin Bill. 

Bankers should worry about a stablecoin bill worming through Congress, writes American Banker. It’s a bill that AFR and other advocates have decried as offering too little oversight and potentially amplifying the crypto tokens’ risk. Some banking experts say that some of the proposed versions could enable Big Tech to cross the line between banking and commerce and expose the FDIC to more risk – George Washington University’s Art Wilmarth calls it a “backdoor way for nonbanks to get into the banking business.” 

HOUSING

Equity for Cash.

Earlier this year, the government-sponsored mortgage lender Freddie Mac issued a proposal that would allow itself to purchase second mortgages on single-family homes. The move would, by one estimate, allow homeowners to pull out $850bn in equity from their houses and pump it back into the economy. Some suggest the policy would encourage “equity-stripping” and increase foreclosure risk; Republicans, meanwhile, have accused the administration of using it as some sort of long-term “vote-buying” scheme.

Restoring Public Housing.

Joined by several fellow lawmakers, Sen. Warren reintroduced the Public Housing Emergency Response Act, which disburses $70bn to address a backlog of public housing maintenance and repairs, ensuring that existing housing stock isn’t lost to disrepair as lawmakers work to expand affordable housing supply. 

Family Buyer Disadvantage. 

A report from CoreLogic found that investors own around 30 percent of single-family homes in the U.S., with the highest rate at 35 percent in California. One solution presented has been to limit investor owning and forcing sales of excess homes. Lawmakers have proposed an excise tax on hedge funds owners and establishing grants for down payment assistance. Another proposal lawmakers could consider is changing the tax code to eliminate the advantage larger investors have by being allowed to write off depreciated properties. Family buyers cannot, and must also pay capital gains taxes when selling.

CLIMATE and FINANCE

Climate Disclosure.

AFR, Public Citizen, the Sierra Club and other allies warned lawmakers to vote against Congressional Review Act resolutions against the SEC’s already watered-down climate disclosure rule, which seeks to produce insight into corporate emissions.