Crypto’s Old-Fashioned Approach to Politics: Lotsa Money
For all its rhetoric about being novel and innovative, the crypto lobby is resorting to the most common, old-hat tactic for business interests in politics: hosing money into the system. Not play-money cryptocurrency, either – real American dollars.
Two years ago, the disgraced Sam Bankman-Fried flooded the 2022 elections with cash. Now the crypto lobby has outdone even that, with major crypto super PAC Fairshake raising $202 million, making it the largest this cycle - according to Follow the Crypto, a website created by Molly White, a technologist and fierce crypto skeptic.
Meanwhile, one presidential candidate – Trump – has jumped in the tank for crypto, promising friendly policies for money. (If it’s not as explicit as Trump’s promise to the fossil fuels industry, it’s pretty close, and in keeping with the more pro-corporate tone of his campaign this time around.) The industry has, for the first time, managed to appear in a political platform, as industry leaders appeared at the Republican National Convention. Trump is now saying that he would establish a bitcoin stockpile, something that would do little more than drive up the price and bolster profits for the already rich.
As a result, various Silicon Valley and tech-overlord types are now certified Trumpers, be they longtime venture capitalists or Facebook-rich twins. They are throwing real money after political power. AFR’s Mark Hays said the quiet part out loud:
The bulk of the money and energy is coming from half a dozen people. It’s [Andreessen Horowitz], it’s Ripple, it’s Coinbase . . . and not to be crass, but kind of white, male, billionaire Silicon Valley folks who are really looking to shape political outcomes to serve their business objectives through policy.
The emergence of Kamala Harris as the de facto Democratic nominee for president seems to have scrambled the Democratic politics of crypto somewhat, with pro-crypto Democrats seeking an opening to influence her mid-campaign policy positions. But there’s a political problem with that too: the newly Trumpified crypto lords are not exactly doing any favors for Democrats. Indeed, as White points out on her website, they are spending virtually nothing opposing any Republicans, but a lot of money trying to take down Democrats.
The crypto lobby is also still grasping at the possibility of friendly legislation this year, not the least because its government-influence operation has bulked up this year. But for now, the main piece of legislation at hand, spearheaded by Sen. Debbie Stabenow, Democrat of Michigan, is on hold.
BANKING AND FINANCIAL STABILITY: Capital One/Discover – Banks and Fintechs – Bad Big Bank Risk Management – Eying Big Money Managers – Criminals Can’t Hide in Private Equity
CONSUMER: Buy Now, Pay Later – Low-Income Consumer Stress – Whistleblowers – Making Kids Pay More for Lunch – Enforcement Actions
CAPITAL MARKETS: Fiduciary Rule
PRIVATE MARKETS: Private Equity and Labor – Private Equity, Hospitals, and Racial Division – Steward – Engineering More Time – Private Equity and Looking Pretty – PE and Pro Athletes – Other Private Markets News
CRYPTO: Talking Turing
HOUSING: Mobile Home Rents – Not Enough Affordable Housing – San Diego Tenants – Stand Up for Tenants – Mr. Cooper
CLIMATE AND FINANCE: Carlyle and the Climate Crisis – Flooding and Small Business – SBTi and Carbon Credits
POLITICS AND MONEY: Kamala Harris
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
Capital One/Discover.
Advocacy groups warned against the proposed Capital One-Discover merger during a hearing with the Office of the Comptroller of the Currency and the Federal Reserve, noting that it would create a highly unstable mega-bank. Speaking at the hearing was AFR’s Patrick Woodall, who said:
“It would be irresponsible for the regulators to approve this merger after Capital One has repeatedly broken its promises made to secure previous mergers…It shut down two-thirds of its branches after promising to maintain its geographic footprint. It stopped making home purchase and home improvement mortgages after promising to maintain service levels.”
Related: While federal regulators consider whether to approve or reject the merger, Capital One has used teams of workers to sign sometimes thousands of debt collection affidavits a day, many containing errors, according to a report from The Capitol Forum. Employees recall signing affidavits with wrong balance amounts and for medical debt: “My heart would break signing,” one said.
Banks and Fintechs.
Some banks rely on third-party fintechs to deliver their products and services, such as deposits, payments and lending. The Fed, FDIC and OCC warned financial institutions about the potential risks of these arrangements, including insufficient risk management, lack of access to records, financial risks, inability to manage liquidity risk, and regulatory violations, among other possible missteps. The regulators are also seeking more information about the implications of bank-fintech relationships to judge whether additional steps are needed.
Bad Big Bank Risk Management.
Turns out, they’re not that great at it. Bloomberg reports that the OCC keeps secret, non-public metrics covering operational risks on the banks it supervises. Of the 22 large banks it supervises, 11 have “insufficient” or “weak” management of these risks, which can range from potential cyber attacks to employee screw-ups. This assessment resulted in a third of those banks ranking 3 or lower on a five-point scale rating overall management. This news comes as the banking lobby pushes aggressively against needed capital rules that would address shortcomings in operational risk.
Eying Big Money Managers.
The FDIC is beefing up scrutiny of big money managers, like BlackRock and Vanguard, that own ever-increasing shares of banking institutions. There have been worries that the investors are exerting control over banks through their large ownership stakes while avoiding the regulatory oversight that comes with it through the use of so-called “passivity agreements” with bank regulators. The FDIC is seeking input on a more hands-on approach to protect depositors, consumers, and the public interest from the potential adverse impacts of the concentration of bank ownership in the hands of a few asset managers.
Criminals Can’t Hide in Private Equity.
AFR-EF supports a rule proposed by FinCEN earlier this year that holds advisers to the same standards as banks. They’d have to apply Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) provisions from the Bank Secrecy Act, report suspicious activity to FinCEN, and keep good records, among other requirements. Importantly, AFR-EF emphasizes the need to verify the General Partners of private funds, themselves actors in a particularly opaque segment of the financial system. AFR-EF’s Andrew Park cites the funds’ “poor track record of operational and risk failures.” They have also often refused to voluntarily disclose critical information.
CONSUMER
Buy Now, Pay Later.
AFR-EF and nearly one hundred other groups support the CFPB’s recent interpretive rule, which clarifies that accounts used to access Buy Now, Pay Later, are considered credit cards and should comply with credit card rules. Said AFR-EF’s Amanda Jackson:
“The CFPB’s proposal is a critical first step, but the agency must go further and require BNPL providers to comply with the same rules and consumer protections that are required for credit cards.”
And AFR-EF’s Christine Zinner:
“Using buy-now-pay-later comes with serious risks, and this proposal helps protect people from the hidden financial costs and risks of using buy-now-pay-later products to make purchases. Lower-income and financially vulnerable people — who are disproportionately women, Black, and Latine — can get into unexpected financial trouble using BNPL that can be one-click credit traps.”
Low-Income Consumer Stress.
Q2 results from some of the country’s largest banks reveal financial stress hitting lower-income consumers. JPMorgan’s financial chief Jeremy Barnum cites some spending moving out of discretionary (expenses that aren’t essential) and dipping into non-discretionary (essential expenses), a dynamic typically understood to point to increasing household financial stress..
Whistleblowers.
The CFPB advised law enforcement agencies and regulators that some companies under their purview may be breaking the law when they require employees to sign broad nondisclosure agreements that could deter or intimidate whistleblowers. Depending on the wording or the context, seemingly legitimate NDAs could illegally chill speaking out about misconduct.
Making Kids Pay More for Lunch.
The CFPB released a report this week that scrutinized how payment processing companies can take advantage of a “captive customer base” – parents who have limited alternatives on how they wish to make school lunch payments for their children. With little to no competition, these companies charge children and their families excess junk fees on top of their school lunch payments. Often, the fees are broad, not disclosed clearly, and disproportionately impact lower-income families, as parents are left with no control over fee rates and no chance to shop around for cheaper options.
Enforcement Actions.
Rent-a-Center. The CFPB sued Acima, an affiliate of Rent-A-Center, and its founder for illegal lending practices in connection to as many as five million financing agreements. The agency alleges that the company used “deceptive dark patterns and other tricks to trap consumers in high-cost credit agreements.”
CAPITAL MARKETS
Fiduciary Rule.
The Department of Labor’s fiduciary rule, which would direct all investment professionals to provide advice that is in retirement investors’ best interest and protect investors from conflicts of interest, has been temporarily stayed by a judge in Texas.
PRIVATE MARKETS
Private Equity and Labor.
The American Federation of Teachers scrutinized how the “dubious labor practices” among ten firms’ portfolio companies “generate unacceptable fiduciary risk” for the workers whose money is tied up in their investments. AFT lowlighted a number of some of the largest firms’ labor transgressions, like Blackstone’s child labor scandal, Carlyle’s freedom of association restrictions, KKR’s mass layoffs, and Apollo’s diversity and equity shortcomings, among many others. The study also emphasized pension funds’ work to adopt labor standards: The country’s largest pension fund, CalPERS, urged its private fund managers to adhere to a new set of labor standards, and the New York State Common Retirement Fund adopted a responsible workforce management policy targeting private equity.
The backdrop: Pension funds that invest public dollars in private equity want their fund managers to take ethical labor standards more seriously, a year after 2023’s hot labor summer exposed poor working conditions across the country. Amid the wave of strikes and increasing child and migrant labor scandals throughout PE portfolio companies, investors seek a change.
However: Some pension funds, especially underfunded ones, are stuck on their private equity investments, despite the litany of risks – including a “historical decline in performance” – in the hopes that they can deliver on promises of returns that beat public equity.
Private Equity, Hospitals, and Racial Division.
A report published by the Center for Economic and Policy Research (CEPR) exposes how financiers profit from racial division among hospitals. Numerous nonprofit hospitals were financed by a 1946 program that inequitably delivered funds to certain hospitals and reinforced racial segregation; today, nearly half of Black patients receive care in a “small number of highly segregated hospitals.” Modern federal programs still affect how money flows to certain facilities. The report’s authors point to an IRS guideline allowing hospitals to own for-profit subsidiaries, which attracted venture capital firms to already wealthy hospitals, and a CARES Act provision that provided funding to richer hospitals with higher Medicare reimbursements. The authors provided policy recommendations, such as revisiting public funding frameworks and imposing a tax on profits by for-profit subsidiaries of nonprofit hospitals, among other suggestions.
Steward.
The Steward Health Care crisis has entered a new stage as two more hospitals in Massachusetts are scheduled to close, angering local residents as the Governor made additional calls for Steward to sell the hospitals. The closures come as the Senate Health, Education, Labor, and Pensions Committee voted to subpoena Steward CEO Ralph de la Torre for testimony. The subpoena also comes as Senator Markey formally introduced the Health Over Wealth Act.
Relevant: Two new studies show what private equity does to health care over time, and how. One from JAMA, featured in the Washington Post, found that as soon as a PE firm buys a hospital, they begin to sell off its assets, debunking the claim that they invest in patient care.
Engineering More Time.
Private equity firms, facing trouble flipping their portfolio companies, have tried resorting to financial engineering in so-called “continuation funds” to secure more time – occasionally on the order of years past deadline – to turn things around. Clients want little to do with it; they just want their money back. Firms try to push assets they can’t sell from older, already invested funds into brand-new ones. Then, they’ll court other investors to buy into the new fund and “cash out old clients,” sometimes at a discount. Writes Bloomberg: “Some investors are balking at how continuation funds seem to reward managers for not getting the job done in time.”
Private Equity and Looking Pretty.
In 2021, the PE megafirm Carlyle bought the multi-level marketing skin care company Beautycounter. In three years’ time, Beautycounter shuttered, leaving the former founder struggling to pick up the pieces. Carlyle had imposed a new compensation system that reduced commission, resulting in an exodus of salespeople. In the wreckage, it became apparent that Carlyle’s investment had been wiped out. The firm expressed intention to no longer invest in consumer and retail companies.
PE and Pro Athletes.
Over 200 professional athletes have invested in companies owned by the private equity firm Patricof Co. since 2019. Athletes are one of the few groups of people with a substantial amount of money to invest and the public profile to promote businesses. Patricof has teamed up with firms such as KKR and Bain, to specialize in consumer products, of which firms such as Carlyle have pulled out.
Other Private Markets News.
Radiology. Now that Australian radiology firm I-MED has broken into the U.S. market, its private equity owner Permira is looking to sell for nearly $2bn.
Alaska. David Rubenstein is the co-founder of the private equity megafirm Carlyle. His daughter, Gabrielle Rubenstein, was, until recently, on the board of Alaska’s sovereign wealth fund. She resigned after “fund officials complained about her aggressive push to have them work with private equity groups with ties to her.”
CRYPTO
Talking Turing.
When it comes to trying to regulate decentralized finance, there are apparently theoretical limits as well as practical. Researchers have deduced that a decentralized and Turing-complete system – a computer that can take any possible program, run it and solve it; basically, a computer that can solve any problem – wouldn’t be able to comply with anti-money laundering or know-your-client regulations. In the authors’ view, authorities would have to “accept new trade-offs that limit their enforcement powers if they want to approve the use of permissionless platforms formally.”
HOUSING
Mobile Home Rents.
Low-cost loans financed by Fannie Mae and Freddie Mac for mobile homes are fuelling acquisitions of an unwelcome sort, as new owners buy available homes and then hike up the costs. Some mobile home residents don’t own their homes, meaning that a third party can buy their property and charge more for rent. Some longtime residents are now being priced-out as the normal five- to ten-dollar increases have become 50-dollar increases.
Not Enough Affordable Housing.
The housing crisis has reached a point where increasing numbers of people working full-time jobs have become homeless. Homelessness reached a record high last year, and evictions continue to climb as well. One worker interviewed by The Washington Post said he worked fifty hours a week, earning twenty one dollars an hour and working for Amazon, but cannot afford housing in Nashville. The main causes are fast-rising rents and affordable housing shortages. The crisis puts people in danger of falling into a deeper hole as well: unhoused people have trouble showering, washing clothes, and other activities necessary to be presentable and keep a job.
San Diego Tenants
The Blackstone Tenants Union is fighting rent increases and other abuses that came about once the private equity megafirm stepped in, reports HeySocal, via Public News Service. The Alliance of Californians for Community Empowerment is aiding their efforts. Blackstone is doing what private equity does: making contributions to politicians. AFR’s Caroline Nagy noted that several Californian representatives have accepted money from Blackstone employees, including Rep. Mike Garcia, R-Calif., Rep. Michelle Steel, R-Calif., Rep. Ken Calvert, R-Calif., Rep. Young Kim, R-Calif., Rep. David Valadao, R-Calif., and Rep. John Duarte, R-Calif.
Stand Up for Tenants.
The Revolving Door Project urges Harris to ignore chatter from corporate landlords, especially by way of innocuous-sounding housing trade associations, and focus on standing up for tenants. (Reminder: AFREF, Bargaining for the Common Good and the Private Equity Stakeholder Project recently released a report that pulls back the curtain on the outsized influence corporate landlords have on influencing policy through interconnected webs of trade associations at the local and national level.) And, indeed, she recently vowed to tackle price gouging, implement rent increase caps, and take on corporate landlords.
Mr. Cooper.
Mortgage origination and service company Mr. Cooper Group announced plans to scoop up Flagstar Bank’s third-party origination and mortgage servicing arms for $1.4bn. If the sale goes through, it’ll mark the largest mortgage acquisition in the 2022-2024 cycle.
CLIMATE and FINANCE
Carlyle and the Climate Crisis.
Over a decade since its inception, a Carlyle fund that invests heavily in oil and gas is still making acquisitions across Europe, Africa, Asia and Latin America. Carlyle International Energy Partners announced its fifteenth investment just last month in its plans to purchase a portfolio of oil and gas projects in Italy, Egypt and Croatia and install a former BP chief exec as its head. Reminder: A report late last year from the Private Equity Climate Risks project, of which AFR is a part, revealed that 94% of Carlyle’s energy investments were in fossil fuels, having spent billions on the dirty assets.
Flooding and Small Businesses.
Climate change is beginning to take its toll on small businesses, as increasingly severe disasters such as hurricanes cause massive flooding that destroys buildings and inventory. A report from the US Chamber of Commerce found that one in four small businesses are a disaster away from being forced to close. The threat doesn’t just affect business owners: many small businesses exist in poorer communities and formerly red-lined areas.
SBTi and Carbon Credits.
Earlier this year, staffers at the standard-setting Science Based Targets initiative (SBTi) fought leadership, who floated a plan to allow companies to use carbon credits to offset reported Scope 3 emissions in meeting net zero targets. This would effectively have allowed corporations to meet goals without scaling back their actual carbon emissions. The group has since appeared to backtrack on the decision, but the fight will continue.
POLITICS and MONEY
Kamala Harris.
Kamala Harris has had her hat in the presidential ring for about a week and a half. Billionaire Reid Hoffman, founder of LinkedIn, donated $10mn to her campaign. And then promptly demanded she fire FTC Chair Lina Khan. Conveniently, Hoffman is on the board of Microsoft, which is currently under investigation by the FTC. (Khan, meanwhile, has retorted: “Monopolies not only have economic power, but use that power to buy political power.”)