Click, Clack, KKR
When this writer was a child, he loved to read the classics. The quizzical theatricality of Opposites and the lyricism of Click, Clack, Moo: Cows that Type spoke to him. As he and his taste in literature matured, he turned to Out of My Mind and the thrilling fantasy escapades of Beyonders. More recently, in his adulthood, he read the heartwarming A Man Called Ove. In fact, he owes about twenty years of reading, in part, to the publisher Simon & Schuster ...
… which is being purchased by the private equity giant KKR. An op-ed written by AFR’s Aliya Sabharwal dives into how the “barbarians at the gate” are coming for the publishing house some years after they bought Toys ‘R’ Us, which later declared bankruptcy and left 33,000 former employees jobless. Besides literature, KKR and other private equity firms exert influence over many aspects of daily life: healthcare, real estate, music and more (see AFR’s ABCs of Private Equity).
Writes Sabharwal:
The private equity model is to loot and flip, not to invest or run companies well — an ominous history for any acquisition, but especially for a business requiring long-term commitments, like book publishing…Private equity firms raise money from pension funds, endowments and wealthy individuals and use a slice of that money plus a lot of leverage to buy companies that are then saddled with the debt. The Simon & Schuster transaction will leave the publisher $1 billion in hock, ratcheting up pressure to repay the debt — and turn a profit.
Read the full op-ed here.
CONSUMER: Section 1071 – SCOTUS Fight – The Scheme to Kill the Post Office
FINANCIAL STABILITY: Bank Mergers – Executive Accountability – Nonbank SIFIs – Bonds and Bank Ratings – Wells Fargo’s Big Buyback – Fintechs, SBA, 7(a) – Anti-ESG Critics Lack Clout – Regional Bank Rules
CAPITAL MARKETS: Outbound Investments
PRIVATE MARKETS: PE’s Fossil Fuels – Fee Disclosure Fight – Alts are Bad for Alpha – PE Insurance
CRYPTO: Stablecoins – SEC Ripple
HOUSING: Tenant Protections – The Housing Crisis – Black Ice
CLIMATE AND FINANCE: Climate and Audits – Climate Disclosure
Feedback? Reach us at afrnews@ourfinancialsecurity.org
CONSUMER
Section 1071.
Since the ruling from a Texas federal judge, the Consumer Financial Protection Bureau has faced more challenges to its authority to enforce Section 1071, the small-business data collection provision in Dodd-Frank. While Section 1071 combats discrimination and increases transparency and accountability among small business lenders, banking and financial services groups have attempted to undermine the provisions. Two credit unions have requested the judge allow them to intervene, suggesting that the judge’s injunction against the CFPB is too narrow. They want it to cover credit unions too. Meanwhile, a new lawsuit filed by a coalition of Kentucky-based banks attempts to tear down the same requirements as unconstitutional and begs relief from the court. These cases come despite the rules tackling unlawful discriminatory lending practices that fuel economic concentration and deepen inequality. The data collected would help uphold fair lending laws and identify the needs of women- and minority-owned small businesses across the country.
SCOTUS Fight.
The CFPB submitted a reply brief for CFSA v. CFPB, the landmark SCOTUS case to be heard in the fall upon which the agency’s funding hinges. In the 29-page document, the agency: clarifies that the Appropriations Clause, which opponents have invoked to attack the Bureau, does not require Congress to budget down to the precise dollar, and notes that Congress didn’t cede appropriations power to the agency; notes that other agencies, including the Fed, OCC and FDIC, have similar funding mechanisms; argues that vacating the payday lending rule would not be an adequate solution; and suggests that a decision that invalidates the Bureau’s previous actions would have a destabilizing effect.
Related: A study from Accountable.US finds that consumers in 10 states whose Republican representatives have sought to defund the CFPB have actually benefited from more than $240mn from the agency’s Civil Penalty Fund from 2012 to 2022.
The Scheme to Kill the Postal Service.
In an op-ed for Truthout, AFR’s Annie Norman details United States Postmaster General Louis DeJoy’s ten-year plan to reduce the post office’s capacity. Mail service would be relegated to regional centers, rather than individual post offices. While there would be no mass layoffs upfront, with less work to perform, these offices – especially smaller, rural ones – would be prone to a reduction in hours or to closure. Earlier this year, the Save the Post Office Coalition sent a letter to the secretary of the USPS Board of Governors to make them aware of 160,000 customers across the country urging them to stop DeJoy’s plan. The same day, the Postal Regulatory Commission issued a public inquiry order asking the Postmaster General to detail his plan; DeJoy objected, opting instead for hostility during a later hearing. Writes Norman:
The bottom line is that the public has a right to more transparency and input in the decision-making process at a public institution. This requires engagement with said public — which DeJoy is actively resisting. When you put a rich, white, private-sector executive who isn’t used to public accountability and cooperation in charge of a treasured public institution, such a clash might be inevitable. It’s plain DeJoy doesn’t have the temperament for public service.
FINANCIAL STABILITY
Bank Mergers.
Senate Banking’s Brown, Warren, Reed and Fetterman sent a letter to the Fed’s Powell and Barr on Aug. 9 requesting the agency “review and reconsider its approach to big bank mergers.” Though Dodd-Frank gives them the authority to do so, the Fed has yet to issue guidance on the types of mergers that threaten financial stability. They raise how the Fed allowed Silicon Valley Bank’s acquisition of another bank in 2021 to go through, only two years before they had to invoke a systemic risk exception for it. The lawmakers also call for stronger regulatory standards, writing: “We cannot perpetuate a banking system that favors the largest, most complex institutions and puts consumers, smaller institutions, and our financial system at risk.”
Executive Accountability.
Lawmakers are hopeful that the executive accountability bill introduced by Senate Banking’s Brown and Scott, S.2190 (Recovering Executive Compensation Obtained from Unaccountable Practices (RECOUP) Act of 2023) will go to the floor after the August recess. If passed, the legislation would allow regulators to take certain actions against executives at failed banks, including compensation clawbacks, the removal of mismanaging bank leadership, and stronger penalties against bad actors. Politico reports some Republicans, such as Thom Tillis, who was one of only two to vote against it in Committee, and industry lobbyists are likely to fight it. Otherwise, the bill has bipartisan support.
Nonbank SIFIs.
Systemically Important Financial Institution (SIFI) – that’s when regulators deem an organization important enough such that its collapse would be seriously harmful to the economy. Politico takes stock of the Treasury and Biden administration’s efforts to empower FSOC to designate nonbanks as SIFIs, and outside proponents and detractors. A new proposal would undo a Mnuchin-era change requiring FSOC to perform a cost-benefit analysis on a nonbank before labeling it as a SIFI. Columbia Law’s Lev Menand and 31 other scholars submitted a comment letter stating that a cost-benefit analysis would get in the way of oversight. In a series of comment letters earlier this year, the U.S. Chamber of Commerce, the Insurance Coalition, and the American Investment Council (private equity), among others, railed against the proposal.
AFR sent a pair of comment letters to FSOC on two proposals that would strengthen its tools on climate financial risk. Read the technical letter from AFR-EF, Public Citizen, the Sierra Club and the Sunrise Project here. And a big coalition letter here. The letters detail how threats to financial stability from nonbank financial institutions are growing, and it encourages FSOC to quickly strengthen and finalize its proposals.
Bonds and Bank Ratings
If the bond market’s any indication, regional banks may not be in the clear; WSJ writes that “bonds are showing less relief on banks than their shares.” The trade of bonds is part of how banks make money, but pressure on the market has given them a squeeze. On Aug. 8, Moody’s downgraded the credit ratings of ten small and midsize lenders, owing to rises in funding costs and loan losses – especially in commercial real estate – and declines in income and profitability. Besides the handful that already suffered downgrades, another six institutions are under review for more and eleven have poor outlooks. Economist Mohamed El-Arian says the ratings actions will “with banks’ expectations of a tighter regulatory context…lead to some further reduction in credit extension.”
Related: FT gives a brief history of “how bonds ate the entire financial system.” Recent high interest rates “triggered the worst setback in at least a century,” with overall losses amounting to near $10tn.
Wells Fargo’s Big Buyback.
Public Citizen sent a letter to the Fed’s Powell and Barr challenging why the agency would allow Wells Fargo to pursue a $30bn stock buyback, announced at the end of July. The plan “compounds several notable weaknesses in Wells Fargo’s capital position,” leaving a minimal margin to buffer the too-big-to-fail bank’s assets. Writes Public Citizen:
A mega-bank should not make precipitous decisions to further feather the nest of already well-compensated senior managers at the risk of a foundational bank safety measure…Given economic uncertainties, and the Federal Reserve’s current rulemaking on capital standards, acquiescing to a massive stock repurchase program at a banking organization with verifiable concerns contradicts Federal Reserve’s historic insistence that bank holding companies serve as a source of strength for their depository subsidiaries.
Fintechs, SBA, 7(a).
Last month, a bill co-sponsored by the Senate Small Business Committee’s Cardin and Ernst to restrict the Small Business Administration’s ability to offer its 7(a) lending program to nonbank lenders, advanced out of Committee. Under 7(a), the SBA guarantees 85% on loans of $5mn or less. The bill would only allow 17 “nondepository” lenders to take advantage of the program. Fintechs call it “unfair and burdensome,” and some proponents argue that allowing nonbanks to access 7(a) would enable more small-dollar lending, including to underrepresented groups.
Related: The Revolving Door Project scrutinizes how the SBA has grown overly reliant on underregulated fintechs to meet lending responsibility obligations. RDP argues that the agency needs to “increase its capacity,” rather than hand authority over to nonbanks.
Anti-ESG Critics Lack Clout
With the Republican “ESG Month” behind us, Politico examines how much political capital they could net for all their efforts to undermine investor-friendly regulations, shelter public companies’ management from accountability and hamstring responses to prudential risks. Not much. Over half of GOP primary voters in a Morning Consult Poll believe that companies are doing just enough or not enough to advance social equality and acceptance, or they had no opinion on how much companies were doing. A separate poll suggests 52% of Republican primary voters are more likely to support a candidate that doesn’t dictate what corporations can support.
Related: The SEC’s enforcement division sent requests, including subpoenas, to fund managers seeking documents related to their ESG investments.
Regional Bank Rules.
On Monday, FDIC’s Gruenberg gave an overview of what to expect from upcoming banking rule proposals at the Brookings Institution. The agency plans to: propose banks with $100bn or more in assets issue more long-term debt to cover recapitalization in the event of their failure; propose a “restatement” of resolution plans to make them more effective; and review uninsured deposit guidelines.
CAPITAL MARKETS
Outbound Investments.
The Biden administration has plans to issue an executive order to establish new rules on American outbound investment in Chinese tech sectors. The program, fearing threats to national security, is expected to take effect next year and will only apply to new investments, not existing ones.
PRIVATE MARKETS
PE’s Fossil Fuels.
Private equity continues to swallow up oil and gas firms, leaving the public to foot a potential cleanup bill, according to a report from Public Citizen. Nineteen firms, including Blackstone, Carlyle, Apollo and KKR, invested in 35 oil and gas companies that were allowed to drill on federal lands since 2017. And if protections aren’t put in place, taxpayers could face a $384mn charge in eight states to decommission and clean the nearly 2,700 on federal and tribal land.
Fee Disclosure Fight.
This month, the SEC will finalize stronger rules, proposed last year, related to how hedge funds and private equity firms disclose their fees and interact with investors. Bloomberg reports the rules would require disclosure, prohibit certain types of fee arrangements and would make it easier for pensions and endowments to sue fund managers for their investment decisions. The Managed Funds Association, a trade group representing asset managers, is already gearing up to sue the SEC within two weeks of finalization.
Alts are Bad for Alpha.
Alts: alternative investments, oft touted by private equity and hedge funds. Alpha α: a single number that expresses how well an investment does against a benchmark index fund (i.e. an alpha of 4 means it did 4% better than benchmark). A study to be published in the Journal of Investing finds that alts “actually destroyed alphas,” according to Institutional Investor. The study reveals that public pension funds have generated negative 1.2% alpha since the 2008 financial crisis. That means public money put in the hands of private funds’ alts does worse than it would have if invested normally.
PE Insurance.
Brookfield, the world’s second largest PE giant with about $850 assets-under-management, is carving out an aggressive path into the insurance industry, following similar moves by its private equity peers. When the company bought American National Insurance Co. last year for $5.1bn, it began pushing the insurer’s cash into private credit/debt.
CRYPTO
Stablecoins.
The Fed sent guidance to banks outlining its expectations on “novel activities,” particularly tech-driven crypto and blockchain offerings, especially stablecoins. If banks are interested in “issuing, holding, or transacting” in dollar-backed crypto, they write, they’ll have to prove they have the guardrails in place to handle a variety of risks. And they’ll have to get written “nonobjection” from the Fed to do it, wrote the Fed’s Gibson and Belsky.
Also: PayPal plans to issue a stablecoin called PayPal USD, a major move by a major company.
SEC Ripple.
The SEC plans to appeal NY federal judge Analisa Torres ruling that Ripple Labs’ XRP token was only a security when sold to institutional investors and not to retail investors. A different federal judge in NY has already rejected the premise of Torres’ ruling. Scholars, such as Duke University’s Lee Reiners, have also raised concerns with several parts of Torres’ ruling.
HOUSING
Tenant Protections.
AFR-EF joined the Homes Guarantee Campaign and over 300 organizations to urge the Federal Housing Finance Agency to require tenant protections in order to receive federal multifamily financing. Protections would include a limit on rent increases, good-cause eviction protections, respecting the right to organize, a ban on source-of-income discrimination and more. Reads the letter:
In today’s market, Enterprise-backed financing has become a tool that enriches real estate investors, often at the expense of tenants. Favorable loan terms benefit the landlords and their investors; tenants are an afterthought, mostly unprotected by any rights or regulations. The GSEs [Fannie Mae and Freddie Mac] have a track record of buying and providing guarantees to overvalued loans. Many of these loans can only be paid down if the borrower plans to hike rents and fees, neglect building maintenance, and evict tenants. The GSEs have enabled a market that, in some ways, incentivizes predatory behaviors by landlords.
The Housing Crisis.
It isn’t a lack of supply that’s causing the housing crisis, writes Indiana University Law’s Fran Quigley, but largely a housing affordability gap. While the Atlantic writes that the “Obvious Answer to Homelessness” is building more homes, Quigley rebuts, saying: “Millions of people simply do not make enough money to consistently afford market-rate housing.” Quigley highlights solutions from housing advocates: universal housing vouchers, to remedy the fact that 3 in 4 eligible households can’t access housing subsidies because of underfunding. This, he says, should be a step “on the path to social housing freed of the for-profit market.”
Related: Bloomberg reports the first U.S. city to get a handle on inflation, Minneapolis, “owes its success to affordable housing.” Since 2018, the city has eliminated zoning requirements that only allowed single-family housing, and has invested $320mn in rental assistance and subsidies.
Some stats: The overall housing market has hit a record $47tn, representing the total worth of all U.S. homes. Across the board, the value of homes rose about 0.4% YoY and 19.1% from two years ago. And WashPost reports that the median first-time homebuyer age has hit 36.
Black Ice.
The FTC has abandoned its fight against the takeover of Black Knight, a mortgage software provider, by Intercontinental Exchange (ICE), what Financial Times calls “a vast data-centric business that ranges from bond prices to running the New York Stock Exchange.” Some worry the $12bn acquisition gives ICE considerable control over tech that “could become the backbone” of the mortgage industry.
“The deal faces strong reservations in the US mortgage industry, where small lenders are particularly worried ICE’s dominance will make it hard to switch technology providers and could add to their costs. When the FTC sued to block the deal in March, it said it would drive up costs to lenders and homebuyers.”
CLIMATE and FINANCE
Climate and Audits.
Public Citizen sent a letter to the Public Company Accounting Oversight Board (PCAOB), a major accounting/auditing industry regulator, commending them for recent amendments related to companies’ climate-related noncompliance. With an eye toward how the “climate crisis and the economy-wide decarbonization transition are creating new incentives and opportunities to misrepresent their financial position,” PC appreciates that the Board has attempted to bolster auditors’ ability to suss out whether a reporting company is noncompliant with existing laws or regulations.
Climate Disclosure.
Reps. Sean Casten, Vargas and Castor led a coalition of 77 of their colleagues in a letter to the SEC’s Gensler urging his agency to finalize a “strong and durable climate disclosure rule.” Wrote the lawmakers:
“Enhanced climate-related disclosure is the direction of travel for capital markets around the world…You have drafted a well-reasoned proposal that is grounded in financial materiality, aligns with the demands of investors and market participants, and is clearly within the SEC’s mission, authorities, long-standing norms, and responsibilities. We urge you to finalize and adopt a credible mandatory disclosure rule as quickly as possible.”
Gensler responded, emphasizing the work isn’t about speed, but about “putting investors and issuers first.” The agency wants to continue working to “get it right” and “ensure that we stay at the top of our game in an ever-changing technological world.”