The Fight for Crypto Accountability Isn’t Over
Last week, Sam Bankman-Fried – the now-disgraced former poster child of the crypto boom – was sentenced to 25 years in prison for defrauding customers and investors of his defunct crypto exchange, FTX. The decision comes a month after his attorneys insisted his scheme, which cost customers and investors at least $8 billion, was supposedly harmless.
Once the second-largest crypto exchange in the world, FTX’s momentous collapse in November 2022 sent shocks through the crypto sector, destabilizing a risky, shaky industry already suffering from multiple firm failures earlier in the year. The general shape of the ploy: Bankman-Fried had been siphoning funds from FTX customers and commingling them with assets being traded by Alameda Research, a hedge fund run by his ex-girlfriend Caroline Ellison, using some to fill Alameda’s loan losses. When other firms collapsed due to failure and fraud, overall crypto prices fell, and FTX suffered serious shortfalls, exposing FTX’s schemes and ultimately leading Bankman-Fried to where he is today.
But the broader fight for crypto accountability is not over. Far from it, writes Americans for Financial Reform’s Mark Hays, since tens of thousands of customers from other platforms – like Terra, Voyager, Celsius, Gemini and others – are “still languishing in bankruptcy proceedings, with additional billions of dollars of investments out of reach.” Numerous crypto CEOs face civil or criminal charges, and several federal lawsuits against crypto chiefs and their exchanges are working their way through the system.
Says Hays:
“The systemic problems in the crypto industry that contributed to the crash also haven’t gone away. Hacks, thefts, rug pulls, and other predatory schemes are a near-daily occurrence in the industry. Just [last] week, crypto platform KuCoin and its founders were charged with violations of anti-money laundering laws. Major firms such as Coinbase and others are still facing charges that they are operating what amount to vertically-integrated, unregistered securities exchanges – a practice that leaves investors exposed to harms and raises a host of conflicts of interests which likely put more consumers at greater risk.
All in all, there is still a long way to go to ensure the crypto industry’s most infamous figures and firms are held to some measure of accountability, and more that regulators can do and are doing to deal with the systemic risks and harms posed by an industry that struggles to meet even basic investor and consumer protection standards.”
BANKING AND FINANCIAL STABILITY: Capital Requirements – New York Community Bancorp – Bank Failure Sentiment
CONSUMER: Credit Card Late Fees – Swipe Fees – Digital Wallets – Overcharging the Troops – Colorado Crackdown – CFPB, FTC, UDAAP – Money Transfers
CAPITAL MARKETS: Fiduciary Rule
PRIVATE MARKETS: Steward Health Care – Private Equity and Health Care – Private equity and Fossil Fuels – Pumping in Private Markets – Blackstone and Flu Shots – A Swiss Bank and Apollo – Other Private Markets News
CRYPTO: Coinbase – Crypto’s Disguise – KuCoin
HOUSING: Racial Bias in Home Appraisals
CLIMATE AND FINANCE: The Bankers’ New Climate Metric – What Banks Want – Ready for the Future?
POLITICS AND MONEY: Companies and Election Deniers
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
Capital Requirements.
In an op-ed for FT, former investment banker William Cohan pushes back against bank lobby arguments: “The more equity capital a bank has, the harder it becomes to generate a high [return-on-equity], as simple math dictates. So that could mean lower bonuses for executives. No wonder they are fighting it tooth and nail and are enlisting allies in Congress to try to thwart the regulators…The truth is that the more capital the banks have, the safer they are.”
And: Bloomberg’s Clive Crook wants to refocus the conversation on leverage, not risk-adjusted assets, pointing to long-standing advice from Stadford’s Anat Admati and the Planck Institute’s Martin Hellwig. The increase in capital requirements, Crook writes, is not large enough. Regulators are paying attention to risk-weighted assets (some assets are ID’d as riskier than others and carry different equity requirements), rather than straight equity – specifically, the Tier 1 leverage ratio (that’s equity-to-assets). The incoming rules, he says, aren’t strong enough, even as Fed Chair Powell signals possibly scaling them back even further. Says Crook:
“Banks take risks, so they need to fund themselves in ways that can absorb losses. One form of funding, bank deposits, can’t absorb losses because depositors expect to be paid back in full on demand. But banks make no such promise to their shareholders. Therefore, to be safe – and to protect taxpayers from the recurring need to bail out failures – banks should use more equity.”
New York Community Bancorp.
NYCB, the regional lender buffeted by commercial real estate-related turbulence and now supported by a Mnuchin-led infusion of $1bn, had ties to Meridian Capital Group, a real estate brokerage blacklisted by Fannie Mae and Freddie Mac. Meridian founder Ralph Herzka would source real estate loans for NYCB, and the two companies capitalized on the New York property boom while interest rates were low. Fannie and Freddie recently blacklisted Meridian in response to allegations about its brokers using falsified figures to secure larger mortgages for their clients, though it’s unclear whether any of NYCB’s troubled loans came from the brokerage.
Separately: There’s a class action lawsuit brewing against the bank from investors who suffered losses from acquiring NYCB securities between March 2023 and February 2024. The plaintiffs claim that the bank “made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, financial condition, and the impact of the Flagstar and Signature Bank acquisitions.”
Bank Failure Sentiment.
One year on from the banking crisis, nearly 80% of corporate treasurers are worried about counterparty risk management, counterparty risk being the likelihood that the other party in a transaction doesn’t hold up their end of the deal and might default. About 60% say they’ve changed their risk profiles in the past year, according to a client survey from Institutional Cash Distributors (ICD).
CONSUMER
Credit Card Late Fees.
The bank lobby’s suit against the CFPB over its $8 credit card late fee cap drew concern from Judge Pittman of the Northern District of Texas over forum-shopping. Banker groups sought an emergency injunction to stop the rule from the Fifth Circuit Court of Appeals, a legal venue notorious for siding with industry. In a blow to the bank lobby’s case, however, Pittman questioned whether the case even belonged in the jurisdiction. Instead, he sent it to DC. But, yesterday, the Fifth Circuit granted a stay of the decision to move it.
Swipe Fees.
Amid work on the Durbin-Marshall credit card bill to cap swipe fees, credit card giants Visa and Mastercard agreed to limit fees last week, in an antitrust settlement that Reuters calls “one of the largest in U.S. history.” Merchants say the deal will save them nearly $30bn in five years, with the potential for the savings to be passed onto consumers.
Digital Wallets.
The DoJ has brought an antitrust case against Apple for its use of Apple Pay services and its digital wallet. The case alleges that Apple is restricting the use of third-party digital wallets and tap-to-pay functions on iPhones, making it harder for a user to switch from Apple products to other products. The DoJ is receiving assistance from the CFPB. Banks back the case, as it may ensure new players in the field are equally regulated. AFR’s Mark Hays and Amanda Jackson noted that it is likely to be a net win for consumers if Apple is compelled to allow other digital wallets.
Overcharging the Troops.
A new lawsuit alleges the megabank Wells Fargo overcharged active duty servicemembers for credit card interest rates and fees, in violation of the 6% cap set by the Servicemembers Civil Relief Act, and possibly the Credit Card Accountability Responsibility and Disclosure Act. Wells Fargo has been penalized for abusive practices against servicemembers before when it was made to pay $24mn in refunds and penalties for illegally repossessing servicemembers’ cars. AFR-EF has a resource to catch up with that and more of Well’s misdeeds here.
Colorado Crackdown.
A Colorado law that seeks to crack down on high-cost consumer lending is facing a lawsuit from industry interest groups. The law would cap interest rates on state-chartered banks based outside of Colorado, allowing Colorado to regulate outside banks without breaking national laws that prevent a state from regulating national banks. Consumer advocates state that this is necessary because lenders will often move outside state borders to avoid laws such as the one Colorado is proposing, which would take effect this summer. The bank industry opposes the law, stating Colorado breaks national regulations, but also out of fear that other states will pass similar laws should it take effect.
CFPB, FTC, UDAAP.
A paper from Jeff Sovern of the University of Maryland Law School argues against a recent ruling from the Fifth Circuit in Texas regarding Unfair, Deceptive, or Abusive Acts or Practices (UDAAP). He states that while multiple laws prohibit discrimination in several areas affecting consumers, many transactions can fall through the gaps. The CFPB and Federal Trade Commission have tried to bridge the gaps by proposing rules under UDAAP, but the Chamber of Commerce sued to prevent this. An appeal from the CFPB and FTC is stayed.
Sovern argues that the rules should stay and that the regulators were correct in treating discrimination as UDAAP because… discrimination is indeed unfair, and the industry argument, and ruling in favor, is based upon historically mistaken definitions of “fair” from before the 1960s.
Money Transfers.
The CFPB cautioned remittance transfer companies – like Western Union or MoneyGram – against making deceptive claims about the speed of transfers in their advertising. Specifically, the agency has observed false marketing about “free” services when companies will actually tack on junk fees, promotional conditions getting buried in fine print, and advertising overstating how quickly a money transfer will go through.
CAPITAL MARKETS
Fiduciary Rule.
The Department of Labor is nearing the release of a new rule that would require professionals dealing with investors to act as fiduciaries, which would strengthen the standards they are held to. A previous attempt by the Obama administration was struck down by the Fifth Circuit and the Trump administration chose not to defend it in court.
PRIVATE MARKETS
Steward Health Care.
Members of the Massachusetts legislature heard testimony about Steward, alerting them to the need for more guardrails, oversight, increased penalties, and public databases that could help rein in unstable for-profit healthcare companies.
Steward confirmed last week they would be closing a Massachusetts hospital in April. Steward blamed several factors, including the hospital “underperforming” and the Governor’s unwillingness to bail them out. The MA Department of Public Health found that the hospital was “essential” to the area, and required Steward to submit a plan on how they would keep the hospital running and deal with patients until the closure. Steward proposed last week to sell its network of doctors to Optum, a division of the for-profit health insurerUnitedHealth Group. The Massachusetts Health Policy Commission will review the proposal to analyze its effects on healthcare costs and access. Optum controls 10 percent of the physician market in the U.S. and is currently subject to a DOJ antitrust review.
Also: Steward’s problems had gone international, with the Boston Globe reporting last week on how the company caused a nightmare in Malta. Steward received 400 million euros from the government to provide care and upgrade the island's medical institutions, but the same mismanagement that plagues many of the company’s hospitals in the U.S. applied in Malta.
Private Equity and Health Care.
Commentary by Ed Dudensing, a former Sacramento County deputy DA, calls on the state to take private equity’s role in senior care more seriously. Earlier this year, the U.S. Senate Special Committee on Aging announced an investigation into “walk away deaths,” when elderly people walk away from their care facility or are left unattended. Many of these facilities are corporate-owned and backed by PE. Dudensing notes that these deaths are often overlooked despite the same causes and impacts associated with higher-profile cases like Steward. Assisted living communities have become a large part of real estate portfolios at firms such as KKR and Bain.
Private Equity and Fossil Fuels.
Banks are stepping back from fossil fuel financing, but private credit managers are taking their place. Private credit transactions in oil and gas climbed to $9bn in the 24 months through 2023, up from $450mn in the prior two years. Some banks are exploring ways to hang onto high-carbon assets, using dubious financial engineering tricks such as “emissions-weighted risk transfers” that offload emissions from loans to less-regulated third parties.
Pumping in Private Markets.
Earlier this month, FINRA proposed a rule expansion that would allow private market brokers to target more audiences with advertising promoting projected returns. If the rule is approved, speculative information could potentially be communicated to so-called “Knowledgeable Employees,” which include execs, trustees, general partners, advisory board members, and similarly situated investors.
Blackstone and Flu Shots.
Blackstone offered the pharma company Moderna $750mn in financing to help develop flu vaccines. In return, Moderna will kick up commercial milestone payments and royalties on the flu shot, as well as a royalty on a combo vaccine that tackles the flu and COVID.
A Swiss Bank and Apollo.
UBS continues with its integration of Credit Suisse, which was taken over amid several bank collapses a year ago this month. They agreed to sell Apollo $8 billion worth of assets, yachts included.
Other Private Markets News.
Football. The owners of the NFL were going to vote on allowing private equity firms to buy stakes in teams, and then they didn’t. Instead, they pushed the vote off until later this year. An approval would see as many as eight minority interests becoming available.
Office Space. Blackstone is moving toward the $1.9bn sell-off of The Office Group, a flexible office brand based in the United Kingdom.
CRYPTO
Coinbase.
The crypto exchange Coinbase tried to get the SEC’s case against it thrown out. A federal judge in the Southern District of New York shot down the request, suggesting that the SEC complaint plausibly supported the claim that Coinbase is operating as “an unregistered intermediary of securities.”
Crypto’s Disguise.
Much of crypto’s appeal comes from the way you might sell a car. How does it look? How does it feel? Katie Martin writes in the Financial Times, “in the most vibes-based industry of all, it is vital to sound important, clever and complicated. You, too, could enjoy its bounty if only you were more ‘educated’.”
KuCoin.
A prominent global cryptocurrency exchange called KuCoin, along with its two founders, have been charged by the DOJ for violation of anti-money laundering laws and for operating an unlicensed money-transmitting business under the Bank Secrecy Act. They sought to conceal that consumers were using their platform, according to the U.S. Attorney working on the case.
HOUSING
Racial Bias in Home Appraisals.
Drs. Nathan Connolly and Shani Mott at Johns Hopkins tried to sell their home in 2021. A white appraiser valued the property at around $470,000 during a visit. After Connolly and Mott whitewashed the home – removing their own family photos and having a white friend stand in as the homeowner – a second appraiser placed the value at $750,000. In 2022, they sued the appraiser and the mortgage lender, loanDepot (the sixth largest in the country), whose contractor hired the appraiser. Though Dr. Mott passed away earlier this month, the couple secured a settlement from loanDepot last week. As part of the settlement, the lender agreed to several policy changes, including a second appraisal if bias is suspected.
CLIMATE and FINANCE
The Bankers’ New Climate Metric.
JPMorgan Chase and Citigroup will begin disclosing information about “green financing ratios”, and how much they finance low-carbon energy as opposed to fossil fuels, in a win for climate activists. Those calling for the change included NYC pension funds, the NYC Comptroller's Office, and organizations like the Sierra Club. Bank of America, Goldman Sachs and Morgan Stanley are being pressed to take similar steps..
What Banks Want.
Bloomberg explains: “The world’s biggest banks are quietly hanging on to carbon-intensive clients because of what they see as unrealistic demands from regulators and civil society — and the threat to their fees.” They cite UBS banker Judson Berkey’s outburst in a closed-door meeting: “Banks are living and lending on planet earth, not planet NGFS [Network for Greening the Financial System],” later telling COP28 delegates, “You have to make it profitable.”
Ready for the Future?
Not really. Citigroup’s latest climate report says that 42% of its energy sector clients still don’t have a clear plan on how they’ll achieve net zero. Another 29% have high-level ideas but aren’t sure if they will be able to execute them.
POLITICS and MONEY
Companies and Election Deniers.
Popular Information profiles the 50 companies that have donated over $23mn to election deniers in Congress since 2021. Some of the heavyweights: Koch Industries ($1,371,250), AT&T ($1,234,100), UPS ($926,000), Lockheed Martin ($870,000), Home Depot ($862,000).