Slowing the Production of Private Equity Billionaires
A University of Oxford scholar once called private equity a “billionaire factory” owing to its prowess in extracting so much wealth from the very investors – mostly pension funds – who give the industry money to manage. Now, maybe that will get a little harder.
In a pathbreaking step – arguably the most important rules for the sector since it emerged in the 1980s – the Securities and Exchange Commission today voted to curtail the abuses of private equity and hedge funds, in a 3-2 vote that finalized a set of rules mandating greater transparency from the gargantuan $20 trillion private fund sector. Private funds have long benefited from high fees—usually harvested from their investors many being public pensions, foundations, and insurance companies—and an opaque framework that lets them overstate returns. The rules, first proposed in Feb. 2022, marks an important step toward transparency.
Americans for Financial Reform, which has long pushed for greater transparency in the private funds market, noted that the rule will arm investors with crucial information to make investment decisions, force private fund advisers to compete on a fairer playing field for capital, and limit fees that reduce returns to people who have saved for retirement. Key provisions include quarterly disclosures, standardized reporting, rules on special agreements that may harm small investors, prohibitions from passing the cost of investigations onto investors, and more. SEC fact sheet here.
Says Park:
“The lack of basic, comparable information on investment terms in an industry that has grown exponentially in the last decade has enabled a massive transfer of wealth from savers and retirees to private fund executives, many of whom now have a net worth in the billions. The SEC is using the traditional, time-tested tools of transparency and disclosure to reinvigorate this part of our capital markets.
How are industry lobbyists taking the news? The Managed Funds Association hinted at litigation. The American Investment Council, representing PE firms, previously called into question the SEC’s authority to create the rules. They’re hoping that the notoriously right-wing Fifth Circuit (where they’ve created a trade association) will overturn the rules. But their argument is nonsense: “The SEC has long exempted private funds from much disclosure required in public markets, so it is only logical that it has the power to improve transparency for investors,” says Park.
FINANCIAL STABILITY: Racial Justice – Neoliberalism and Financialization – Federal Home Loan Banks – Uninsured Deposits – Financial Firms Shift South – Fintechs
CONSUMER: Harmful Data Broker Practices – Junk Fees – SCOTUS Fight – Tribal Payday Lending – CFPB Enforcement Actions – Student Loans – Consumer Stats
PRIVATE MARKETS: Prison Healthcare – PE Energy – Antitrust Activity – Handoffs to Rivals – Private Credit
CRYPTO: Stablecoins
HOUSING: Housing Unaffordability – Community Benefits Agreements – Property Tax Foreclosure
CLIMATE AND FINANCE: Insurance
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Racial Justice.
This week, Rep. Ayanna Pressley sent letters to the heads of the country’s five largest U.S. banks seeking follow-ups on their institutions’ racial equity pledges made in the wake of George Floyd’s murder in 2020. The banks – JPMorgan Chase, Bank of America, U.S. Bank, Wells Fargo, and Citi – each pledged as little as $116mn (U.S. Bank) to as much as $30bn (JPMorgan). AFR’s Natalia Renta uplifts the Congresswoman’s efforts in a blog post, putting into perspective attacks on efforts to close racial inequities, including tying it to Republicans’ past “ESG Month.” Writes Renta:
[W]e applaud Pressley’s important demand that the five largest banks — which hold outsized power over our economy — use that power “to rectify the wrongdoing and heal the very communities harmed by the historical and contemporary role that [these] institutions . . . have played and continue to play in perpetuating racial inequities.” Additionally, we hope shareholders’ ability to hold banks accountable on racial equity issues is protected against opponents’ attacks and expanded to become more meaningful.
Related: It would take centuries for Black Americans and their families to reach economic equity with their non-Black counterparts, according to a new report from the Institute for Policy Studies and National Community Reinvestment Coalition. That’s per the pace that certain metrics have improved in the 60 years since the March on Washington. For example, in 1967, Black households had 58 cents for every dollar of white family income; in 2021, they had 62 cents. If that course (an improvement of 4 cents in ~60 years) continues, it would take 513 years to achieve parity.
Neoliberalism and Financialization.
AFR’s Executive Director Lisa Donner takes a big-picture look at the “neoliberal financialization” run rampant in the economy in a piece for the Hewlett Foundation, describing how Wall Street “seizes, controls, and extracts in a highly predatory manner” and profits at the expense of everyone else. Writes Donner:
The neoliberal system of financial rules then repeatedly rewards wealth with more wealth, and punishes lack of wealth with fees, hidden charges, high-interest rates, abusive collection practices, and even criminalization. And yet somehow, conventional wisdom manages to pretend that none of the byzantine traps created by finance are relevant to deep and persistent disparities in racial wealth, economic and social opportunities, health and wellness, and more.
Federal Home Loan Banks.
An explainer from FT dives deep into the Federal Home Loan Banks (FHLB) system. It’s the “byzantine corner” of the financial sector that acts as a lender of next-to-last resort for failing banks by “keeping dying institutions artificially alive and increasing the ultimate costs of their failures.” Ahead of their failures, SVB, Signature and Silvergate received $30bn in loans from the FHLB. And during the throes of the crisis, FHLB lending jumped 28% at the end of March.
Uninsured Deposits.
A month ago, the FDIC announced banks were underreporting their uninsured deposits, issuing guidance on how to do it correctly (e.g. including intercompany and collateralized deposits). Since then, 46 banks have restated their Q4 2022 calculations, some multiple times, and 65 have done it for Q1 2023. Some institutions, like Columbia Bank and First Bank Chicago, saw their real totals double.
Financial Firms Shift South.
From Jan. 2020 to Mar. 2023, 370 investment companies left California and New York for the Sun Belt, Southern states characterized by warm climes, lax taxes and cheap real estate. Bloomberg estimates both states each lost $1trn worth of these companies’ AUM. While they scattered to several different states, Florida attracted droves from NY, and many of California’s exits went to Texas.
Fintechs.
Fintechs are having a tougher time becoming banks, reports Bloomberg, as the costs of financing and striking partnerships with banks have ballooned with higher interest rates. What’s more, Biden-appointed regulators have approved zero de novo bank charters for fintech firms. Crypto firms have found it especially difficult, as the Fed scrutinizes the digital asset space in the wake of several high-profile crypto collapses. With difficulty mounting, some firms have instead opted to purchase existing banks to assume control of their charters.
CONSUMER
Harmful Data Broker Practices.
CFPB Director Chopra delivered remarks at a White House roundtable about protecting consumers from harmful data broker practices. The agency will pursue rulemaking to prevent data brokers from misusing and abusing sensitive data after an inquiry revealed harms “from the identification of victims for financial scams to the facilitation of harassment and fraud.” One would treat identifying data – payment history, income, criminal records, etc. – as a consumer report, thereby allowing it to fall under Fair Credit Reporting Act requirements. The other centers on whether “credit header data,” key identifiers taken from credit reports sold by reporting agencies like Equifax, would likewise be considered a consumer report.
Important context: Previously, it surfaced that the National Consumer Telecom & Utilities Exchange sold “header data,” which included names, addresses and social security numbers, to Equifax. Then, Equifax sold that data for use in databases that were used by government agencies, private investigators, and law enforcement – notably including ICE.
The National Consumer Law Center and other consumer advocates lauded Chopra’s announcement that the CFPB would pursue this rulemaking authority.
Junk Fees.
The American Economic Liberties Project rolled out model legislation tackling junk fees, the extraneous charges laid atop consumer transactions that cause customers to pay more than they expect. Their so-called Junk Fee Proposal Act (JFPA) outlines: a broad rule that would require “all in” pricing across prices in all sectors, heftier statutory damages for offending companies, granting junk fee enforcement powers to the FTC and CFPB, and allowing for private “rights of action” and banning arbitration, among other provisions.
SCOTUS Fight.
With six weeks until oral arguments are heard on Oct. 3, the Supreme Court blocked 27 states and their Republican attorneys general from raising their own challenges against the CFPB in CFSA v. CFPB.
Tribal Payday Lending.
A federal judge recently ruled that the defendants in a tribal payday lending suit can’t throw out the case or send it to private arbitration. The payday lender Skytrail Servicing Group LLC and individual leaders of the Lac du Flambeau Band of the Lake Superior Chippewa tribe must “face class action allegations that they violated racketeering and usury laws by issuing loans with illegally high interest rates,” according to Law360, after plaintiffs took out loans at interest rates as high as 771%.
CFPB Enforcement Actions.
The agency levied penalties against the Freedom Mortgage Corporation and Realty Connect USA Long Island for engaging in an illegal kickback scheme. The agency says the mortgage lender offered illicit incentives to Realty Connect and other brokerages in exchange for referrals. The former will pay $1.75mn into the CFPB’s victim relief fund, while Realty Connect will pay $200,000.
The CFPB also filed suit against Heights Financing Holding Company, a high-cost installment lender, for “induc[ing] struggling customers into a fee-harvesting and loan-churning scheme.” The agency alleges the company, owned by the consumer lender CURO Group Holdings, identified borrowers who had trouble repaying existing loans and aggressively pushed them to refinance.
Student Loans.
On Tuesday, the Biden administration officially launched the Saving on a Valuable Education (SAVE) plan, an income-driven student loan repayment plan meant to extend accessibility with lower monthly payments and a faster track to forgiveness. Politico’s Morning Education newsletter reports Republicans are already gearing up to overturn it. Senate Education’s Bill Cassidy intends to unveil legislation to repeal it after August recess, while Rep. Virginia Foxx plans to move with companion legislation in the House.
Consumer Stats.
A flyby of some consumer stats over the past week:
Credit Card Debt. American credit card debt has ticked above $1trn for the first time. While there’s “little evidence of widespread financial distress,” 60% of consumers have had a balance for at least a year and nearly half never pay off their debt in full. Higher-income households are more likely to stay in debt longer.
Gen X. Gen X, the Forgotten Generation, faces a unique financial situation: paying off their own student loan debt while taking on their childrens’ and saving for retirement. Theirs was the first generation whose employers started phasing out pensions for 401(k)s.
Pandemic Cash. Whatever excess cash consumers squirreled away during the pandemic is running out.
Childcare. Childcare prices are rising at nearly double the overall inflation rate, as daycare and preschool services’ costs rise and their federal aid ends.
PRIVATE MARKETS
Prison Healthcare.
Ownership of Corizon Health, the foremost provider of prison healthcare services, has juggled between various private investment groups over the past six years, from the hedge fund BlueMountain Capital in 2017 to the holding company Flacks Group in 2020, before landing in the hands of “an opaque group of investors” in 2021. Over those years, they’ve engaged in negligent care and malpractice. In one case highlighted by an Insider investigation, a father of four detained for a six-day sentence was refused medical assistance for multiple days, suffering from possible internal bleeding, before they allowed him to go to a hospital. Transported via security van rather than an ambulance, he died a day later.
As of July 2023, Corizon faces 475 active lawsuits ranging from malpractice claims (the vast majority of these lawsuits) to a handful of employment-lawsuits, as well as $88mn in claims from medical providers. In a “controversial maneuver,” however, the company filed for bankruptcy “to wall off its assets from such claims,” also staying claims against codefendants.
PE Energy.
Executives from the private equity giant Blackstone sit on the board of directors of two public utility companies, NiSource and FirstEnergy. Public Citizen and Citizens Action Coalition argue that this violates antitrust laws. The citizen advocates urge the Federal Energy Regulatory Commission to require Blackstone to produce a full list of companies where their executives serve as board members in order to “assess whether the proposed transaction is consistent with the public interest and with federal anti-trust statutes.”
And: The Institute for Energy Economics and Financial Analysis flags that private equity-owned power plants in the PJM Interconnection, the organization that provides power to some northeastern/midwestern states like Philadelphia, Ohio, Virginia, and Maryland, “face growing financial challenges.” Private equity owns about 60% of fossil-fuel generation in the Interconnection, and lower capacity payments – payments made by energy users to the owners of that energy – for developers may mean higher rates from lenders.
Antitrust Activity.
The Department of Justice has dropped its antitrust challenge against the private equity firm Thoma Bravo’s $2.3bn acquisition of ForgeRock, an identity management software company. Politico reports that the Department will continue to monitor the companies for “potential anticompetitive conduct.”
The FTC and Department of Justice have taken aim at interlocking directorates at competing firms, whereby an executive – often from a private equity owner – sits on the boards of multiple competing companies. This week, the DoJ’s scrutiny prompted two Pinterest directors to resign from the Nextdoor board, and the FTC preempted private equity firm Quantum Energy Partners from sitting on the board of the country’s largest natural gas producer, EQT. Said FTC Chair Lina Khan: “This sector is characterized by a tight-knit set of players rife with entanglements and a history of suspicious ventures and information exchange. This dense & tangled web of coordination heightened the risk to competition.”
Seven states sent a letter calling for the FTC to block the grocery giant Kroger’s $24.6bn acquisition of Albertsons, a merger that would corner a quarter of the food retail market. AFR wrote about the proposal back in October 2022, emphasizing how the private equity mega-firm Cerberus sought to capitalize on the move, putting Albertson workers and their pensions at risk.
Handoffs to Rivals.
When the going gets tough, private equity bails out. Lately, large private equity firms – the likes of KKR and Bain Capital – have pushed some of the struggling, distressed companies under their ownership into the arms of rival firms. Take for example the healthcare company Envision: Earlier this year, it went bankrupt and KKR’s investment was “wiped out in a deal for a group of senior lenders including Blackstone to take over the company.” It coincides with the growth of private credit, quickly becoming a larger sliver of firms’ business than buyouts.
Private Credit.
A recent agreement is “being looked at as a template for rival leveraged buyout shops” in an environment marked by slow growth, high interest and trouble with debt. Lenders to the fintech company Finastra required its owner Vista Equity Partners to invest $1bn into the company in exchange for a $4.8bn loan that the latter needed to refinance old debts. Normally, buyout firms would offload debt by selling companies. But with fewer trades, firms like Vista, confronting debt loads, have to turn to private credit to act as lifelines.
CRYPTO
Stablecoins.
Earlier this month, PayPal said it would launch a dollar-backed stablecoin called PayPal USD. George Washington University Law’s Arthur Wilmarth wrote an op-ed suggesting that the token “poses a grave threat to financial stability.” He calls on Congress to require all stablecoin issuers and distributors be FDIC-insured banks:
Stablecoins are highly vulnerable to runs by investors whenever there are doubts about the adequacy of their reserves. More than 20 stablecoins have failed since 2016. In May 2022, the collapse of the TerraUSD stablecoin inflicted tens of billions of dollars of losses on investors. TerraUSD’s failure triggered a widespread crisis in crypto markets, resulting in the demise of numerous leading crypto firms such as FTX and Alameda.
And: Coinbase, the United States’ largest crypto exchange and sued earlier this year by the SEC for operating as an unregistered securities broker, has taken a stake in Circle, issuer of the USD Coin stablecoin.
HOUSING
Housing Unaffordability.
Mortgage rates have hit their highest level since 2002, with the average for a 30-year, fixed loan reaching 7.09%. Bloomberg suggests that further rate hikes might push mortgage rates even closer to 8%. Between record rates and home prices, the housing affordability index for first-time homebuyers has plummeted to its lowest ever point (recording began in the late 80’s). Wealthy borrowers seeking jumbo loans have also received fewer benefits than they had previously.
Related: A group of House Dems led by Rep. Waters has called on the Federal Housing Finance Agency “to use its full authority in providing permanent and meaningful protections for tenants” who live in multifamily units (like apartments) backed by loans from Fannie Mae and Freddie Mac. The lawmakers pushed for rent hike limits, the implementation of higher housing standards, the creation of an Office of Tenant Protections to enforce tenant protections and offer remedies, the strengthening of anti-discrimination protections, and the prohibition of evictions without good-cause.
Community Benefits Agreements.
The National Community Reinvestment Coalition suggests regulators take lessons from the Coalition’s community benefits agreements (CBAs) when it comes to overhauling the merger review process. CBAs allow underserved borrowers in these communities to access lending and investment opportunities. The NCRC advises regulators to require institutions to create an effective CBA before a merger goes through.
Property Tax Foreclosure.
The National Consumer Law Center issued a new report delving into how property tax lien foreclosures harshly impact inheritors who come to own a home without a will or without having gone through probate. People in these so-called “tangled title” positions, whereby they own the property but aren’t on the deed, are “at heightened risk of losing the family home to property tax foreclosure” and other threats. The NCLC report also offers remedies, such as extending eligibility for property tax homestead exemptions and other relief to heirs or clarifying that penalties for failure to report a property change cannot apply to these heirs who intend to make the home their primary residence, among others.
CLIMATE and FINANCE
Insurance.
WashPost examines how Florida allowed United Property and Casualty (UPC), one of the state’s top insurers, to neglect homeowners post-disaster before finally going insolvent earlier this year. Even as UPC floundered amid a worsening financial situation, regulators did not take evidence of alleged wrongdoing seriously. All the while, officials believed that the company would still be able to cover claims. Now, after its failure, the Florida Insurance Guaranty Association has to deal with 22,000 unresolved claims at an estimated cost of around $600mn. UPC is the ninth property insurer in Florida to go under since 2021, and the largest in 15 years.
And: There’s insurance, and then there’s reinsurance. Think of it like insurance for the insurers. When a natural disaster creates too much damage for an insurance company to pay on its own, a reinsurance firm can step in with additional cash. NYT examines how these reinsurers have “changed the math for insuring against natural disasters.” Most reinsurance policies are renewed on Jan. 1, and in the weeks leading up to it, reinsurers informed American and Canadian insurers that they’d be hiking their prices. With higher rates and more intense and frequent disasters, the cost borne by policyholders has risen.