Financial Justice, 25th Edition: The Need for Postal Banking

May 25, 2023

Americans for Financial Reform Education Fund and associated organizations have released a new report calling for a public banking option to be restored within the U.S. Postal Service. With nearly 10 million households unbanked, disproportionately among people of color, postal banking can serve as an affordable, accessible alternative to the hefty fees imposed by the private banking industry. And it’s been done before:

The Post Office is an ideal place to offer a public banking option, thanks to its trained workforce, public interest mission, high level of public trust, and over 30,000 locations in communities across the country. And there is historical precedent: the Postal Savings Program ran from 1911 to 1967, with a core base of immigrant users.

Another plus worth mentioning, given this year’s banking crisis: a public postal bank couldn’t go bust. The downside here is that USPS is under the leadership of Trump appointee Louis DeJoy, who has run a tiny pilot program for check cashing and refuses to explore the broader possibilities of what the post office could do. Fortunately, this report has you covered.

FINANCIAL STABILITY

Bank On the FDIC.

The 2023 Bank On National Conference saw Gruenberg raise a number of points about the FDIC and the state of banking. The banking crisis, he says, has not damaged the credibility of the FDIC, nor has it had much impact on low- and moderate-income families. Fewer American households are unbanked in recent years, he said. And the FDIC has crypto firms and shadow banks in the crosshairs for misleading claims about FDIC coverage:

"In some instances, these firms have made misleading claims in connection with crypto assets, while others have carefully developed fraudulent websites that trick consumers into believing they were doing business with the bank. We take this stuff personally… Some nonbank providers, service providers are eager for the association with deposit insurance without actually offering insurance.”

Congress and the Crisis.

House Financial voted 26-22 to advance a bill by Rep. Barr which purports to “increase financial regulatory accountability and transparency,” requiring, among other things, the Fed, FDIC and other banking regulators to report more frequently to lawmakers. The proposed legislation drew Republican support but no Democrat votes. AFR sent a letter in opposition to the bill to McHenry and Waters.

Politico reports that Waters says Barr’s bill would “hamstring regulators’ effort to respond to and resolve future bank failures.” Instead, she’s working to push agencies to finalize Dodd-Frank Section 956 dealing with executive pay and clawbacks. Said Rep. Tlaib:

"I really think until we can actually target the compensation and target executive pay and shareholder buyouts, we're never ever going to have real teeth to enforcing mismanagement of banks."

A reminder: AFR has been urging the implementation of Section 956 rules.

Meme Stocks.

Remember when Gamestop and AMC stock went to the moon after Reddit investors thought they’d make for good meme stocks? The same is happening now, says WSJ, with regional bank stocks. Already victim to months of dizzying volatility, some traders are reportedly jumping onto their shares trying to predict the next epic high. In PacWest’s case, in early May, a barrage of posts on social media prompted short-sellers to enter the fray and the bank’s stock to slip. “I came to kill the banks,” one investor said to a Discord server.

Fed Ethics.

Wall Street on Parade highlights evidence that Fed IG Bialek’s investigation into unethical trading practices during the agency’s pandemic economic cleanup was weak. Bialek cleared Powell and former vice chair Clarida – his bosses – of any wrongdoing.

PacWest Real Estate.

PacWest plans to sell its Civic Financial Services division, which specializes in real estate lending, to Roc360. On Monday, they offloaded $2.6bn across 74 real-estate construction loans, pushing its valuations up by 20%. The news comes as the bank turns to focus on community banking.

Reciprocal Deposits.

In order to keep depositor accounts under the FDIC-insured limit, regionals are increasingly turning to reciprocal deposits. These arrangements allow banks to spread customer cash around to multiple lenders in accounts that keep shy of the $250,000 threshold, allowing customers at places like PacWest to keep up to 700 times the limit. The amount in these accounts totaled $221bn in Q1, up from $158bn the previous quarter. One of the largest service providers is IntraFi, owned by private equity megafirms Blackstone and Warburg Pincus.

Narrow Banking.

How times change. Bloomberg picks up on the idea of a "narrow bank" that keeps customer money at the Fed, eliminating the danger of bank runs. Saule Omarova, the OCC nominee who got pilloried for a version of the idea in 2021, is quoted in the piece. A brief description:

Customers could put money in this bank, which in turn would stash it at the Fed, passing along the interest minus a service fee. Since every dollar of deposits would be backed by cash, there’d be no risk of a bank run. Variations of the idea have been embraced by libertarians who see it as a way to lessen the need for regulation, but also by people on the left looking to reduce the systemic danger and political clout of too-big-to-fail banks.

First Republic and the DOJ.

Stock trades by First Republic employees during the bank’s collapse have caught the eye of the Justice Department. They’re investigating whether insider trading had a part to play in the transactions. But First Republic isn’t alone in government scrutiny; the DoJ has also been examining potential trade misconduct by SVB executives.

Deposits From Small to Big.

A new paper (under review) from the Fed Board of Governors documents “an unprecedented flight to safety of deposits from regional banks toward large banks” in early 2023. Researchers found that large banks lowered their deposit rates, indicating that the depositor influx was “because they are considered safer.”

SCOTUS and Bank Enforcement.

Following up on news about the Supreme Court’s stay of an FDIC lifetime ban against a Michigan banker: the American Banker suggests the ruling to halt the order and kick it back to the FDIC Board may “make financial regulators more hesitant to levy enforcement actions against individuals.”

CONSUMER

Safe Harbor.

Per the American Banker, banks and credit unions are “outraged” by the Consumer Financial Protection Bureau’s proposed $8 credit card late fee limit. The safe harbor would cut by $9bn off the top of the $12bn these institutions make off of late fees. A reminder: previously when banks screamed that fee caps would harm consumers, they were dead wrong.

CAPITAL MARKETS

Buybacks.

According to WSJ, there have been $600bn worth of stock buybacks this year despite reticence from investors to take up equities. And they’re on-track to repurchase more than $1tn. Much of the activity has been by larger corporations; Apple, Alphabet, Meta and Microsoft claim the top spots. Meanwhile, institutional and individual investors look increasingly to safer bets, like money-market funds.

The American Prospect continues the conversation raised in WSJ. TAP makes the case for a bill put forward by House Dems, called the Reward Work Act, that would outright ban buybacks and require public corporations to have a third of their board members be elected by the employees. Says Rep. García:

“Stock buybacks only exist to pad the pockets of already wealthy corporate executives and shareholders. Companies buy back their stock using funds that could be used to increase worker pay or invest in resources needed to provide high-quality goods and services, leading to higher levels of inequality and business practices that can harm everyday people.”

Executive Pay Disclosures.

The SEC requires shareholders to disclose when executives “receive windfall pay packages.” But the changes to the formula to include “compensation actually paid,” writes FT, may cause pay to be understated or even overstated, resulting in corporate heads theoretically owing their companies money due to the fluctuating equity component of their calculation.

Investment Rollbacks.

On Wednesday, House Financial advanced, by a middlingly bipartisan 37-11 vote, a set of bills that would roll back rules protecting investors. The bills came out of a previously GOP-led package. Waters spoke against one, saying it “would be better entitled Increasing Investor Risk Act because it poses significant risk to retail investors,” citing opposition by investor groups, consumer advocates and state regulations.

For details on why this set of bills is bad, see AFR letters linked in this news release.

The Bond Cartel.

The U.K.’s Competition and Markets Authority identified five banks – Morgan Stanley, Royal Bank of Canada, Deutsche Bank, Citi and HSBC (which First Citizen recently sued for their “scheme to plunder”) – they suspect shared “competitively sensitive information” about U.K. government bonds. The information related to “trading strategies for gilts and gilt asset swaps between 2009 and 2013,” per Politico.

PRIVATE EQUITY

PE and Regionals.

Blackstone CEO Schwarzman indicates that his firm is in talks to buy regional bank assets and originated loans, reports Bloomberg.

PE in Politics.

Axios dips into how private equity and venture capital are looking at next year’s presidential election, with former Carlyle CEO Glenn Youngkin’s potential candidacy and the involvement of David Sacks in the DeSantis campaign (more on that below).

PE’s Vice.

FT examines what Vice’s bankruptcy means for private equity’s buy-in to what they believed would be the future of media. TPG Capital’s $450mn investment evaporated, and Vice’s valuation sits somewhere below $300mn.

The fall is also the story of Wall Street colliding with a creative industry that was home to big personalities and towering egos. In a few months, the company that staked its reputation on being edgy and irreverent — publishing stories such as “Here’s everything you need to know about ketamine” and “Twenty hours in a New York strip club” — will be owned by Wall Street lenders.

Bankman-Fried’s Out, PE’s In.

Digital media startup Semafor recently raised $19mn to replace a previous $10mn investment from disgraced FTX founder Sam Bankman-Fried. The new investors include private equity giant KKR co-founder Henry Kravis, 3G Capital co-founder Jorge Paulo Lemann and Yahoo co-founder Jerry Yang, among others.

More on German Footballers.

A follow-up on previous talk about the Bundesliga: A narrow vote by Germany’s top football clubs prevented a stake in the league’s media operations from going to private equity. A majority voted in favor of the hand-off but were four votes shy of the two-thirds needed to pass.

CRYPTO

Crypto’s Rebound.

Barron’s explores how crypto is reportedly bouncing back after a $3tn crash, the cash disappearing in a storm of “frauds, bankruptcies, and token losses.” They call it novel; no other recent bubbles have grown, popped and resurrected in a two-year span.

A mix of forces is keeping the enterprise alive. Some factors that caused the crash, including a surge in interest rates and high-profile bankruptcies like FTX, have receded. There is still profit in trading tokens, from Bitcoin to new joke coins like Pepe. Regulations, while tightening, have yet to shut down major trading operations or networks. And the technology still has fans, including investors, developers, and companies that fear missing out and see ways to make money off crypto in the future.

Says AFR’s Mark Hays:

“The entire market collapsed because of the exact problems the critics said would happen, and yet it’s hardly a blip on the radar.”

CLIMATE and FINANCE

JPMorgan Capturing Carbon.

The megabank plans to buy more than $200mn in credits financing the removal of carbon from the atmosphere, according to the American Banker. Climate advocacy analyst Patrick McCully calls the purchases – which would already remove 800,000 metric tons of emissions – “insignificant” in the bank’s grand scheme to go net-zero by 2050. The practice has drawn scrutiny from climate activists as well, who claim these credits provide a convenient smokescreen so banks can continue financing environmentally damaging industries. After all, a memo from the Union of Concerned Scientists, found that JPMorgan provided $434bn in financing to fossil fuel companies from 2016 to 2022.

POLITICS and MONEY

DeSantis, Musk, Sacks.

Yesterday, DeSantis launched his presidential campaign with a glitchy foray into Elon Musk’s Twitter Spaces, ostensibly “moderated” by right-wing entrepreneur David Sacks. Sacks is a long-time associate of Musk, both belonging to the “PayPal mafia.” Musk said on Tuesday that he was not formally supporting any candidate at this time, despite being bedfellows with DeSantis and Sacks both and previously expressing support for DeSantis.

David Sacks.

Aside from being a bigtime political donor who’s fundraised for DeSantis before, he moonlights as the host of a podcast where Silicon Valley tech-heads can chatter about “the media, ‘woke’ and triggered libs, anti-capitalists, tech workers aka the ‘surplus elite,’ criminal justice reformers,” according to Slate. The New Republic has a piece detailing Sacks’ political rise in reactionary corners.

Sacks seems to think “corporations are run by Marxists,” that there is a “tyranny of woke Progressivism,” and compared Musk’s purchase of Twitter to the fall of the Berlin Wall, in which “It was the first time that you saw somebody stand up to this galloping wave of censorship that we’ve been seeing.”

Financial Justice