Punishing Executives at Failed Banks

Jun 22, 2023

In the days before Silicon Valley Bank failed, former CEO Greg Becker sold $3.6mn worth of the ailing bank’s stock to end a years-long selling spree of nearly $30mn. In the months ahead of First Republic’s failure, insiders sold $11.8mn. And insiders at the crypto-friendly Signature sold $100mn in bank stock during the digital-asset surge. Now, executives may in the future face compensatory penalties so that they don’t profit while the public picks up the tab.

On Wednesday, Senate Banking advanced by a 21-2 vote a bill that would penalize executives at failed banks. Only two Republicans, Sen. Tillis and Sen. Hagerty, voted against the proposed legislation that takes aim at “executive mismanagement and regulatory supervision failures.”

Wednesday’s bill, a compromise brokered between Scott and Brown, came after Warren and Vance drew up a bill of their own seeking clawbacks. The version that made it out of Committee would capture two years of pay rather than Warren/Vance’s suggested three but expands the topics covered.

“There is now bipartisan momentum to pass legislation to hold executives more accountable when Wall Street takes outsized risks that pay off for executives but not the rest of us…It is a welcome change that some Republicans are finally joining forces with Democrats to advance an important aspect of financial reform,” says Natalia Renta, senior policy counsel at Americans for Financial Reform.

The committee approval comes nearly two months after Michael Barr’s report on SVB, in which the vice chair for supervision came down both on the bank’s upper management as well as supervisors at the central bank. On to the House?

FINANCIAL STABILITY

Bank Mergers.

On Tuesday, Americans for Financial Reform and the American Economic Liberties Project (AELP) led a joint letter warning Yellen and other regulators about their dangerous permissiveness in allowing the mergers and overconsolidation of already too-large banks to proceed. Said the letter:

The banks that failed so far this year, while much smaller than their global Wall Street counterparts, required extraordinary government action to prevent their collapses from devastating the economy. Individual banks should be able to fail without taking down the economy, but as consolidation leaves a smaller number of larger and more complex banks dominating the financial system, individual failures increasingly threaten systemic consequences.
Yet the Federal Reserve, FDIC and OCC continue to facilitate further consolidation.

On Tuesday, assistant antitrust AG Jonthan Kanter “put banks on notice” that the Department would enhance its merger scrutiny and explore broader criteria. Kanter said evaluations would step beyond the expected branch overlap and deposit concentration and may include factors like fees, interest rates and customer service. Kanter stressed that DoJ would lean into its role in advising the bank regulators and withdraw from the role of negotiating remedies.

AFR-EF welcomes these changes and the DoJ’s willingness to block bank mergers even after approval by their primary regulators. Say’s AFR-EF’s Alex Philo:

“Justice has long been deferential to banking regulators, who have been too deferential to bankers wishing to consolidate. That is now changing, although authorities still need to hammer out a set of pro-competition bank merger guidelines.”

Further to SVB and First Republic.

Both Silicon Valley Bank and First Republic encouraged employees of all levels to buy company shares, their top employees even received a portion of their pay in stock, reports WSJ. The two institutions allowed purchases at a discount; at First Republic, two-thirds of employees took part in the program. After both banks failed, the workers who bought in now face monumental losses. A poll of 41 First Republic employees found that nearly half had paper losses of $50,000 or more by May 9.

And: Despite having had their deposits seized by the FDIC, SVB’s customers in Asia still find themselves responsible for paying back their loans to the bank’s new owner, First Citizens.

House Dem Bills.

House Financial Democrats, led by Rep. Waters, unveiled a bundle of 11 reform bills addressing the events that precipitated the banking crisis. The bills would empower federal regulators and strengthen oversight over institutions. One enhances authorities’ ability to clawback compensation, issue fines and ban execs from the industry. Another would close loopholes in Dodd-Frank allowing banks to slip under the radar if they don’t have a holding company. Others would address the production of timely systemic risk reports, expand stress-testing, expand scrutiny over acquisitions, require chief risk officers, and more.

The Fed’s Master Account Database.

On Friday, the Fed released its Master Account and Services Database, providing insight into the financial institutions that possess master accounts, which provide access to the central bank’s array of financial services. Regulated banks were, for decades, understood to be the only ones that wanted and could easily obtain such accounts. But American Banker reports the recent release reveals more digital-asset and fintech entities on the roster.

Prof. Julie A. Hill offers up some interesting findings here. Currency Reserve Bank, arranged by former Fed Board member Randy Quarles, has requested master accounts. Two banks in the database, Exchange Bank of Canada and Moneycorp Bank, don’t have U.S. operations.

Banking Stress.

Northwestern University Prof. Gregor Matvos asserts that the same sources of banking sector stress that brought down SVB continue to threaten the precarious position of regional banks. “The real problem is the confidence of uninsured depositors,” said Matvos. Interest rates still undermine the value of banks’ assets while a sizable swath of depositors remain uninsured. What’s more, new threats – the stumbling commercial real estate market, greater demand for higher interest payments from depositors – will only compound the pressure.

Bloomberg’s Lisa Abramowicz flags another undercurrent of banking sector stress. By June 15, the amount lent by the Fed’s emergency lending facility rose for a sixth straight week, staying above $100bn.

Reverse Stress Tests.

Fed Vice Chair for Supervision Barr and other regulators are considering subjecting banks to “reverse” stress tests, per Politico. Rather than formulate and simulate a potential source of stress and observe how it plays out, the reverse stress test would ask, “‘What would it take to break this institution?’,” in his words. This would, in theory, help executives figure out vulnerabilities to unforeseen threats and not just ones they see coming.

Capital Requirements.

FDIC’s Gruenberg indicated during a speech on Thursday that the Basel III Endgame requirements regulators have been working on might also target banks between $100bn and $250bn in assets, reports Politico. The proposed framework would have, says Gruenberg, provided for the unrealized losses on SVB’s securities and may have prevented further contagion.

Junk Loan Defaults.

A greater amount of junk loans defaulted between January and the end of May than in the entirety of 2021 and 2022 combined, reports FT. In that span, 18 loans worth $21bn defaulted. In May alone, three totaling $7.8bn defaulted, sending the monthly dollar amount to its highest since the pandemic era. Numerous “junk”-rated companies took on leveraged loans during rock-bottom interest, and now that rates are higher, so too are their payments.

Wall Street Jobs.

Executives on Wall Street are on course to cut over 11,000 jobs this year, scaling back earlier headcounts inflated by a pandemic-era recruitment frenzy. As M&A activity slowed with heightened inflation, big banks now seek to trim redundancies. Low rates of employee departure and limited desire for new appointments has made that task difficult, however.

Fed Boss Disclosures.

Atlanta Fed president Bostic noted more errors in his financial disclosures than previously acknowledged, many to do with trades prohibited by Fed rules. Those who oversaw his accounts made trades when they shouldn’t have. Bostic has reported the mistakes to the central bank, the Board of Governors and to the regulator’s Inspector General, currently investigating improper market activity by regional Feds.

CONSUMER

Student Loans.

Repayments resume at the end of August after the federal government’s pause which began in March 2022. In all, borrowers across the country are expected to continue paying back between $5bn to $8bn, with an average payment of $393. The hit to payees, on average single, female and lesser-earning than the average consumer, will carry through and hit retailers, says WSJ. The end of a similar government relief program born of the pandemic – a loss of $3bn after the end of enhanced food stamp benefits – impacted places like Dollar Tree and Family Dollar, which marked notable declines in quarterly sales after the change took effect.

Related: research published in the Loyola Consumer Law Review encapsulates an analysis of all of the complaint narratives submitted to the Consumer Financial Protection Bureau regarding student loans. Consumers most often had qualms in four major areas: “mismatch between ability to repay and repayment options,” the most common, followed by; customer service; inappropriate payment processing; and unauthorized loans and scams.

Southern States.

The CFPB issued two reports exploring the “financial opportunities and challenges facing Southern communities,” identifying the unique needs and shortcomings of the sector in the lower half of the nation. One report delves into consumer experiences and outcomes in rural communities. The other examines banking and credit access across all the South, urban-inclusive. Some of the Bureau’s key findings:

Southerners face higher interest rates (3.51% vs. national average 3.13%) and more difficulty accessing credit (when it comes to mortgages, 27% of applicants are denied vs. 11% nationally). BIPOC tend to be more likely to face rejection than their white counterparts, and ruralites more so than urbanites. The region is also highly unbanked. Mississippi and Louisiana have the highest rate of unbanked in the country, disproportionately affecting rural communities and communities of color.

Servicemembers and Digital Payment Apps.

In 2022, servicemembers, veterans and their families filed over 1,000 complaints about digital payment apps, such as Venmo or Zelle, with the CFPB. The agency, noting increasing usage of these apps among members of the military, identified a number of related risks: fraud and scams, identity theft and unauthorized account access, and the lack of a timely resolution to complaints lodged by servicemembers to the providers.

Misleading Deposit Insurance Claims.

The FDIC sent fintech company Money Avenue a cease and desist letter, alleging the firm “has made false and misleading statements… concerning [its] deposit insurance status.” Money Avenue claimed in a letter to the FDIC that it had an affiliation with an FDIC-insured bank, but the regulator couldn’t verify the information. In addition, the company’s website uses the FDIC logo and has made statements suggesting to consumers that it’s “FDIC-insured.”

CAPITAL MARKETS

Republicans vs. the SEC.

In their spending bill for the 2024 fiscal year, House Republicans made several proposals that would kneecap the SEC’s ability to act as a regulator, per Politico. First, they want to take away $150mn from its funding down to $2bn, less than the agency’s request for $2.44bn. And they’ve attached “riders” to its funding, prohibiting it from promulgating proposed rules related to: climate risk disclosures, mutual fund share price overhaul, reimagining how stocks are traded, safekeeping investment advisers’ client assets, as well as keep them from pushing more private companies public.

PRIVATE MARKETS

Interest Rate Exposure.

Private equity firms weren’t ready for high interest rates, reports Bloomberg, and now the companies onto which they’ve loaded debt are paying the price. Many asset managers decided not to hedge against rising rates, and “nearly three-quarters of the floating-rate debt taken out during the leveraged-buyout boom lacked hedges as recently as August” in the U.S. In one case, Aventiv Technologies, acquired by Platinum in 2017, has been working to seal a deal that would refinance two loans worth $1.3bn and repay $135mn in revolving credit. And since rates rose, so too did Aventiv’s interest expense – by more than 20%. Credit rating firm KBRA estimates of the 2,000 private, medium-sized companies they analyzed, over 300 will be unable to meet their interest payments. That’s about 15%.

Buy Now, Pay Later for Private Equity.

Private equity giant KKR will buy nearly $44bn worth of PayPal’s buy now, pay later loans in Europe, according to Reuters. Reminder: private equity has been pushing further into private credit markets.

Election Gambles.

Kalshi, a platform purporting to let people “trade on the outcome of events,” has a new idea: letting hedge funds gamble on the results of U.S. elections. The exchange has been fighting the CFTC to permit people to bet on elections to add to its current pot of current event-based wagers – like how Harvard’s affirmative action case will pan out, or whether a recession will happen. Kalshi’s new proposal would open the door to big Wall Street firms, including hedge funds, to gamify real life and bet as much as $50mn on the outcome of the next congressional elections, where individuals could only go as high as $250,000.

CRYPTO

Binance Relief.

Politico reports the SEC has secured emergency relief allowing customers to withdraw their assets during the regulator’s legal battle with the crypto exchange Binance. The exchange, which the Commission accused of commingling customer funds, will be required to repatriate any assets belonging to U.S. customers and continue facilitating withdrawals, according to the SEC’s press release on the matter.

BlackRock and Crypto.

Last week, asset management giant BlackRock applied with the SEC to offer a Bitcoin exchange-traded fund (ETF), reports FT. If the Commission approves, it would go up on the Nasdaq as the “first publicly traded spot bitcoin ETF” in the country. The PE giant already has a private spot ETF, and a public option would deepen its relationship with its existing token custodian, Coinbase (still facing an SEC lawsuit).

HOUSING

Rising Evictions.

Between the end of pandemic-era tenant protections and rents boosted by inflation, eviction filings are 50% higher than their pre-pandemic averages in many cities, according to Eviction Lab, a project by Princeton University. Rents are 30.5% higher compared to 2019, and evictions are up 78.6% from 2021 in the locations it tracks. “The disturbing rise of evictions to pre-pandemic levels is an alarming reminder of the need for us to act — at every level of government — to keep folks safely housed,” said Rep. Pressley.

Waters’ Housing Bills.

Rep. Waters unveiled a package of housing bills she hopes will eliminate homelessness and create a wave of first-time homebuyers. According to NYT, the congresswoman is after $100bn in direct assistance to purchase a home, $150bn in affordable housing investment and the expansion of the “Section 8” housing voucher program. The first of the bills would provide up to $20,000 for first-time homebuyers and up to $25,000 for disadvantaged homebuyers. Says Waters:

“Housing should be our number one priority… We cannot continue to claim we are the greatest nation on earth with people living on the street and without their basic needs being taken care of.”

CLIMATE and FINANCE

Like A Good Neighbor…

State Farm’s always there, unless you’re in California or any of the leagues of places where housing is endangered by climate catastrophes. An op-ed by AFR’s Caroline Nagy explores the positive feedback loop created by the insurance company that profits from fossil fuels while denying coverage to homeowners increasingly under siege by natural disasters invigorated by climate change. Reporting from WaPo indicates that State Farm invests “more money in oil and gas ventures” than any other insurance provider, with at least $30.9bn in fossil-fuel-related ownership in 2019. Meanwhile, they’ve pulled out of offering insurance to Californians. In places like Florida and Louisiana, insurance rates have gone up by as much as 63%. Writes Nagy:

Our current system is far from sustainable. We cannot leave this critical issue in the hands of the profit-driven insurance industry. Instead, we must prioritize and act on a dual strategy that directly addresses both the housing affordability and climate resilience crises. Our collective future depends on it.

POLITICS and MONEY

Justice Alito Out Fishin’.

Propublica dissects SCOTUS Justice Alito’s relationship with a Republican megadonating, hedge-fund billionaire that eventually brought cases before the Court. In 2008, Alito went on a luxury fishing trip with Paul Singer that never made it onto official financial disclosures. Later, Singer’s hedge fund appeared before the court “at least 10 times in cases where his role was often covered by the legal press and mainstream media.” Feeling pressure from ProPublica to answer questions regarding the connection, Alito instead lambasted the investigative nonprofit with an op-ed in WSJ.

Fore for DeSantis.

The self-described “blue collar” presidential candidate, who a pro-DeSantis PAC spokesperson says “can’t be bought,” was given a golf simulator and numerous private flights by a Florida megadonor, according to WSJ.

Financial Justice

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