Reasons Multiply to Reject Capital One-Discover Takeover
Reasons Multiply to Reject Capital One-Discover Takeover
Ever since financial services provider Capital One announced plans to take over rival company Discover, reasons to oppose the creation of another new megabank have only grown.
As Americans for Financial Reform pointed out in a new fact sheet, federal antitrust and banking laws forbid bank mergers that substantially lessen competition, fail to meet the convenience and needs of communities, have a poor track record of regulatory compliance, or could pose a risk to financial stability. A combined Capital One and Discover meets none of these statutory requirements, and would enrich bank executives and shareholders at the detriment of merchants, consumers and communities across the country.
The proposed takeover just doesn’t pass the laugh test, and a new blog by Patrick Woodall, AFR’s managing director for policy, gives us a David Letterman-esque top ten reasons why. A non-exhaustive handful here:
The merger would create a credit card lending monopoly for people with non-prime credit scores, who are disproportionately Black and Latine families.
The merger would create a new megabank that could pose risks to financial stability, heavily weighted in credit card loans that could suffer billions in losses under stress.
The merger would ignore Capital One’s record of deceptive marketing and aggressive debt collection, the company having paid $225 million to settle deceptive credit card marketing cases in the past.
The merger would expose merchants to debit interchange price gouging, since Capital One plans to shove its debit business onto Discover’s network and impose higher prices on merchants who want to accept their cards.
The merger is just too darn big! The merger would create a much larger and more complex bank whose financial distress or failure could spread across the financial system and compromise the viability of other banks. The Capital One-Discover takeover would create the sixth-largest bank by assets ($624 billion domestic assets) and the fifth-largest by deposits ($470 billion).
Regulators convened today in a hearing on this risky transaction, during which they heard some real facts.
“This merger is 13 times larger than what its own regulator says is ‘reasonable,’ which is why we urge the authorities to break with the history of rubber stamping harmful mergers in the banking industry and block this illegal deal,” noted Ashley Nowicki, policy analyst at the American Economic Liberties Project. And Bart Naylor, financial policy advocate with Public Citizen noted the new bank would be larger than the three banks that failed during the 2024 banking crisis: “Regulators should not compound our too-big-to-fail problem by approving this merger.”
Merchants have criticized the merger as well. “Nothing in the proposed merger changes the cartel pricing of swipe fees that are determined by Visa and Mastercard,” said Doug Kantor, general counsel of the National Association of Convenience Stores. “The lack of competitive market forces on credit cards cries out for legislative action. This merger isn’t the answer.
Related: The Capital Forum reveals that CapOne potentially violated consumer protection rules by voiding rewards on popular credit cards. Over the past several years, hundreds of customers have raised concerns about the rewards program, with some claiming the company closed their accounts and canceled their rewards without warning.
In a bid to get the green light for the merger, CapOne has pledged $265bn over five years to lending, philanthropy and investment, promising to maintain some branches in and support affordable housing low-and-moderate income communities. But, as the National Community Reinvestment Coalition has pointed out, the plan has all sorts of holes and Capital One bailed on the plan it announced when buying ING Direct in 2012. As NCRC President Jesse Van Tol put it:
By the time Capital One broke its promises, it was too late for the agencies to do anything about it. They’d already acquired ING Direct. This time can be different: The American public’s banking regulators can show they won’t be fooled a second time by a bank that’s built an empire around trapping lower-income families in revolving debts they’re unlikely to ever repay.
BANKING AND FINANCIAL STABILITY: Capital Rules – Names for Nominations – Undo Funding Cuts
CONSUMER: Chevron Fallout – Credit Card Late Fees – Payday Lending and Payrolls – Chase Checking Threat – Anti-Redlining – Prepaid Cards – All Eyes on Nonbanks
CAPITAL MARKETS: Standing with Nike Workers – CHIPS – Retirement Security Rule
PRIVATE MARKETS: Private Equity and Asbestos Poisoning – PE’s Financial Chicanery – PE and Healthcare – Private Credit – Betting on Banks – Bubble Burst – PE and Taxes – Other Private Markets News
CRYPTO: Crypto, An Overlooked Threat – Crypto Pressure Failure
HOUSING: The Rent’s Too High – Avoiding Foreclosure – Title Acceptance Pilot – Federal Home Loan Banks – Overvalued Loans – Automated Appraisals – Single Family Rentals
POLITICS AND MONEY: Wealth Inequality Kills Democracy – Big Banks and Trump – Crypto Cash
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
Capital Rules.
Fed Chair Powell is poised to water down the Basel III Endgame, the system-stabilizing rule that would have increased levels of regulatory capital necessary to bolster resiliancy for megabanks to reduce the risk of future financial crises. The Fed is reportedly considering a tweak to the calculation that would save the megabanks, which rake in many billions of dollars in income every year, billions more across the board. Regulators are “split on next steps” as Powell seeks broad support from outside interests (read: “bending to banks’ will,” as UMich’s Jeremy Kress puts it).
Names for Nominations.
AFR and allies sent letters supporting three nominees for banking and securities regulators.
AFR and 18 allies support Biden’s nomination of current CFTC Commissioner Christy Goldsmith Romero for the chairmanship of the FDIC, after Gruenberg’s resignation earlier this year. The coalition cites her expertise and commitment to the public interest and her experience cleaning up after the 2008 financial crisis at the Special Inspector General for the Troubled Asset Relief Program.
Plus: AFR and allies also back the nomination of Kristin N. Johnson for Assistant Secretary for Financial Institutions at the Treasury, highlighting her work to promote market stability and protect participants and investors from fraudulent practices.
And: AFR and allies support another term for SEC Commissioner Caroline A. Crenshaw, who was unanimously confirmed by the Senate in 2020.
Undo Funding Cuts.
AFR joined a letter urging House Appropriations to undo irresponsible funding cuts and reject harmful policy riders in the FY25 Commerce, Justice, Science and Related Agencies bill that would drastically impede the ability of the DOJ’s antitrust division to do its job.
CONSUMER
Chevron Fallout.
Fintech lender MoneyLion argued before a federal judge that a CFPB case against it should be thrown out, citing two recent SCOTUS rulings, including the reversal of the longstanding Chevron deference doctrine. In 2022, the CFPB sued MoneyLion and its subsidiaries for alleged violations of the Military Lending Act by using fee structures that exceeded MLA rate caps and using illegal forced arbitration provisions, among other charges.
Credit Card Late Fees.
The Fifth Circuit has once again ruled that the industry case against the CFPB’s credit card late fee case must stay in Texas, despite the Texas District Court Judge Pittman’s two attempts to have the case transferred to D.C. The CFPB had previously cited a SCOTUS opinion from Justice Clarence Thomas to support moving the credit card late fee suit back to D.C., after having moved in and out of a Texas jurisdiction several times this year. In June, Thomas issued a concurrence in Food and Drug Administration v. Alliance for Hippocratic Medicine that expressed concern about how industry groups enjoy lenience to bring cases in courts where they might not have standing – not unlike what the plaintiffs in the CFPB case have done in Texas.
Payday Lending and Payrolls.
The CFPB proposed an interpretive rule to remind lenders that so-called “earned wage advance” products, which usually charge workers a fee to access their paychecks early, are subject to the Truth in Lending Act. The average worker using employer-sponsored versions of these products takes out 27 loans per year at an APR over 100% – making them predatory payday loans. A related report found that 90% of workers in 2021 and 2022 paid at least one earned-wage fee. AFR celebrates the much-needed rule. Said AFR’s Christine Zinner:
These products are nothing more than workplace payday loans, with consumers more easily preyed upon since the money is only a tap away on a cell phone. Workers of color and lower-income workers are particularly susceptible to predatory lending practices as they may be unable to access traditional banking services and products and are also less likely to be paid a living wage.
Chase Checking Threat.
Chase Bank has effectively threatened to start charging for checking accounts if regulators implement a consumer-friendly rule that would cap overdraft fees at up to $14. Said the National Consumer Law Center’s Lauren Saunders: “Chase is more reliant on overdraft fees than other banks and so they’re looking to squeeze consumers in another way.”
Anti-Redlining.
The Seventh Circuit court of appeals has ruled in favor of the CFPB in its enforcement action against Chicago-based lender Townstone Financial for racist business practices. The suit was brought after CEO Barry Sturner made remarks that discouraged prospective Black applicants from applying for loans. The court ruled the Equal Credit Opportunity Act applied to prospective applications in addition to those already applying.
Prepaid Cards.
The use of prepaid cards – like those sparkly Visa gift cards – has picked up pace this year, with transactions expected to pass $1trn across the world for the first time. The stats include an increase in the use of payroll cards, which employers use to pay employees that may not have bank accounts, such as migrant workers.
All Eyes on Banks and Nonbanks.
The CFPB is looking at restoring an old Federal Reserve rule, Regulation AA, which restricted certain consumer credit practices at banks. The regulation banned certain types of contract clauses that give banks and creditors expanded powers to collect debts. A new rule may be proposed in September, and may include other previous provisions such as prohibiting banks from using contract clauses that waive a borrower's legal protections against property seizure, giving them free rein to take wages directly from a borrower's employer, or letting them lay claim to a borrower's "household goods" to repay unrelated debt.
Also: The CFPB finalized a new rule that requires some nonbank financial firms to register with the agency upon being found in violation of consumer protection laws, and designate a senior executive to testify annually to compliance measures.
CAPITAL MARKETS
Standing with Nike Workers.
AFR supported Global Labor Justice and other groups outside the New York Stock Exchange on July 16 to bring attention to women working for low pay in Nike’s supply chain in South and Southeast Asia. Natalia Renta says in a recent blog: “We must rein in this practice that lets Nike CEO John Donahoe and other executives get richer while the women in South and Southeast Asia who actually make the company’s highly-profitable products toil for low wages that don’t let them live a dignified life and thrive.”
CHIPS.
A new report from the Institute for Policy Studies and Americans for Financial Reform Education Fund provides detailed data on how corporations poised to benefit from the CHIPS Act subsidies meant to bolster semiconductor manufacturing in the U.S. are spending significant sums on stock buybacks that boost executive pay rather than investing that money to increase worker pay, make safety improvements, or make other long-term investments. Said AFREF’s Natalia Renta: "Commerce Secretary Raimondo must finalize CHIPS contracts with strong stock buyback restrictions to make sure public money serves the public good, as intended, not narrow, private interests.”
In a recent letter to Commerce Secretary Raimondo, Senator Elizabeth Warren, Congressional Progressive Caucus Chair Rep. Pramila Jayapal, Rep. Casten, and Rep. Foster note that the federal agency has the “statutory authority to fully ban CHIPS grant recipients from engaging in stock buybacks as a condition of award.”
Retirement Security Rule.
The House Committee on Education and the Workforce voted 23-18 to reverse a Department of Labor rule that would direct all investment professionals to provide advice that is in retirement investors’ best interest and protect investors from conflicts of interest. A floor vote to overturn the DOL rule has not been scheduled. AFREF supports the DOL rule.
PRIVATE MARKETS
Private Equity and Asbestos Poisoning.
Private equity firms that own companies with decades-long records of asbestos poisoning have engineered a way to dodge responsibility and profit off peoples’ suffering. When an industrial manufacturer wants to get rid of its financial asbestos liability, it can create a subsidiary company to offload their asbestos-related assets. Then, a private equity company scoops up that company and “use[s] threadbare oversight and cutthroat legal maneuvers to delay and deny these victims’ claims.”
PE’s Financial Chicanery.
The companies owned by private equity that have boatloads of debt and whose interest expenses are variable because they are linked to the same rates set by the Federal Reserve. Facing much more difficult conditions, the private equity funds themselves have had to increasingly resort to much more creative financial engineering. One way has been for the private equity fund taking out net-asset value (NAV) loans, or having their companies issue “payment in kind” (PIK) arrangements that let those companies defer receiving cash interest, instead being paid with new debt. Investors who have made commitments to PE want the firms to actually make their companies better, rather than use “financial leverage,” as one Canadian pension chief says. Still, there’s evidence that firms have scaled back the use of NAV loans. The use of NAVs to pay dividends fell about 90% during the second half of last year, following investor complaints.
PE and Healthcare.
New Mexico AG Raúl Torrez has launched a probe of patient care at Memorial Medical Center, a medical facility owned by Apollo-backed Lifepoint Health, over allegations that the center “violated state laws by turning away indigent and low-income patients seeking care.”
Private Credit.
Many private credit managers are refusing to put their own capital into their funds, meaning they have no personal risk should it fail. As private credit’s role in lending grows, concern over the risk of sudden collapse grows, as with the tech company Pluralsight, which received such loans based on the pace it was growing rather than its real value, and then defaulted.
Betting on Banks.
When a bank is teetering, private equity often pushes capital into the ailing institution to buy up shares at steeply discounted prices. Sometimes, the new capital can somewhat help a rebound. But firms are just as liable to lose big if they make a bad bet and the bank goes bust anyway.
Bubble Burst.
An opinion piece from Allison Schrager, senior fellow at the conservative Manhattan Institute think tank, warns about an impending private equity bubble burst. While she states the decline could be gradual, a sudden bubble burst is also very possible, as more and more investments build up in an industry that has pressure to hand out returns on demand despite a slowdown in dealmaking.
PE and Taxes.
Private equity lobbyists are gearing up to “preserve the industry’s most valuable tax benefits” as Congress prepares to rewrite taxes next year. Their priorities, WSJ reports: keeping the carried-interest tax break, and retaining a provision that lets them deduct interest payments.
Other Private Markets News.
Colleges. Weak returns from their private equity investments have threatened universities’ liquidity, after years of pushing endowment cash into PE investments. Endowments may need to lean on their public stocks and bonds to make up the difference, or start selling PE positions at a discount.
CRYPTO
Crypto, An Overlooked Threat.
An op-ed by AFR’s Lisa Donner and End Citizens United’s Tiffany Muller warns: Cryptocurrency is One of The Most Overlooked Threats Against our Democracy, as crypto cash continues to flood this electoral cycle and buy influence on the Hill. The billionaires behind the industry’s “rampant money laundering, vanishing investor money, and weaponized dark money” erodes the foundation of democracy, all while the Silicon Valley and Wall Street interests are working to shield their own companies from having to protect consumers, investors and financial stability. They write:
“If they win, we’ll lose. We’ll see lax rules for crypto and more crypto scams, more collapsing crypto firms, and more economic instability––all of which will harm communities, consumers, and investors…Taking a stand against the undue influence of crypto special interests is a crucial part of safeguarding the integrity of our elections and securing a government that truly serves the interests of the people, not those who write the biggest checks.”
Crypto Pressure Failure.
The crypto industry tried to pressure lawmakers to override Biden’s veto on a House resolution which would have overturned the SEC’s SAB 121 – non-binding guidance that recommended specific protections to address the unique risks of crypto assets. The effort failed, in a victory for retail investors and the public. Said AFR’s Mark Hays:
“The crypto industry’s gusher of campaign cash and nonstop lobbying did not succeed in overcoming the President’s veto, or increased the number of votes for this wrong-headed proposal. Yesterday’s failed vote is good news that protects investors, communities, and financial institutions from the volatility and fraud in crypto.”
Related: House Financial Ranking Member Waters opposed the Republican-led resolution to overturn Biden’s veto and preserve SAB 121.
HOUSING
The Rent’s Too High.
No beating around the bush: The rent is too damn high. And President Biden has made a substantive move to tamp down on corporate landlord profiteering in the housing sector. That’s the main sentiment that underpins a new blog from Americans for Financial Reform’s Caroline Nagy, in which they reflect on a recent announcement that the Biden administration supports caps on rent hikes. The proposed measure, which needs Congressional approval, would axe a tax benefit for landlords who raise rents more than 5% in a year, so long as they own more than 50 units. The plan would apply to about half of all rental properties.
Nagy applauds this step in the right direction, citing that the six largest publicly-traded apartment companies saw their combined net incomes increase by nearly $300 million – kudos to a report from Accountable.US – in the first quarter of 2024. Meanwhile, rates of homelessness and housing unaffordability have risen to untenable levels, and half of all tenants spend over 30% of their income on rent. They write:
“There is more to be done to address the problem of rent affordability in the United States. The nation must dramatically increase affordable housing construction and require suburbs to contribute their fair share of new housing construction through the release of a strong Affirmatively Furthering Fair Housing rule. The federal government must expand rental assistance to every person who qualifies for it.”
Related: Separately, before the announcement, the Federal Housing Finance Agency announced what they call “tenant protections” on multifamily properties financed by government-sponsored loans from Fannie Mae and Freddie Mac. Landlords have to agree to provide a 30-day written notice of rent increase, a 30-day written notice of lease expiration, and a 5-day grace period on rent payments if they want to avoid penalties.This action strikes corporate landlords where it hurts: financing. But if the FHFA really wants to protect renters from unfair rent hikes, they need to limit their multifamily financing to landlords who don’t price gouge their tenants, and this is something the Biden administration can do today.
Avoiding Foreclosure.
The CFPB is proposing a new rule to make it easier for homeowners facing foreclosure to get help. The rule would require mortgage services to focus on avoiding foreclosure when a homeowner asks for help, seeking to reduce the amount of paperwork and to improve communication, such as through language access. The proposal also seeks to limit fees and reduce delays. AFR and allies celebrate the language access requirement. Said AFR’s Christine Chen Zinner:
“This proposal represents a significant step toward a fairer marketplace for borrowers with limited English proficiency. Mortgage servicers have a duty to serve LEP customers and help them avoid foreclosure, ensuring critical information is delivered where possible in the homeowner’s language and with access to oral interpretation services as needed.”
Title Acceptance Pilot.
AFR and other advocacy groups support Fannie Mae and Freddie Mac’s intention to explore pilot programs aimed at reducing closing costs for homeowners – specifically, a “title acceptance” pilot program that would waive the requirement of a lender title policy in certain refinances.
Federal Home Loan Banks.
Sharon Cornelissen, chair of the Coalition for Federal Home Loan Bank Reform, calls on the Federal Home Loan Bank system, a government-sponsored enterprise that provides subsidized loans to its members with the intent to boost housing affordability, to actually invest more in housing. Cornelissen cites a study that found that 42% of FHLB members hadn’t originated a single mortgage over the previous five years.
Overvalued Loans.
We are now seeing the potential for significant defaults in the multifamily lending industry, as detailed in a recent NY Times piece. Tenants have long complained about the detrimental impact of overvalued multifamily loans on their quality of life, as corporate landlords load their building with debt and then seek to repay their loans by raising rents, skimping on maintenance, and evicting tenants. Many landlords are also now struggling to fill units and generate income, putting themselves underwater, yet they are locked into high-interest, overvalued loans that will not allow them to charge the lower rents we desperately need.
Automated Appraisals.
Regulators issued a final rule designed to ensure that automated valuation models used by mortgage originators and secondary market issuers provide accurate estimates on home values that comply with nondiscrimination laws and work without manipulation or conflicts of interest.
Single Family Rentals.
A study by the Philadelphia Fed suggests that the influx of single-family rental investors dramatically drives up rents by an average of 60% in neighborhoods, especially in neighborhoods with higher proportions of Black residents, but that it doesn’t result in gentrification. As investors moved in, the share of white and college-educated residents tended to dip.
POLITICS and MONEY
Wealth Inequality Kills Democracy.
A research report has found that economic inequality increases the risk of democratic backsliding, and contrasts America wealth inequality to similar countries. The report, summarized in Project Syndicate, notes the impact on the current political environment and upcoming election, and the often right-wing, populist policies that gain support (such as anti-immigration) when inequality exists.
Big Banks and Trump.
Despite his new running mate J.D. Vance railing against the “Wall Street barons” that wrecked the economy, Rolling Stone highlights that Trump’s campaign is being underwritten by the same financial executives who profited greatly off of the 2008 housing crisis, who the former president is being lobbied to install, were he to win.
Crypto Cash.
Multicoin Capital, a crypto-centric investment firm, has teed up $1mn to support four crypto-friendly Republican candidates, joining a growing list of crypto-rich contributors trying to influence the election.