The Buyback Battle
When a company makes a profit, they can reinvest that money into raising workers’ wages, improving productivity by upgrading equipment and infrastructure, or saving for a rainy day. Too often, however, they’ll use the cash to finance stock repurchases. Also called buybacks, a company will buy back its own stock to remove shares from circulation and boost the value of the remaining shares, ultimately enriching itself and its shareholders at the expense of its workers.
It’s a pretty popular tactic, especially among companies with already-vast executive-worker pay divides. In 2022, S&P 500 companies spent a record $922.7bn on buybacks. The biggest banks shelled out $85 billion on buybacks last year. And the Institute for Policy Studies found that the one hundred S&P 500 companies that paid the lowest median wages to their workers spent over $340bn on stock buybacks, while the gulf between CEO compensation and worker compensation remained wide.
Previously, the Securities and Exchange Commission tried to subject corporations to stronger repurchase disclosure requirements and bring long-overdue transparency to the practice. In October 2023, the Fifth Circuit Court of Appeals alleged violations of the Administrative Procedure Act and gave the SEC thirty days to make revisions – an impossibly tight timeline which the court refused to extend. The agency missed the deadline and, in December, the court vacated the rule entirely.
Now, Americans for Financial Reform and its allies are urging the SEC to re-propose the disclosure rule. The coalition writes:
“The SEC needs to act with urgency to repropose a rule that would provide disclosures necessary to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation…During the pandemic, companies spent $521 billion on share repurchases, even as many employees were losing their jobs and many others were being forced to work in unsafe conditions. Meanwhile, because the bulk of their compensation is equity-based, executives have an incentive to exercise share repurchases opportunistically to artificially inflate their own pay.”
The problem is getting worse. This month, Reuters reports stock buybacks are expected to increase in 2024. The total amount could rise to as much as $1 trillion on an annualized basis, according to Deutsche Bank.
BANKING AND FINANCIAL STABILITY: Capital One-Discover – Interchange – Executive Accountability – (Almost) One Year Later – A New Bank, Rejected
CONSUMER: Freedman’s Bank – Credit Cards – Earned Wage Access
CAPITAL MARKETS: Robinhood
PRIVATE MARKETS: Private Equity and Groceries – Private Equity and Healthcare – The Texas Two-Step – Private Equity and Meat – Private Public Offerings? – PE Tax Benefits – Other Private Markets News
CRYPTO: Pig Butchering – Binance – Gemini – Crypto and Taxes
HOUSING: FHLBs
CLIMATE AND FINANCE: Climate Disclosure Rule – Climate Investor Activism – ESG
POLITICS AND MONEY: Larry Summers as Pundit – Trump’s Truth Social Cash
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
Capital One-Discover.
Last week, Capital One announced it would acquire Discover. That would make the duo the largest credit card issuer in the country, at a time when card companies are harvesting interest rate margins like never before.
AFR and other financial regulation advocates point to outdated bank merger guidelines, with updates long promised by the Fed, FDIC, OCC and Treasury but never delivered. Sen. Warren led a group of senators to call on regulators to block the merger and strengthen merger policy. Rep. Maxine Waters led fifteen House Democrats to call for a revamp of merger review procedures. Wrote the representatives:
“We’ve seen the harm that unbridled market consolidation poses to consumers and entrepreneurs when the biggest financial institutions get even bigger through mergers… In allowing one of our largest banks to control a credit card network, that would enable them to influence multiple points of the marketplace by setting prices for credit card customers as well as merchants that swipe their cards.”
Aside from market competition concerns, Risk.net flags that Capital One’s credit exposure risk would rise three percentage points to a six-year high if the merger goes through.
And: A firsthand account from a former employee detailed how Capital One burdened poor customers with debt: “Many families are paying Capital One at least $800 in interest every year. And most of that interest gets paid by the families who can least afford it.” At one point, the writer worked with “Mainstreet” – an internal euphemism for subprime – customers; she and her coworkers would have to regularly extend credit limit increases to people with low credit scores that were approaching their limit.
Interchange
In the background: It was Sen. Durbin’s amendment to Dodd-Frank that helped to regulate debit card transactions fees, aka interchange. Now that he, Sen. Marshall and others are working to pass similar legislation to regulate credit cards, he’s concerned about the potential Capital One-Discover merger. He expressed being open to revisions to the bill to ensure the “act represents the reality in the marketplace.”
Related: The Points Guy, a popular internet figure who writes about squeezing the most out of credit card points, is all but a paid flak for the big banks, according to Accountable.US. Brian Kelly, as his friends call him, has “a cozy relationship with the credit and hospitality industry” that includes direct financial support. Also related: CFPB warns about conflicts of interest at comparison-shopping websites.
Executive Accountability.
Industry interest groups continue to push back on the RECOUP Act with bad faith arguments. The RECOUP Act is much needed regulation to defend consumers from banking system instability. It would hold executives of banks such as SVB, Signature Bank, and First Republic Bank, which precipitated last year’s crisis, accountable for their actions. The act would also allow the FDIC to claw back the salary of executives, as well as money from any stock sold, in the lead-up to a bank's failure.
Last year AFR expressed support for the bill in a letter to Senate leadership, further noting the benefits not just to bank customers but financial stability as a whole.
(Almost) One Year Later.
It’s been nearly a year since Silicon Valley Bank collapsed in March 2023 and sparked turmoil that rippled through numerous midsize banks. Since then, “lenders are still feeling pressure on all sides.” While deposit retention is less of a concern these days, some small and midsize banks that had to up the interest rates on their deposits have noticed that the interest rates on their loans haven’t caught up on their balance sheets. They may give more to their customers, but receive less from low-interest loans like government bonds.
A New Bank, Rejected.
James McAndrews, the New York Fed’s former head of research and current CEO of The Narrow Bank, is pushing back against the Fed for denying the startup a master account, which allows a bank access to the payment system that the central bank runs.
The difference between The Narrow Bank and other banks is the Federal Reserve is the only place they would put money, which McAndrews claims will make it extra safe since the Fed is as safe as it gets. The Fed worries that such a bank would cause financial stability concerns since a financial crisis may cause a flood of activity toward the bank and away from the rest of the system, causing a collapse.
CONSUMER
Freedman’s Bank.
In the case for reparations, there is one instance in which we know exactly who is owed money: those former slaves who had deposited money in the Freedman’s Bank. The bank was chartered by the US Congress but was marred by years of fraud and bad speculation by the white leaders who ran it. Frederick Douglass, who was persuaded to become its president, later regretted affiliation with it. It was like being “married to a corpse,” he said. However, the Freedman’s Bank kept meticulous records; they are used by genealogists to track family trees. Researchers know exactly who the depositors were and who they are related to today. Congress chartered the bank and Congress let the bank fail, the National Community Reinvestment Coalition’s Jesse Van Tol argues. And Congress has the power to rectify the issue.
Credit Cards.
The Merchant Payments Coalition finds that banks are “triple dipping” on revenue streams by increasing credit card interest rates, annual fees and swipe fees. Meanwhile, they’re fighting the Credit Card Competition Act to keep swipe fees high.
Earned Wage Access.
AFR is among 142 groups that signed a letter from the National Consumer Law Center to Rep. Bryan Steil opposing HR 7428, which would “exempt fintech cash advances from the Truth in Lending Act, to endorse a form of loan that makes workers pay to be paid, and to facilitate new evasions by payday lenders.”
The bill seeks to regulate earned wage access, a service that allows employees to access parts of their paycheck early. However, some EWA providers are third parties who charge a fee for employees to access their own money. But they aren’t exactly payday loans regulated by the Truth in Lending Act (TILA).
The bill is a trojan horse: it would actually obscure the costs and exempt fintech companies from regulations and bring about more evasion. AFR and other groups have previously called for Earned Wage Access to be regulated like payday loans, allowing consumer protection under TILA.
CAPITAL MARKETS
Robinhood
A bipartisan group of lawmakers wants the SEC to “dump its proposal to restrict the use of advanced analytics and artificial intelligence by firms such as Robinhood Markets.” The SEC plan is an afterclap of the 2021 meme-stock frenzy. The lawmakers cite (unsubstantiated) fears that the rule “would harm historically underserved, low- and moderate-income retirement savers and investors who rely on low-cost brokerage services and self-directed investment tools.”
PRIVATE MARKETS
Private Equity and Groceries.
The FTC is joined by attorneys general from nine states in a move to block the megamerger of rival grocery chains Kroger and Albertsons. The merger, which AFR warned against in 2022, is backed through Albertsons by the private equity firm Cerberus. Kroger and Albertsons claim that the merger is necessary for their survival (despite being the two largest grocery chains), while the FTC argues that the merger is anticompetitive and would lead to higher prices, lower quality products and services, and reduce options for employees plus consumers.
AFR supports the FTC’s action, noting it marks a critical step in safeguarding workers, consumers, and competition in the grocery business. “The FTC complaint highlights the anticompetitive anti-worker elements of the proposed merger, which has been a hallmark of private equity retail roll-ups for years,” said Patrick Woodall, senior fellow at AFREF.
Private Equity and Healthcare.
Private equity gutted for-profit medical company Steward Health Care and left it crushed under debt. Unable to pay its bills, a new mother died after one of its hospitals’ life-saving equipment had been repossessed by the manufacturer. While his hospitals are under threat of closure, CEO Ralph de la Torre can cruise comfortably in any of a $40mn superyacht, a $15mn sportfish boat, $62mn private jet (the same type that Taylor Swift flew to the Superbowl), or a second ~$30mn plane. Notably, the two jets are registered under a holding company specifically for plane owners who want to avoid public scrutiny. Wrote the Boston Globe’s Brian McGrory:
“You, like me, might be wondering why a for-profit health care system with particularly fragile hospitals often located in low income communities might choose to spend tens of millions of dollars to own and operate two fabulously luxurious private jets, especially when the company is headquartered in a major airline hub like Dallas that has nonstop flights to virtually any destination that any normal person would want or need to go…
The painfully obvious answer is, it absolutely doesn’t.”
Related: Colorado’s AG is taking action against U.S. Anesthesia Partners, which was in the news last year after being sued by the FTC for its anticompetitive practices in Texas. USAP is backed by the private equity firm Welsh, Carson, Anderson & Stowe, and is notorious for its “roll-up schemes,” where USAP buys all the large anesthesia practices in an area to eliminate competition, and then jacks up costs. Colorado is now forcing USAP to sever its contracts at its five most profitable hospitals in the state after the Denver District Court sided with the AGs office in a lawsuit. USAP will pay $200,000 to conclude the antitrust litigation, and Colorado will use that money to pay for consumer protection enforcement.
The Texas Two-Step.
Corizon Health split to become YesCare and Tehum Care in order to pull off a controversial Texas Two-Step. The Department of Justice wants to block the scheme.
The prison healthcare company Corizon Health, previously owned by private equity, paid millions in fines, penalties and lost revenue due to inadequate staffing and failures to improve patient care between 2015 to 2020. By July 2023, it still faced 475 active lawsuits, most of which pertained to malpractice. That’s when they tried to pull a “Texas Two-Step,” in which a company will split in two, pile all their assets in one half (YesCare) and all their liabilities in the other (Tehum), and declare bankruptcy on the latter. If successful, this would insulate their public sector contracts while forcing their victims into accepting lower settlements. But the Department of Justice argues that the bankruptcy shouldn’t stand if it pursues a “coercive” settlement against the plaintiffs.
Private Equity and Meat.
A meatpacking plant in Missouri is shutting down (at least temporarily) after concerns were raised about E.coli-contaminated water it discharged into a local river. This comes less than a year after the plant’s owners, Missouri Prime Beef Packers, was bought by STX Beef Co., a company owned by the private equity firm JDH Capital. The incident is just another example of private equity bringing havoc to the lives of people, as the plant's closure has resulted in the plant’s 335 workers being laid off.
Private Public Offerings?
Private equity firms call it a private IPO (initial public offering). In an effort to “cash out” from dormant investments, private early backers will privately sell to longer-term investors like mutual funds. Unlike an IPO, in which a company hits the public stock exchange for the first time, there’s not much public about these transactions.
WSJ reports: “Some mutual-fund managers who have been approached to do private IPOs are wary. While they might get better prices and bigger allotments of shares in a private IPO, the liquidity—or lack of it—is a big drawback. If the managers buy stakes this way, it isn’t clear when they would be able to sell them.”
PE Tax Benefits
Private equity stands to benefit from provisions in a Senate tax bill that would roll back parts of the Trump-Republican tax legislation of 2018 that helped pay for that gargantuan giveaway. This time, favors for business are being paired with the extension of the child tax credit, one of the best poverty-fighting measures the country has ever seen. “The provision dealing with business interest was a Republican priority in negotiations,” a spokesperson for Sen. Wyden said.
Other Private Markets News.
How Much Does PE Pay? Who really knows? Bloomberg’s Paul Davies explains that investors can never be sure how much their investments in private equity have made until a fund repays all capital. The standard metric (internal rate of return, or IRR) is “easily manipulated” and hard to compare with the more obvious returns of stocks or bonds.
Defense. Despite low points in 2018 and 2023, broad trends indicate that private equity and venture capital’sresence p in the U.S. and European defense sectors is growing, in line with a projected 4% growth rate for the United States’ defense budget through 2028. The industry’s investment in defense climbed to a high in 2022, with 40 transactions representing $11.4bn.
Pharma. The consumer health arm of pharma giant Sanofi, which produces OTC meds like Phytoxil cough syrup and Icy Hot pain relief gels, has attracted interest from numerous potential investors, including private equity megafirms Blackstone and KKR.
The Law. The $400bn law firm market has been largely untouched by external ownership, and might be “the only field where private equity has yet to stake a claim.” But on its hunt for new territory, Forbes’ Brandon Kochkodin suggests, that might make law the PE industry’s next target.
CRYPTO
Pig Butchering
It’s the ugly name for what in another era might have been called confidence scams. All those texts where somebody “accidentally” sends you a text meant for another and then tries to draw you into a conversation – to fatten you up – and somewhere down the line an “opportunity” to invest in crypto emerges and if you take it … well, that’s the “butchering” part. One estimate puts losses at an astonishing $75 billion.
Binance.
Last Friday, a judge approved a plea deal that would see Binance – the crypto exchange that was under investigation by the SEC for inflating trading volumes, diverting customer funds and misleading investors, and whose founder pled guilty to anti-money laundering and sanctions charges last year – pay $4.3bn in settlement and submit to compliance monitoring by an independent firm.
Gemini.
The crypto exchange Gemini will return at least $1.1bn to customers of its Earn program, who suffered fraud by an “unregulated third-party,” and pay a $37mn fine for numerous compliance failures after a settlement with the New York State Department of Financial Services.
Crypto and Taxes.
The IRS is seeking to bolster its efforts in combating tax avoidance involving cryptocurrency. The agency hired Raj Mukherjee, who was previously head of tax at a blockchain software company, as well as an executive at a crypto exchange. He will also be joined by Seth Wilks, who was previously VP of government relations at tax and accounting at a software company.
The agency hopes that by pulling experience from the private sector, it will gain better insight into how to better deal with digital assets in the lead up to a 2026 regulation that would obligate crypto exchanges to report digital asset sales. There is an estimated $28 billion of hidden wealth in opaque crypto markets.
HOUSING
FHLBs.
The Federal Home Loan Banks, a network of banks intended to lend to other banks to help them fulfill affordable housing goals, had their most profitable year on record, pulling in $6.7bn. But, as the Consumer Federation of America explains, much of that cash didn’t go toward affordable housing. Instead, they’re paying most of it out as dividends to their members.
CLIMATE and FINANCE
Climate Disclosure Rule.
The SEC plans to unveil its climate disclosure rule in early March, likely more watered down than originally intended. AFR and allies long pushed for full transparency in emissions disclosures, urging the inclusion of Scope 3 (greenhouse gas emissions through a company’s full value chain) in the proposed rules. The disclosure requirements, Scope 3 in particular, faced significant pushback from company lobbies, Republicans and moderate Democrats.
Climate Investor Activism.
Ellen Dorsey, founder of activist investor coalition DivestInvest, and Public Citizen’s Clara Vondrich defend the power of climate-focused investor activism: “The fossil fuel divestment movement channeled moral outrage into effective action, exposed the corporate capture of governments the world over, demanded politicians act consistent with science and birthed a new generation of climate leaders.”
ESG.
Another episode in the ongoing Republican attack on ESG investing: West Virginia has warned six banks that the state may refuse to provide them contracts if the financial institutions continue to limit doing business with coal, oil and gas companies. As always, you can brush up on why ESG benefits investors, including public pension funds for retirees and other savers, here.
Climate Change and College Students.
Climate change hits many communities hard, but can hit college students particularly hard. Natural disasters can affect students' career paths, and consequently their financial prospects. Severe weather can disrupt lives, leading to poor grade performance, so a student has to stay in college longer to graduate. This means more loans, more debt, more trouble paying the debt, followed by struggles to get into jobs or graduate programs. And voila: a financial hole that can last for some time – all because of the changing climate.
POLITICS and MONEY
Larry Summers as Pundit
Jeff Hauser, Harvard ‘95 and head of the Revolving Door Project, lands a bomb right on Larry Summer’s quad with a piece in The Crimson highlighting the former Treasury Secretary’s ties to Wall Street. Summers, who is invariably also identified as a Harvard prof, has lots of ties to finance but still gets treated like the Oracle at Delphi – independent and full of wisdom. Don’t buy it.
Trump’s Truth Social Cash.
Donald Trump's SPAC-IPO of Truth Social could net him a big paper gain, but he has to get a waiver from other shareholders to cash out because of the typical holding times after a company goes public. You can't just have shares, take a company public, and then bail – at least not if you follow the law. Trump’s on the hook for $454mn civil fraud penalties, so receiving the waiver could amount to the new Truth Social shareholders paying his fines. But there’s now also a lawsuit accusing Trump et al. of some pre-IPO shenanigans. Shocker!