Bitcoin (and Instability) for Sale on Exchanges
Bitcoin (and Instability) for Sale on Exchanges
On Wednesday evening, the Securities and Exchange Commission approved the applications for eleven Bitcoin exchange-traded funds (ETFs) by a 3-2 vote, with Chair Gary Gensler, who is anything but a tool of the crypto industry, voting with the two Republican commissioners in support of the move. The other two Democratic commissioners voted against. Crenshaw, a Democrat, wrote that the approval was “unsound and ahistorical” and “put us on a wayward path that could further sacrifice investor protection.”
The ETFs track the price of the token, meaning that investors are exposed to its volatility and unpredictability – and to the potential for manipulation and fraud rampant in crypto-world – even though they are not be directly buying or selling Bitcoin. Gensler signaled that the approval would be “cabined” to just Bitcoin.
AFR wrote that approval will “reward bad actors in the crypto industry and amplify risks for investors.” Bitcoin ownership and mining pools remain highly concentrated, and the blockchain on which it operates rests in the hands of an opaque group of programmers. And studies have found that wash-trades account for most trades on major exchanges, distorting prices, hiding illegal activity and breeding instability.
Said AFR’s Mark Hays:
“We are disappointed the SEC approved these filings despite endemic market manipulation and investor risks found in crypto-asset markets, which led to billions in consumer losses during the recent crash. This step will expose a much larger group of investors to that same risk. And, this approval provides the crypto industry with an imprimatur of legitimacy that it has craved but not earned.
“[Regulators] should also proactively use the tools they have available to address the industry’s record of systemic noncompliance with basic consumer and investor protection regulatory standards.”
One interesting wrinkle in the saga: On Tuesday, a day before the actual announcement, someone gained access to the SEC’s Twitter account and posted that the Bitcoin ETFs had been approved, causing the token’s price to surge. The problem: It wasn’t true; the SEC quickly admitted they’d been hacked.
FINANCIAL STABILITY: Take Risks, Get… Nothing – Most Profit Ever – Capital Requirements – Bank Backstop – Bond Markets – Quantum Leaps in Quantum-Proofing
CONSUMER: Big Tech Payments – Data Collections – Overdraft – Doing Right by Depositors – Race and Wealth – Enforcement Actions
PRIVATE MARKETS: Private Fund Rule – PE Bankruptcies – Private Equity and Insurance – Private Equity and Healthcare – Private Equity, Groceries, and a Human Trafficker – Global Infrastructure Partners – Public Libraries & Private Equity – Evergreens – Private Equity and Cold Warehouses – PE for the Sorta-Rich – Private Credit Risks – Other Private Markets News
CRYPTO: Stablecoin – (DeFi)nite Risks
HOUSING: Want Insurance? Good Luck
CLIMATE AND FINANCE: California Climate Disclosure
POLITICS AND MONEY: Dark Money
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Take Risks, Get… Nothing.
With Tanya Otsuka having been sworn in to the National Credit Union Administration’s board, financial regulators now have majorities to move ahead with executive pay reform first outlined in Dodd-Frank Section 956 — 14 years ago. The provision required six agencies to write rules banning incentive-based compensation that encourages “inappropriate” risk-taking. The 2023 banking crisis gave the long-delayed rule new momentum.
Says AFR’s Natalia Renta:
“With all key regulators in place, the time is now for decisive action to protect the public from the reckless actions of executives, who too often put their own greed ahead of the health and stability of their companies and the financial system. We cannot afford to wait until another Silicon Valley Bank-style crisis for regulators to finalize a strong executive pay rule — a task Congress assigned them over a decade ago.”
Most Profit Ever
JPMorgan Chase recorded $49 billion in profit in 2023, the most ever in the history of American banking. Remember that when CEO Jamie Dimon whines about things like …
Capital Requirements.
Brandeis University’s Stephen Cecchetti and NYU’s Kim Schoenholtz exhorts regulators to “ignore the bank lobby” and get the Basel III “endgame” – the slate of rules intended to bolster financial system resilience by requiring the largest banks to hold more capital – over the finish line. Some of their major points: capital doesn’t just sit idle, as it enables banks to offer more credit; more capital means more of a cushion when things go wrong; and, while it may cause some riskier activities to move over to shadow banks, “allowing banks to act unsafely is surely not the way to address the possibility of risks migrating elsewhere.” Plus, they would directly affect only the largest 40 of the over 4,500 U.S. banks.
For all their talk of supporting fair lending, banks typically fall short of their own purported commitments. An op-ed in Fortune suggests that “big banks are hiding behind racial equity to avoid new capital standards.” The author continues, “By wrapping their arguments under a cloak of racial equity, the banking lobby is preserving the status quo and letting underserved communities disproportionately bear the impact of a tightening lending market.”
And let’s not forget: banks vociferously opposed the CFPB’s implementation of Section 1071 of Dodd-Frank, which will provide more transparency on racial disparities in lending. (See below for more on that.)
The biggest banks are gearing up for a legal fight over the rules. Eugene Scalia, son of the former SCOTUS justice, is “quietly drawing up a lawsuit to block the proposed rules on behalf of the Bank Policy Institute."
Bank Backstop.
The Fed offers a loan to a financial institution with below 5% financing through its bank term funding program (BFTP), the emergency backstop program formed in the midst of last year’s banking crisis. The borrower stashes those funds in the Fed’s overnight deposits facility and earns 5.4%. It happily pockets the difference. That’s how banks are “gaming” a failsafe designed to rescue ailing lenders, WSJ explains. This Wednesday, the BFTP’s lending activity hit a record $141.2bn, but increases in tapping the program seemingly don’t stem from new stress on banks. Free money.
Not for long? The Fed’s Barr signaled the BFTP wouldn’t be extended beyond its scheduled wind-down in March.
Bond Markets.
The International Capital Markets Association suggests that central banks will need to more frequently intervene in bond markets in order to maintain stability, Reuters reports. “Market participants accept that episodic heightened volatility, with rapid evaporation of liquidity, and a sharp repricing of risk, is the new normal,” wrote ICMA.
Quantum Leaps in Quantum-Proofing.
If you’ve got three and a half minutes, the Bank of International Settlements (you know, the international regulator behind that Basel III “endgame”) has a video detailing its efforts to quantum-proof the financial system. The innumerable financial transactions that occur everyday rely on encryption to keep them private. Most modern computers couldn’t hope to crack it – at least, not in the lifetime of the bad actor. But as powerful quantum computers grow more sophisticated, they become increasingly capable of cracking through that encryption. So, BIS has been test-piloting a quantum-proof VPN to funnel transaction data through between the Banque de France and Deutsche Bundesbank.
CONSUMER
Big Tech Payments.
The CFPB’s been working on stronger oversight for Big Tech players in the payments sector as they continue providing consumers digital wallets (Apple Pay, Google Pay, etc.) and payment apps. Politico rounded up some major groups that wrote in this week to get the agency to slow its roll: TechNet (tech executives) and the Financial Technology Association (fintechs, including PayPal and Klarna). Amazon and Coinbase want to be exempt. At the same time, the bank lobby generally supports the rule, in part viewing it as a way for nonbanks to fall under similar oversight as they do. Some banking groups, however, remain skeptical about the CFPB’s proposal to extend the rule to cover crypto. AFR has called for the CFPB to cover crypto. AFR also previously sent two comment letters (here and here) to express concern about Big Tech’s power in the digital payments market and urge stronger consumer protections in peer-to-peer payment systems.
Data Collection.
A Senate vote to overturn President Biden's veto of the disapproval resolution on CFPB’s rule to collect data on small business lending, aka Section 1071, failed 54-45. The rule will allow for better data collection on lending to minority- and women-owned small businesses. Senate Banking’s Chairman Brown celebrated the outcome as a “win for the engines of our economy: small business and entrepreneurs.”
Overdraft.
Accountable.US reveals that the ten megabanks that still charge their customers overdraft fees – that includes the likes of JPMorgan, Wells Fargo and Bank of America, among others – collected over $2.3bn from the practice in 2023.
Meanwhile, the Consumer Bankers Association wants to convince everyday people that, actually, the billions in overdraft fees that banks extract from customers every year is good for consumers. The group’s own research seemingly finds that consumers love the stuff. Execs at the majority of the banks highlighted in Accountable’s report sit on the association’s board. And three of those banks – Wells Fargo, Bank of America, and Region’s Bank – have been penalized by CFPB for overdraft abuses.
Doing Right By Depositors.
Among regional banks: more pressure to pay more to depositors compared to their larger counterparts, but tepid demand from borrowers, Reuters reports. Banks with $100bn or less in assets will especially feel the pressure. Using deposit betas, a metric that quantifies how “banks pass Fed interest rates moves to depositors,” the largest banks sat around 15-19%, while regional and community banks posted in the 60s. That means depositors’ rates at smaller banks swing more whenever the Fed adjusts macro rates.
Race and Wealth.
The Brookings Institution explains that while the pandemic increased Black wealth, it simultaneously widened the racial wealth gap. Between 2019 and ‘22, median wealth went up by about $51,000. In the same period, the wealth gap grew by almost $50,000. By 2022, Black families had $15 to every white families’ $100. Much of the growth in Black households’ wealth came from home equity, while corporate or business equity increased white households’.
Related: A paper in the Michigan Journal of Race and Law finds that, though U.S. bankruptcy law is “race-neutral on its face,” the proceedings tend to let white debtors hang onto more of their property than Black debtors. Using data from bankruptcy cases in Washington, D.C., in 2011, researchers from the Society of Actuaries determined that white debtors retain about $1,800 more in property and 80% more in home equity than their Black counterparts. They suggest bankruptcy law appears “to play a role in perpetuating wealth inequality.”
Enforcement Actions.
FloatMe. The FTC sued the Texas-based fintech FloatMe, the provider of a subscription service that offers on-demand cash advances over a dedicated app, over alleged deceptive practices “such as charging customers without consent and being unclear about eligibility standards,” the San Antonio Current reports. Ironically, FloatMe’s website calls it “Your Best Financial Friend.”
Credova Financial. The California Department of Financial Protection and Innovation issued a consent order against the buy now, pay later operator over undisclosed convenience fees charged to borrowers who signed installment contracts.
PRIVATE MARKETS
Private Fund Rule.
AFR-EF submitted an amicus brief to the 5th Circuit Court of Appeals supporting the SEC’s new rule that requires private fund advisers to provide investors with detailed information about their fees, expenses, returns and side letters. It’s the biggest reform in the history of private equity, and the industry is going to fight it tooth and nail.
PE Bankruptcies.
They surged to a record high last year, with 104 private equity- or venture capital-backed companies having filed for bankruptcy in 2023. A number of portfolio company bankruptcies clocked in at well over $1bn in liabilities at initial filing, including Akumin Inc. (one of the largest PE failures in the healthcare sector) and WeWork.
Private Equity and Insurance.
Insurers are dipping into net asset value (NAV) loans to help private equity borrow against its own investments and boost liquidity. In a NAV loan, the borrower puts up its assets as collateral to secure the credit, then – in the case of a private equity firm – use the cash to pay down the debt they loaded onto a portfolio company. Demand for these loans has grown with more stringent capital requirements on the horizon. But since insurers aren’t beholden to the same rules, they’re investing in NAV lending to private funds, The Business Times reports. And the arrangements can get pretty sizable: Athene, an Apollo-backed insurer, helped see Apollo through a portion of its $4bn financing of SoftBank in 2021, though NAV financing alone can climb to around the $2bn in other deals.
Private Equity and Healthcare.
PE firms are “gnawing away at U.S. health care,” Brown University’s Ashish Jha opines in WashPost. He offers an anecdote about how one of his friends sold his cardiology practice to private equity. Slowly, it started to bill “more intensively,” sent out more patients to hospitals for tests, and eventually stopped accepting a major insurer, locking out a swath of his long-time patients. And more practices are falling into private equity’s control.
“It’s a trend that should have everyone’s attention, from politicians to patients, because it can significantly increase costs, reduce access and even threaten patient safety,” Jha writes.
Private Equity, Groceries, and a Human Trafficker.
About a year and a half ago, AFR criticized the grocery chain Kroger’s merger with rival Albertson, the latter backed by private equity megafirm Cerberus Capital Management. At the time, Cerberus was poised to loot Albertson, having announced a “special dividend” amounting to $3.7bn.
This past September, Kroger defended its proposed acquisition by touting its association with four local growers, including Georgia-based blueberry seller and juicemaker Southern Press and Packing. Southern Press had ties to an “alleged human trafficking kingpin.” In 2020, the company called on a labor contracting firm to hire seasonal employees to work in its fields. Less than a year later, the firm’s chief was indicted as part of a $200mn human trafficking ring that subjected numerous Mexican and Central American workers to “modern-day slavery,” revoking their identification documents, threatening them with violence and deportation, and forcing them to live in squalor.
Global Infrastructure Partners.
The gargantuan asset manager BlackRock will purchase Global Infrastructure Partners for over $12.5bn in cash and stock, FT reports. The acquisition of GIP’s assets, which include the Port of Melbourne, the Suez water group, a shale oil pipeline, London Gatwick Airport and more, will make BlackRock the world’s second-largest infrastructure manager in the world. It’s a bid to compete with private equity-oriented asset managers like Brookfield.
Public Libraries & Private Equity.
“Having fun isn’t hard / when you’ve got a library card!” as a cartoon aardvark once sang to children across the country. But looming private equity involvement might change that. Private equity megafirm KKR owns OverDrive (and its associated mobile app, Libby), a private company that dominates the distribution of eBooks and audiobooks for public libraries across the country. Writer Karawynn Long explains the platform has removed features that make it easier for readers to get the titles they want, has pushed them onto a proprietary app and has monetized certain back-end features that librarians use to keep track of their patrons’ interest. Long writes:
“Every extra dollar that KKR sucks out of libraries is another dollar they don’t have for buying books, or for librarian staffing, or for supporting any of the dozens of other small but important services that public libraries provide their local communities, like free access to computers and the internet. Some libraries that already struggle for funding might be starved out of existence.
And if OverDrive goes belly-up at some point in the future, crushed by KKR’s leveraged debt, it’s going to take down access to the digital catalogs of nearly every public library in North America. Between now and then, I expect the user experience to degrade precipitously.”
Evergreens.
Private credit offerers are increasingly putting together evergreen funds, a bid to attract more institutional investors by offering more flexibility than traditional “closed-end funds,” which might see investor dollars dormant or otherwise tied up for longer. Steven Kelly of the Yale Program on Financial Stability notes that this scheme closely approaches a reinvention of a deposit franchise – “It’s a bank.”
Related: Large private equity investors, like sovereign wealth funds and public pensions, are demanding funds free up their previous investments before they commit more money. Other requests “range from from fee discounts and more co-investment opportunities, to greater information rights and representation on committees” and even portions of the fund’s management fee.
Private Equity and Cold Warehouses.
Private equity-owned Lineage Logistics, the largest operator of refrigerated warehouses in the world, and its next-largest competitor Americold, control 71% of all rentable refrigerated warehouse space in North America. In the U.S., 28% of cold storage capacity belongs to the biggest food companies and grocers; everyone else has to rent. Because of private equity consolidation, your food has a high chance of passing through a Lineage or Americold freezer before hitting grocery store shelves. Small food companies have occasionally been kicked out of these warehouses to make room for bigger competitors.
PE for the Sorta-Rich.
Most of private equity’s clients are large institutions: university endowments, public pensions, sovereign wealth funds. Lately, however, firms have been eager to tap into individual, private wealth. This week, despite a delayed release last year, Blackstone reported its debut fund for wealthy individuals collected $1.3bn. “The cash pile…underscores the intensifying race among alternative investment firms to court private wealth as key sources of institutional money dry up,” Bloomberg reports.
Private Credit Risks.
Echoing colleagues in Washington, a Bank of England regulator warned that risks posed by private equity and private credit call for “particular focus.” Growth in private lending grew substantially after a long period of low interest rates, and it’s been difficult to figure out the degree to which banks are exposed to the sector.
Other Private Markets News.
NY PE. Four of New York City’s pension funds will be more heavily exposed to private equity as this year’s reallocations dip deeper into alternatives.
BlackRock. The dominant asset manager plans to lay off 600 employees, about 3% of its total workforce.
CRYPTO
Stablecoin.
Circle Internet Financial, issuer of the USDC stablecoin, quietly filed for an IPO with the SEC on Thursday. Originally, it tried to go public by way of a special purpose acquisition company (SPAC) in 2021.
(DeFi)nite Risks.
On Tuesday, the CFTC released a novel report tackling the biggest issues in decentralized finance, a sector that uses distributed ledger tech (think: the blockchain – not every DeFi project uses it, but it’s one way of implementing such a ledger) to provide services similar to what you’d find a bank, from lending and investing to exchanging crypto tokens, but without a centralized intermediary. The CFTC identifies numerous risks inherent in DeFi endeavors for…
Investors/consumers: DeFi’s all about “asymmetries of information,” so systems tend to be extremely complex and require technological expertise. That opens the door to theft, fraud and other exploitation. And the semi-anonymous nature can make it unclear who holds the power in any given project or transaction.
Market integrity: There’s little accountability or regulation, making schemes vulnerable to market manipulation and artificial price manipulation. Also: DeFi projects use so-called “oracles,” which interface with real world inputs and propagate them through the ledger. Manipulate an oracle, and you’ve manipulated the market and the outcome of automated contracts.
Financial stability: “The use of open source software…would likely generate a dense thicket of economic and technological exposures, making it difficult to identify, measure, or monitor the build-up of potential systemic risks.”
Illicit finance: In traditional centralized finance, banks can identify and report suspicious transactions to agencies like FinCEN. Not as possible when you remove the watchful middleman.
Climate: The “cryptographic tools” put to use can create “pollution, noise, and other environmental impacts” near mining facilities.
HOUSING
Want Insurance? Good Luck.
Buying home and auto insurance is “becoming impossible,” WSJ reports, as the industry continues to “jack up prices and pull back from some markets,” particularly in areas prone to disasters intensified by climate change. Current homeowners might experience higher premiums or loss of coverage, but prospective homeowners-to-be are sometimes unable to secure a policy in the first place, forcing them to insurers of last resort that can send their yearly payments through the roof. Some major players have made it more difficult to get rates, even scaling back how much they spend on advertising, closing sales offices, or introducing new hurdles.
“Climate change will destabilize the global insurance industry,” says one research firm. Allstate’s CEO warned, “There will be insurance deserts.”
The threat of insurance deserts has given insurers the bargaining power to demand higher rate increases. In normal years, insurers in California would only request increases less than 7%. Last August, the state regulator allowed a Progressive-owned insurer a 25% increase, impacting over 40,000 policies. When insurance companies don’t get their way, they threaten to pack up shop. Allstate, which threatened to do just that, landed a 30% auto rate increase in California.
CLIMATE and FINANCE
California Climate Disclosure.
Financial Justice previously discussed a first-in-the-nation law in California that, ahead of the SEC’s own climate disclosure rule, would require companies to account for their own pollution in disclosures, including catch-all Scope 3 emissions. Gov. Newsom signed it in October. This week, he left it out of the budget proposal.
POLITICS and MONEY
Dark Money.
As campaigns for the 2024 election kick into high gear, so too does a crypto “dark money” group’s efforts to influence the election. The crypto industry has funneled money into the lobbying organization, with Coinbase, the largest exchange in the U.S., expected to contribute before the end of the year. So far, armed with money from undisclosed donors, they’ve spent tens of thousands on Meta ads, taken on Senate Banking’s Brown, and hired a group of strategists.