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financial regulations
Trump and His GOP Risk Making Depressions Great Again
Today, every one of the fuse lines that set off past explosions is once again being laid by a Republican president and party that have abandoned any pretense of economic stewardship or patriotism.
Aug 01, 2025
Republicans may be fixing to crash the economy again—Republican presidents oversaw 10 of the last 11 recessions and the Republican Great Depression—and they’re doing it to satisfy the greed of the billionaires they serve.
Today, for example, is the day that some of U.S. President Donald Trump‘s worst tariffs are supposed to go into effect, and many folks on Wall Street are deciding where they want to hide when the ceiling starts falling in. The horrible jobs report just released hours ago highlights not only how bad things were in July, but they had to “revise downward by 285,000 jobs” previous reports; it looks like Trump’s people have been cooking the books.
The Financial Times is on it; they published an article this week titled, “The US Economy Is More Fragile Than It Appears.” It’s author, Tej Parikh, points out that our housing market is in trouble and starting to look like it did around the time of the Bush Housing Crash in 2008, that spending patterns are changing in alarming ways (my phrase, not his), and that both the labor and stock markets are vulnerable. The article is frankly alarming.
And former labor secretary Robert Reich titled his brilliant newsletter yesterday: “Be Warned: The Financial Bubble Will Soon Burst.” The former Clinton cabinet member writes:
The financial economy—stocks, bonds, and their derivatives—is in for a big reality check, and I think it will happen soon.
America has stared into this abyss before; three times, in fact. In the 1770s, a brutal financial crisis driven by colonial overextension, monopolistic control by the British East India Company, and political corruption helped spark the American Revolution. In the 1850s, it was wildcat banking, land speculation, and a collapse in trust that helped produce the Panic of 1857 and push the nation toward civil war. And in 1929, Republican deregulation, tax cuts for the rich, financial speculation, and an all-out assault on labor exploded into the Republican Great Depression.
Today, every one of the fuse lines that set off those explosions is once again being laid by a Republican president and party that have abandoned any pretense of economic stewardship or patriotism.
They are actively destabilizing the pillars of our economy, undermining our democracy, and gutting the social contract that held us together for nearly a century. And unless we act—forcefully, quickly, and collectively—we may soon experience a collapse that makes 2008 look like a speed bump.
The risk of a modern economic depression is not academic or merely theoretical. It’s also not fearmongering. It is real, it is avoidable, and it is being amplified by a political movement that openly disdains regulation, despises democracy, and seeks to roll back every gain the American middle class has made since FDR dragged this country out of the last Republican-created catastrophe.
We are now living under a Republican president whose party has:
- Repeatedly held the full faith and credit of the United States hostage in debt ceiling standoffs designed to force cruel cuts to programs that serve ordinary people;
- Demanded the Fed lower interest rates in a way that could push the nation into an inflationary spiral even as wages stagnate and housing becomes unaffordable for the bottom 90%;
- Pushed for the end of regulations on banks, fossil fuel companies, tech monopolies, and Wall Street speculators, even as their recklessness increases systemic risk;
- Championed massive tax cuts for billionaires and multinational corporations, ballooning the deficit while cutting benefits and raising taxes on working people;
- Enabled trade wars and supply chain disruptions while cutting support for green manufacturing and public investment;
- Promoted and made billions from crypto; and
- Perhaps most grotesquely, embraced open authoritarianism and white nationalism, eroding the rule of law and the very stability on which economic confidence depends.
Every one of these moves destabilizes the foundation of modern prosperity. And every one of them echoes the warning signs of past collapses. The mechanisms of economic catastrophe are not mysterious. We’ve seen them before.
Start with sovereign debt and fiscal dysfunction.
In 2023 and 2024, House Republicans repeatedly brought us to the brink of default just to slash food aid, gut Medicaid, and kill green jobs. Now, in 2025, they’re salivating over a new “Balanced Budget Amendment” that would make countercyclical investment during recessions illegal. That’s economic suicide.
When demand collapses, the government must spend to stabilize the system. That’s Econ 101. But the GOP wants a permanent austerity straitjacket. Why? Because billionaires don’t suffer in recessions: They buy everything at a discount and radically increase their own wealth when things rebound. For the morbidly rich, Republican recessions and depressions are “buying opportunities”: It’s class war, plain and simple.
Then there’s financial speculation and asset bubbles.
We’re once again living in an era of rampant unregulated financial engineering:- Crypto Ponzi schemes.
- AI stock frenzies.
- Private equity gutting essential companies and loading them with debt.
- Trillions of dollars sloshing around the system chasing yield, while regulators like the Securities and Exchange Commission and Federal Trade Commission are neutered by courts stacked with right-wing ideologues.
Remember what happened in 1929? The same “let the market police itself” ideology brought the whole thing crashing down. The difference now is that the contagion would be global and could even be instantaneous.
Trade shocks and de-dollarization are looming risks, too.
Trump’s tariffs hurt American farmers and manufacturers. His talk of a new 10% universal tariff could ignite a global trade war and could push countries like China, Brazil, or Saudi Arabia to finally abandon the dollar as the reserve currency.
If that happens—if Treasury bonds stop being the world’s safe haven—we’re looking at a collapse in our ability to finance debt, a surge in interest rates, a crash in the housing market, and mass layoffs. And the Republicans? They cheer it on. They think chaos is good politics.
And then there are tariffs.
There’s a reason the Founders of this country and Framers of the Constitution gave the power to enact tariffs exclusively to Congress. They knew that nobody would build a factory here unless they knew that a tariff defending their manufacturing would be in place for the decades it would take to recover their investment costs.
When tariffs are simply slapped here and there willy-nilly by a single man and can be easily repealed by the next president, no competent business manager would take them seriously: The only thing tariffs do, under these circumstances, is damage the economy. Meanwhile, Trump’s tariffs so far are going to cost the average American family $2,400 this year.
And, from Donald Trump’s point of view, they force foreign leaders to come grovel in front of him, which absolutely delights him. He brags about it, once noting that, “They are kissing my ass.” This is not trade policy; he’s just doing this for his ego.
And what about public confidence and how the loss of it could cause a depression?
You can’t have a functioning economy without trust in government, in institutions, in money itself. But the GOP has made destroying trust its central project.
They lie about elections. They undermine the courts. They spread conspiracy theories. They smear career civil servants. They openly praise authoritarianism.
When half the population no longer believes in the legitimacy of its own government, and when the other half sees that government captured by billionaires and zealots, economic confidence evaporates.
People stop spending. They stop investing. They retreat into cash and hoarding. That’s how depressions spiral out of control.
Now layer on climate instability and its ability to wreck an economy and you have a real mess.
The GOP’s climate denialism is not just immoral, it’s economically suicidal. Hurricanes, wildfires, floods, and heatwaves are destroying billions in assets every year.
Insurance markets are collapsing in California, Florida, and Louisiana. Agricultural yields are falling. Water shortages are hitting the Southwest. Floods are wiping out the Midwest and the South while wildfires torch the West. But Republicans keep slashing climate research, killing green energy subsidies, and banning environmental and social governance investment strategies. They are literally outlawing the future.
It’s a five-alarm fire, and the Republican arsonists are demanding more gasoline.
There is, however, a way out. We’ve done it before.
They’ve created the conditions for collapse, and they’ll blame immigrants, Democrats, or queer kids when it happens.
After the last Republican-created depression, then-President Franklin D. Roosevelt rejected the dogma of austerity and implemented the most ambitious suite of Keynesian policies in world history. He put people to work. He regulated the banks. He taxed the rich. He unionized the workforce. He broke up monopolies. He guaranteed Social Security, unemployment insurance, and the right to organize.
That system—Keynesian demand-side economics—created the greatest middle class the world has ever seen. It lifted millions out of poverty, stabilized capitalism, and gave rise to the postwar economic boom. It literally created the modern American middle class.
But starting in 1981, Reagan and the GOP declared war on that system. They gutted antitrust enforcement. They slashed top tax rates. They crushed unions. They deregulated finance. They privatized public goods. They shifted the burden of funding government from the rich to the working class. And then they blamed the victims of their policies for the resulting inequality and instability.
Now they’re going for the kill shot.
Trump and his Republican Party are not just misguided; they are dangerous. Their policies are not just bad; they are existential threats to economic stability. They’ve created the conditions for collapse, and they’ll blame immigrants, Democrats, or queer kids when it happens.
We can’t let them. We have to take our country back, economically, politically, morally.
That means rejecting trickle-down nonsense and restoring Keynesian demand-side policies. It means breaking up monopolies and rebuilding a regulatory state that works. It means bringing back progressive taxation and closing loopholes for billionaires. It means massive investment in clean energy, public health, education, and infrastructure. It means rebuilding trust in democracy by reversing Citizens United, defending voting rights, rooting out corruption, and calling out fascism where we see it.
This must be at the core of the platform Democrats run on this fall and during next year’s midterms.
The risk of a depression is real. But the solution is in our hands. We just have to stop letting the Republican Party light the matches.
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'While No One Is Watching,' Senate GOP Makes It Easier for Wall Street Banks to Gouge Working Families
Sen. Warren decried Republicans for helping "squeeze" struggling families and warned that the "latest attack on the CFPB would let big banks rake in huge profits by slamming working people with outrageous overdraft fees."
Mar 27, 2025
All but one Republican in the U.S. Senate voted Wednesday night to advance a joint resolution that would nullify a cap on overdraft fees, a protection put in place by the Consumer Financial Protection Bureau to prevent Wall Street banks from making billions more in profits on the backs of vulnerable American consumers.
" Republicans in the Senate voted tonight while no one is watching to fatten Wall Street profits by jacking up overdraft fees on you," said Sen. Elizabeth Warren, following the 52-47 vote that fell almost strictly along party lines. "So much for lowering costs," she added.
Not one Democrat voted in favor pushing the rule forward, while only Sen. Josh Hawley (R-Mo.) voted against and Sen. Brian Schatz (D-Hawaii) did not vote.
In a speech on the Senate floor ahead of the vote, Sen. Warren decried Republicans for helping Wall Street "squeeze" struggling families and warned the "latest attack on the CFPB would let big banks rake in huge profits by slamming working people with outrageous overdraft fees."
Senate Republicans’ latest attack on the CFPB would let big banks rake in huge profits by slamming working people with outrageous overdraft fees.
I spoke on the Senate floor to fight back—because American families deserve a system that works for them, not just Wall Street. pic.twitter.com/W0VzO3cX1I
— Elizabeth Warren (@SenWarren) March 26, 2025
The draft rule was put in place in the final months of the Biden administration as a way to curb excessive fees and provide reasonable protections for consumers who overdraft their accounts. As The Atlanta Journal-Constitution reports:
In 2023, big banks made $5.8 billion from overdraft and non-sufficient fund fees, according to the Consumer Financial Protection Bureau. CFPB announced a new rule capping those fees in December, shortly before [President Joe] Biden left office, that is slated to take effect in October.
The rule gave banks three options: cap overdraft fees at $5; if offering overdraft as a service, rather than for profits, charge a fee that covered the bank's costs and losses; or if looking to make a profit off an overdraft loan, disclose the loan terms to consumers beforehand.
For households that pay overdraft fees, the rule was expected to save them $225 a year.
Sen. Raphael Warnock (D-Ga.) joined Warren in slamming his Republican colleagues over the vote.
"If we leave this $5 cap for overdraft fees in place, guess what, [the banks will] still be doing just fine,” Warnock told the Journal-Constitution. "But if we overturn it, families that are already being squeezed by inflation and by tariffs and a whole range of bad policies that are putting them in jeopardy are going to be squeezed even more."
According to the watchdog group Accountable.US, lifting the rule will allow large Wall Street banks and other financial institutions "to continue exploiting American families" with little or no recourse for relief from such predatory and profit-seeking practices.
"Senate Republicans are siding with big banks to make it easier for them to trick their customers into paying excessive fees," said Tony Carrk, the group's executive director, on Thursday. "The CFPB's overdraft rule limits abusive fees and puts money back in the pockets of consumers. Any vote against the rule is a gift to Wall Street special interests at our expense."
With the
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Fed Chair Under Fire for Blocking Climate Risk Financial Rules
"Millions of consumers, communities, and financial institutions are at the brink of a financial disaster due to climate change," warned one campaigner.
Apr 05, 2024
The chair of the Federal Reserve, Jerome Powell, is facing scrutiny this week for pushing back against efforts to incorporate climate risk in global financial rules.
"European central bankers have been advocating for the Basel Committee on Banking Supervision to agree on requiring lenders to disclose their strategies for meeting green commitments," according to Bloomberg. "In closed-door meetings, U.S. officials have cited their narrow mandate and concerns that the Basel Committee was overstepping its purpose."
Powell said in a Wednesday speech that "policies to address climate change are the business of elected officials and those agencies that they have charged with this responsibility. The Fed has received no such charge. We do, however, have a narrow role that relates to our responsibilities as a bank supervisor."
The Federal Reserve blocked a proposal making climate risk a focus of financial rules that would require banks disclose their strategies for meeting green commitments. https://t.co/ey49Yl3uek
— Consumers' Research (@ConsumersFirst) April 5, 2024
Anne Perrault, senior climate finance policy counsel with Public Citizen, said Friday that "millions of consumers, communities, and financial institutions are at the brink of a financial disaster due to climate change."
"U.S. Treasury Secretary Janet Yellen has described it as a significant concern for our economy and an existential threat—one that could create an uninhabitable world for our grandchildren and great-grandchildren," she added. "If Yellen's dire warning doesn't prompt action by the Fed, what will?"
Powell had to be escorted out of a speech when climate protesters came to disrupt an event in October.
"We will remain alert to the risk that there will be pressure to expand [the Fed's] role over time. We are not, nor do we seek to be, climate policymakers," Powell said Wednesday.
Powell has framed the issue as a "partisan political fight." He said the Federal Reserve doesn't want to get involved in these debates.
"Jerome Powell's latest claim that acknowledgment of the clear relationship between climate change and financial stability would make the Fed a 'climate policymaker' is outrageous," said Revolving Door Project senior researcher Kenny Stancil. "When an ostrich buries its head in the sand, potential predators do not disappear. Likewise, Powell's ostrich-informed strategy, which waves away obvious climate-related financial risk, is doomed to fail."
"The Fed's decision to carry this intransigent posture to the international standard-setting stage is a disgraceful move that threatens a true global regulatory response to the ongoing crisis," Stancil added. "The bottom line is that the abdication of responsibility by the Fed would usher the banks right into a crisis that would be disastrous for the U.S. economy. There's no reason to wait until it's too late. The time is ripe for the Fed to step up and provide enforceable rules that would protect the public and ensure stability of the U.S. financial system."
U.S. Sen. Ed Markey (D-Mass.) and Rep. Ayanna Pressley (D-Mass.) have previously pushed for the Federal Reserve to get more involved in addressing climate-related financial risks.
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SEC Accused of Bending to Industry Pressure by Omitting Key Measure in New Climate Rule
"The SEC's decision to bow to industry pressure against comprehensive climate disclosure requirements is a disservice to both the planet and investors," said one expert.
Mar 06, 2024
The U.S. Securities and Exchange Commission released a climate disclosure rule on Wednesday that will require public companies to report their greenhouse gas emissions and climate risks, but the new rule does not include requirements for companies to report emissions related to their supply chains.
The SEC seemingly bent to big business interests after many major companies pressured the commission to omit the supply chain aspect of the rule.
"Under the original proposal, large companies would have been required to disclose not just planet-warming emissions from their own operations, but also emissions produced along what's known as a company's 'value chain'—a term that encompasses everything from the parts or services bought from other suppliers, to the way that people who use the products ultimately dispose of them. Pollution created all along this value chain could add up," The New York Times reports.
The new rule only requires that companies report their direct greenhouse gas emissions and the risks they're exposed to from climate-related natural disasters and extreme heat.
Climate risks are financial risks. This @SECGov decision will let big corporations off the hook by not requiring disclosure of emissions throughout their supply chains. That means big promises with little accountability to deliver emissions reductions. Unacceptable. https://t.co/HjO4d1XyZu
— Ed Markey (@SenMarkey) March 6, 2024
Charles Slidders, a senior attorney at the Center for International Environmental Law, criticized the weakened rule in a statement.
"The SEC's decision to bow to industry pressure against comprehensive climate disclosure requirements is a disservice to both the planet and investors," Slidders said. "In an era of urgent need for more sustainable practices, greater transparency, and reliable information on corporate climate impacts and risks, the lack of ambition reflected in this rule represents a step backward that could ultimately undermine efforts to mitigate climate change and protect investors' interests."
David Arkush, director of Public Citizen's climate program, said in a statement that the SEC had "caved to special interests and was cowed by litigation risk." Sen. Sheldon Whitehouse (D-R.I.) said it was "unfortunate" that the SEC had watered down the rule.
"Climate-related risks are financial risks, and investors have a right to know the full scope of a public company's emissions profile. This SEC decision will let big corporations off the hook in the United States, allowing them to avoid disclosure of emissions from throughout their supply chains," said Sen. Ed Markey (D-Mass.).
While the SEC may be refusing to require that companies disclose how their supply chains affect the climate, the state of California doesn't have any problem doing that. The state passed a bill in September that requires large companies to disclose this information.
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How to Diffuse the Derivatives Time Bomb
Current laws allow the big international banks to run the largest derivatives casino that the world has ever seen.
Feb 18, 2024
This is a sequel to a Jan. 15 article titled “Casino Capitalism and the Derivatives Market: Time for Another ‘Lehman Moment’?”, discussing the threat of a 2024 “black swan” event that could pop the derivatives bubble. That bubble is now over 10 times the gross domestic product of the world and is so interconnected and fragile that an unanticipated crisis could trigger the collapse not just of the bubble but of the economy. To avoid that result, in the event of the bankruptcy of a major financial institution, derivative claimants are put first in line to grab the assets—not just the deposits of customers but their stocks and bonds. This is made possible by the Uniform Commercial Code, under which all assets held by brokers, banks, and “central clearing parties” have been “dematerialized” into fungible pools and are held in “street name.”
This article will consider several proposed alternatives for diffusing what Warren Buffett called a time bomb waiting to go off. That sort of bomb just detonated in the Chinese stock market, contributing to its fall; and the result could be much worse in the U.S., where the stock market plays a much larger role in the economy.
The Chinese Derivative Crisis
A January 30 article on Bloomberg News notes that “Chinese stocks’ brutal start to the year is being at least partly blamed on the impact of a relatively new financial derivative known as a snowball. The products are tied to indexes, and a key feature is that when the gauges fall below built-in levels, brokerages will sell their related futures positions.”
Further details are in a January 23 article titled “‘Snowball’ Derivatives Feed China’s Stock Market Avalanche.” It states, “China’s plunging stock market is leading to losses on billions of dollars worth of derivatives linked to the country’s equity indexes, fueling further selling as retail investors offload their positions… Snowball products are similar to the index-linked products sold in the 2008 financial crisis, with investors betting that U.S. equities would not fall more than 25% or 30%,” which they did.
Chinese shares rose on February 6, as officials took measures to prop up the ailing market, including imposing new “zero tolerance” curbs for malicious short selling.
The Greater U.S. Threat
The Chinese stock market is much younger and smaller than that in the U.S., with a much smaller role in the economy. Thus China’s economy remains relatively protected from disruptive ups and downs in the stock market. Not so in the U.S., where speculating in the derivatives casino brought down international insurer AIG and investment bank Lehman Brothers in 2008, triggering the global financial crisis of 2008-09. AIG had to be bailed out by the taxpayers to prevent collapse of the too-big-to-fail derivative banks, and Lehman Brothers went through a messy bankruptcy that took years to resolve.
In a December 2010 article on Seeking Alpha titled “Derivatives: The Big Banks’ Quadrillion-Dollar Financial Casino,” attorney Michael Snyder wrote, “Derivatives were at the heart of the financial crisis of 2007 and 2008, and whenever the next financial crisis happens, derivatives will undoubtedly play a huge role once again… Today, the world financial system has been turned into a giant casino where bets are made on just about anything you can possibly imagine, and the major Wall Street banks make a ton of money from it. The system… is totally dominated by the big international banks.”
The Speculators Dominate the Regulators
In a 2009 Cornell Law Faculty publication titled “How Deregulating Derivatives Led to Disaster, and Why Re-Regulating Them Can Prevent Another,” Prof. Lynn Stout proposed stabilizing the market by returning to 20th-century derivative rules. She noted that derivatives are basically wagers or bets, and that before 2000, the U.S. and U.K. regulated derivatives primarily by a common‐law rule known as the “rule against difference contracts.” She explained:
The rule against difference contracts did not stop you from wagering on anything you liked: sporting contests, wheat prices, interest rates. But if you wanted to go to a court to have your wager enforced, you had to demonstrate to a judge’s satisfaction that at least one of the parties to the wager had a real economic interest in the underlying and was using the derivative contract to hedge against a risk to that interest… Using derivatives this way is truly hedging, and it serves a useful social purpose by reducing risk.
…Under the rule against difference contracts and its sister doctrine in insurance law (the requirement of “insurable interest”), derivative contracts that couldn’t be proved to hedge an economic interest in the underlying were deemed nothing more than legally unenforceable wagers.
…Hedge funds, for example, should really call themselves “speculation funds,” as it is quite clear they are using derivatives to try to reap profits at the other traders’ expense.
The rule against difference contracts died in 2000, when the U.S. embraced wholesale deregulation with the passage of the Commodity Futures Modernization Act (CFMA):
The CFMA not only declared financial derivatives exempt from CFTC or SEC oversight, it also declared all financial derivatives legally enforceable. The CFMA thus eliminated, in one fell swoop, a legal constraint on derivatives speculation that dated back not just decades, but centuries. It was this change in the law—not some flash of genius on Wall Street—that created today’s $600 trillion financial derivatives market.
The Casino Gets Special Privileges
Not only are speculative derivatives now legally enforceable, but under the Bankruptcy Act of 2005, derivative securities enjoy special protections. Most creditors are “stayed” from enforcing their rights while a firm is in bankruptcy, but many derivative contracts are exempt from these stays. Similarly, under the Dodd Frank Act of 2010, derivative claimants have “superpriority” in the bankruptcy of a financial institution. They are privileged to claim collateral immediately without judicial review, before bankruptcy proceedings even begin. Depositors become “unsecured creditors” who can recover their funds only after derivative, repo, and other secured claims, assuming there is anything left to recover, which in the event of a major derivative crisis would be unlikely.
That’s true not only of the deposits in a bankrupt bank but of stocks, bonds, and money market funds held by a broke or dealer that goes bankrupt. Under the Bankruptcy Act of 2005 and Sections 8 and 9 of the Uniform Commercial Code (UCC), “safe harbor” is provided to entities described in court documents as “the protected class.” The customers who purchased the assets have only a “security entitlement,” a weak contractual claim to a pro rata share of a residual pool of fungible assets all held in the name of Cede & Co., the proxy of the Depository Trust and Clearing Corp. (DTCC). As Wall Street financial analyst John Rubino put it in a January 27 podcast:
What we used to think of as a bank bail-in where they take your deposit in order to support a failing bank, that is now spread across the entire financial economy where whatever you have in an account anywhere can just disappear, because they’re going to transfer ownership of it to these big dominant entities out there in the financial system that need those assets in order to keep from blowing up.
Derivative speculators are considered “secured” because they post a portion of what they could wind up owing as “margin,” but why that partial security is superior to the 100% security posted by the depositor or purchaser is not explained. The “protected class” is granted “safe harbor” only because their bets are so risky that to let them fail could crash the economy. But why let them bet at all?
The Solution of the Regulators
The fix of the G20 leaders following the global financial crisis, however, was to force banks to clear over-the-counter derivatives through central counterparties (CCPs), which stand between buyer and seller and protect either party if the other blows up. By March 2020, 60% of credit default swaps and 80% of interest rate swaps were centrally cleared. The problem, as noted in a December 2023 publication by the Bank for International Settlements, is that these measures taken to protect the system can actually amplify risk.
CCPs tend to ask for more collateral than banks did in the pre-crisis world; and when a CCP hikes its initial margin requirement to cover the risk of default, this applies to everyone in the market, meaning cash calls are synchronized. As explained in a May 2022 Reuters article:
It’s logical that CCPs ask for more collateral during a panic: That’s when defaults are most likely. The problem is that margin calls seem to have made things worse. In March 2020, for example, a so-called “dash for cash” saw investors liquidate even prime money-market funds and U.S. Treasury securities.
… [R]ampant margin calls have intensified a financial panic twice in as many years, with central banks effectively bailing out markets in 2020. That’s better than in 2008, when taxpayers had to step in. But the problem of margin calls remains unsolved.
… Central counterparty (CCP) clearing houses should consider asking clients for more collateral during good times to reduce the risk of destabilizing margin calls during a financial panic, a Bank of England official said on May 19.
Yet all this, as Michael Snyder observes, is to allow the big international banks to run the largest derivatives casino that the world has ever seen. Why not just shut down the casino? Prof. Stout’s suggested solution is for Congress to return to the pre-2000 rule under which speculative derivative bets were not enforceable in court. That would include reversing the “superpriority” privileges in the Bankruptcy Act of 2005 and the Dodd-Frank Act. But it won’t be a quick fix, as Wall Street and our divided Congress can be expected to put up a protracted fight.
What If the DTCC Goes Bankrupt?
In a 2015 law review article titled “Failure of the Clearinghouse: Dodd-Frank’s Fatal Flaw?,” Prof. Stephen Lubben points to a more ominous risk from pushing all derivatives onto exchanges; and that concern is shared by former hedge fund manager David Rogers Webb in his 2024 book The Great Taking. The exchanges are supposed to be safer than private over-the-counter trades because the exchange steps in as market maker, accepting the risk for both sides of the trade. But in a general economic depression, the exchanges themselves could go bankrupt. No provision for that is made in the Dodd-Frank Act, which purports to decree “no more bailouts.” Still, reasons Prof. Lubben, the government would undoubtedly step in to save the market from collapse.
His proposed solution is for Congress to make legislative provision for nationalizing any bankrupt exchange, brokerage, or Central Clearing Counterparty before it fails. This is something to which our gridlocked Congress might agree, since under current circumstances it would not involve any major changes, wealth confiscation, or new tax burdens; and it could protect their own fortunes from confiscation if the DTCC were to go bankrupt.
Other Possible Federal Solutions
Another alternative that not only could work but could fix Congress’s budget problems at the same time is to impose a 0.1% tax on all financial transactions. See Scott Smith, A Tale of Two Economies: A New Financial Operating System, showing that U.S. financial transactions (the financialized economy) are over $7.6 quadrillion, more than 350 times the U.S. national income (the productive economy). See my earlier article summarizing all that here. On a financial transaction tax curbing speculation in derivatives, see also here, here, and here.
There are other possible solutions to customer title concerns. There is no longer a need for the archaic practice of holding all securitized assets in the street name of Cede & Co. The digitization of stocks and bonds was a reasonable and efficient step in the 1970s, but today digital cryptography has gotten so sophisticated that “smart contracts” can be attached by blockchain-like distributed ledger technology (DLT) to digital assets, tracking participants, dates, terms, and other contractual details. The states of Delaware and Wyoming have explored maintaining corporate lists of stockholders on a state-run blockchain; but predictably, the measures were opposed. The practice of holding assets in street name has proven very lucrative for the DTCC’s member brokers and banks, as it facilitates short selling and the “rehypothecation” of collateral.
In October 2023, the DTCC reported that it has been exploring adopting DLT; but the goal seems only to be speedier and safer trades. No mention was made of returning registered title to the purchasers of the traded assets, which could be done with distributed ledger technology.
South Dakota’s Innovative Solution
The most readily achievable solution is probably that in a South Dakota bill filed on January 29. The bill is detailed in a February 2 article titled “You Could Lose Your Retirement Savings in the Next Financial Crash Unless Others Follow This State’s Lead,” which observes:
…[I]f your broker… were to go bankrupt, the broker’s secured creditors (the people to whom the broker owes money) would be empowered to take the investments that you paid for in order to settle outstanding debts….
To avoid a catastrophe in the future, a nationwide movement is desperately needed to alter the existing Uniform Commercial Code. Of course, that won’t be easy to accomplish, especially because bank lobbyists and other powerful financial interests will almost certainly fight kicking and screaming to stop policymakers from taking away their advantage over consumers.
The good news is, this “great taking” can be stopped at the state level. Americans don’t need to count on a divided Congress to get the job done. Because the UCC is state law, state lawmakers can take concrete steps to restore the property rights of their constituents and protect them in the event of a financial crisis.
On Monday, South Dakota legislators introduced a bill that would do just that. The legislation would ensure that individual investors have priority over securities held by brokerage firms and other intermediaries.
It would also alter jurisdictional provisions so that cases are determined in the state of the individual investor, rather than the state of the broker, custodian, or clearing corporation. This would ensure that individual investors are able to rely on the laws of their local state.
Hopefully, other states will follow South Dakota’s lead. Tennessee, for one, is reported to have such a bill in the works.
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The Bipartisan Push to Claw Back Pay From Failed Bank Executives
Ordinary Americans across the political spectrum are tired of seeing highly paid executives walk away unscathed from crises they create.
Jun 04, 2023
It’s a rare day in Washington when progressive and conservative lawmakers actually find common ground. But that’s what happened when Senators Elizabeth Warren (D-Mass.) and J.D. Vance (R-Ohio) teamed up recently to introduce a bill that would force leaders of failed banks to repay some of their compensation.
The Failed Bank Executives Clawback Act would require top brass to cough up all or some of the compensation they received during the three years preceding a big bank collapse. The clawback would apply to directors, officers, controlling shareholders, and other high-level decision-makers at banks with $10 billion or more in assets.
With five Republicans and eight Democrats already behind the bill, it stands a real chance of Senate passage.
It’s time for Washington officials to stand up to industry lobbyists and protect working families from the threat of Wall Street greed.
Outrage Over Banker Greed
Ordinary Americans across the political spectrum are tired of seeing highly paid executives walk away unscathed from crises they create.
Silicon Valley Bank (SVB) CEO Greg Becker, for instance, had raked in tens of millions in incentive pay while pursuing high-risk strategies in the years leading up to the bank’s collapse. The most dangerous: his decision to invest funds from largely uninsured deposits in long-term bonds without preparing for inevitable interest rate increases.
According to a Public Citizen analysis, Becker exposed the bank to even greater interest rate risks by terminating a hedge against certain other securities. This maneuver helped boost the short-term value of SVB stock, and Becker made sure to get while the going was good. He even offloaded shares worth $3.6 million just days before the bank disclosed a large loss that triggered its stock slide and collapse.
The Warren-Vance bill responds to public outrage over such dangerous Wall Street greed. Hopefully it will sail through both chambers and become law.
But this Congressional action wouldn’t be necessary if regulators had done their jobs in the aftermath of the 2008 financial crash.
Long Overdue Wall Street Pay Restriction
In response to that national crisis, Congress passed the Dodd-Frank financial reform. Section 956 of that law prohibits Wall Street pay which encourages excessive risk. But more than a dozen years later, regulators still have not put this part of the law into force.
If a strong regulation had been in place before the recent bank crises, executives at the failed banks would’ve had stronger incentives to focus on long-term stability and growth rather than taking short-term risks to maximize their personal gains.
For example, under Section 956, regulators could’ve required executives to set aside a significant share of their compensation every year for 10 years, an idea first proposed by former New York Federal Reserve Bank President William Dudley. This deferred pay would be used to help cover the cost of potential fines or bankruptcies.
With their own “skin in the game,” executives at SVB and Signature bank might’ve acted less recklessly and avoided collapse. If their banks had still failed, they would’ve had to automatically forfeit these deferred funds. A forfeiture action would be a lot easier than getting executives to pay back money they might’ve already spent on yachts or private jets.
Regulators Aim to Issue New Pay Rule This Year
The recent bank failures have provoked renewed pressure on regulators to enact this long overdue Wall Street pay restriction. In late March, 25 labor, consumer, and other groups sent a letter urging swift and rigorous action.
In Congressional hearings, Sen. Raphael Warnock (D-Ga.) and Rep. Rashida Tlaib (D-Mich.) both asked FDIC Chair Martin Gruenberg if he supported this Wall Street pay restriction and he indicated he did. This past week Gruenberg told reporters that the rule would be issued by the end of this year.
It’s time for Washington officials to stand up to industry lobbyists and protect working families from the threat of Wall Street greed.
Senator Warnock recently described this disparity well. “I pastor in communities where poor and marginalized people have the full weight of the law come down upon them for the smallest infractions,” he said. “When bankers made risky bets that endangered our whole economy, they got to cash in. They should be held accountable.”
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Rewarding Risk Drove First Republic to Failure
Risk was at the center of every financial upheaval since the 1980s. What can be done to keep history from repeating itself and threatening the banking system, economy, and jobs of everyday people?
May 02, 2023
First Republic Bank became the second-biggest bank failure in U.S. history after the lender was seized by the Federal Deposit Insurance Corp. and sold to JPMorgan Chase on May 1, 2023. First Republic is the latest victim of the panic that has roiled small and midsize banks since the failure of Silicon Valley Bank in March 2023.
The collapse of SVB and now First Republic underscores how the impact of risky decisions at one bank can quickly spread into the broader financial system. It should also provide the impetus for policymakers and regulators to address a systemic problem that has plagued the banking industry from the savings and loan crisis of the 1980s to the financial crisis of 2008 to the recent turmoil following SVB’s demise: incentive structures that encourage excessive risk-taking.
The Federal Reserve’s top regulator seems to agree. On April 28, the central bank’s vice chair for supervision delivered a stinging report on the collapse of Silicon Valley Bank, blaming its failures on its weak risk management, as well as supervisory missteps.
In each of the financial upheavals since the 1980s, the common denominator was risk.
We are professors of economics who study and teach the history of financial crises. In each of the financial upheavals since the 1980s, the common denominator was risk. Banks provided incentives that encouraged executives to take big risks to boost profits, with few consequences if their bets turned bad. In other words, all carrot and no stick.
One question we are grappling with now is what can be done to keep history from repeating itself and threatening the banking system, economy, and jobs of everyday people.
S&L Crisis Sets the Stage
The precursor to the banking crises of the 21st century was the savings and loan crisis of the 1980s.
The so-called S&L crisis, like the collapse of SVB, began in a rapidly changing interest rate environment. Savings and loan banks, also known as thrifts, provided home loans at attractive interest rates. When the Federal Reserve under Chairman Paul Volcker aggressively raised rates in the late 1970s to fight raging inflation, S&Ls were suddenly earning less on fixed-rate mortgages while having to pay higher interest to attract depositors. At one point, their losses topped US$100 billion.
S&L executives were often paid based on the size of their institutions’ assets, and they aggressively lent to commercial real estate projects, taking on riskier loans to grow their loan portfolios quickly.
To help the teetering banks, the federal government deregulated the thrift industry, allowing S&Ls to expand beyond home loans to commercial real estate. S&L executives were often paid based on the size of their institutions’ assets, and they aggressively lent to commercial real estate projects, taking on riskier loans to grow their loan portfolios quickly.
In the late 1980s, the commercial real estate boom turned bust. S&Ls, burdened by bad loans, failed in droves, requiring the federal government take over banks and delinquent commercial properties and sell the assets to recover money paid to insured depositors. Ultimately, the bailout cost taxpayers more than $100 billion.
Short-Term Incentives
The 2008 crisis is another obvious example of incentive structures that encourage risky strategies.
At all levels of mortgage financing–from Main Street lenders to Wall Street investment firms–executives prospered by taking excessive risks and passing them to someone else. Lenders passed mortgages made to people who could not afford them onto Wall Street firms, which in turn bundled those into securities to sell to investors. It all came crashing down when the housing bubble burst, followed by a wave of foreclosures.
Incentives rewarded short-term performance, and executives responded by taking bigger risks for immediate gains. At the Wall Street investment banks Bear Stearns and Lehman Brothers, profits grew as the firms bundled increasingly risky loans into mortgage-backed securities to sell, buy, and hold.
Incentives rewarded short-term performance, and executives responded by taking bigger risks for immediate gains.
As foreclosures spread, the value of these securities plummeted, and Bear Stearns collapsed in early 2008, providing the spark of the financial crisis. Lehman failed in September of that year, paralyzing the global financial system and plunging the U.S. economy into the worst recession since the Great Depression.
Executives at the banks, however, had already cashed in, and none were held accountable. Researchers at Harvard University estimated that top executive teams at Bear Stearns and Lehman pocketed a combined $2.4 billion in cash bonuses and stock sales from 2000 to 2008.
A Familiar Ring
That brings us back to Silicon Valley Bank.
Executives tied up the bank’s assets in long-term Treasury and mortgage-backed securities, failing to protect against rising interest rates that would undermine the value of these assets. The interest rate risk was particularly acute for SVB, since a large share of depositors were startups, whose finances depend on investors’ access to cheap money.
When the Fed began raising interest rates last year, SVB was doubly exposed. As startups’ fundraising slowed, they withdrew money, which required SVB to sell long-term holdings at a loss to cover the withdrawals. When the extent of SVB’s losses became known, depositors lost trust, spurring a run that ended with SVB’s collapse.
For executives, however, there was little downside in discounting or even ignoring the risk of rising rates.
For executives, however, there was little downside in discounting or even ignoring the risk of rising rates. The cash bonus of SVB CEO Greg Becker more than doubled to $3 million in 2021 from $1.4 million in 2017, lifting his total earnings to $10 million, up 60% from four years earlier. Becker also sold nearly $30 million in stock over the past two years, including some $3.6 million in the days leading up to his bank’s failure.
The impact of the failure was not contained to SVB. Share prices of many midsize banks tumbled. Another American bank, Signature, collapsed days after SVB did.
First Republic survived the initial panic in March after it was rescued by a consortium of major banks led by JPMorgan Chase, but the damage was already done. First Republic recently reported that depositors withdrew more than $100 billion in the six weeks following SVB’s collapse, and on May 1, the FDIC seized control of the bank and engineered a sale to JPMorgan Chase.
The crisis isn’t over yet. Banks had over $620 billion in unrealized losses at the end of 2022, largely due to rapidly rising interest rates.
The Big Picture
So, what’s to be done?
We believe the bipartisan bill recently filed in Congress, the Failed Bank Executives Clawback, would be a good start. In the event of a bank failure, the legislation would empower regulators to claw back compensation received by bank executives in the five-year period preceding the failure.
Clawbacks, however, kick in only after the fact. To prevent risky behavior, regulators could require executive compensation to prioritize long-term performance over short-term gains. And new rules could restrict the ability of bank executives to take the money and run, including requiring executives to hold substantial portions of their stock and options until they retire.
To prevent risky behavior, regulators could require executive compensation to prioritize long-term performance over short-term gains.
The Fed’s new report on what led to SVB’s failure points in this direction. The 102-page report recommends new limits on executive compensation, saying leaders “were not compensated to manage the bank’s risk,” as well as stronger stress-testing and higher liquidity requirements.
We believe these are also good steps, but probably not enough.
It comes down to this: Financial crises are less likely to happen if banks and bank executives consider the interest of the entire banking system, not just themselves, their institutions, and shareholders.
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Small Minds Think Alike: Clarence Thomas and George Santos's Yacht Race to Corruption
Both the junior representative and the Supreme Court justice had trouble disclosing their true income.
Apr 20, 2023
"We sail the ocean blue and our saucy ship's a beauty. We're sober men and true, and attentive to our duty." —Gilbert and Sullivan, H.M.S. Pinafore
It was like manna from heaven for a reputation that had been tarnished by, among other things, a yacht. Just when it looked like a yacht might sink
George Santos, Clarence Thomas and his wife, Ginny, sailed to his rescue on an even bigger yacht. Of course, the context was slightly different. Nonetheless, it was a much needed distraction and one for which George is almost certainly grateful. And it was not merely the yacht that came to George's rescue. It was Clarence's failure to comply with rules about disclosing his sources of income. But I get ahead of myself.
Beginning before, and shortly after George was elected to the House of Representatives, countless investigations were launched into his political and personal finances. Prompting the investigations were his financial disclosure statements that suggested he was a better fiction writer than businessman. For example, in 2020 George's financial disclosure statements indicated that in that year he had almost no income and virtually no assets. One year later his financial disclosure statements revealed an annual income of more than $750,000 and significant assets that included, among other things, a condo in Brazil.
Among the explanations offered by George for the increase in his personal income and wealth during that period was the commission he received from his service as a broker in the purchase and sale of a $19 million, 141-foot super yacht that, for our purposes, we will refer to as the "Soros" yacht to distinguish it from the other yacht that is part of our story.
While the Soros yacht was making headlines, the rescuing yacht sailed into the sea of public consciousness.
The Soros yacht was purchased by Raymond Tantillo of Long Island, New York, from Mayra Ruiz of Miami, Florida. George explained that it was that transaction that was one of the sources of his increase in personal wealth during that period. When asked about the transaction, Mr. Ruiz, the seller of the yacht, declined to comment. His lawyer said her client "was not interested in making any statement other than the fact that he has already publicly disclosed that he does not know who George Santos is and has never contributed to his campaigns and has never done any business with him." How George received a hefty commission from the sale of a yacht owned by someone who "has never done any business with him" is something George will probably be given the opportunity to explain, since reports suggest that both state and federal authorities are investigating his role in that sale. It is not, however, a work of fiction that has come to George's rescue. It is an unlikely rescuer—an even bigger yacht.
While the Soros yacht was making headlines, the rescuing yacht sailed into the sea of public consciousness. The yacht that came to George's rescue is a $500 million vessel owned by Harlan Crow, a Dallas businessman. Clarence Thomas and his wife, Ginny, have taken many trips on that yacht as the guests of Harlan and his wife, the pair of whom Clarence describes as their "very close personal friends."
It was not the fact that Clarence and Ginny were on the boat that caused eyebrows to rise. It was that the trips the Thomases took with Harlan and his family aboard his yacht, on his private plane, and as guests at his private resorts, trips that reportedly had a value in some cases of more than $500,000, were not disclosed on any of the reports filed with the United States Supreme Court where Clarence is an employee and is required to complete a form disclosing personal gifts. Gifts considered "personal hospitality" are not required to be disclosed, and Clarence thought those hundreds of thousands of dollars of gifts qualified as an exemption under the "personal hospitality" rules. (Those rules were amended in March of this year to help Clarence understand that gifts of that magnitude were different from going out to dinner with "very close friends" and, therefore, had to be disclosed.) It was not only the Thomas yacht rides that helped George out. It was Clarence's inability to accurately report the sources of his income. And that, it turns out, is exactly the same problem George has.
Numerous reports suggested that all the financial statements George filed before and after he was elected to Congress had many internal inconsistencies that made it impossible to determine what his sources of income
were. Clarence, it turns out, had the same problem in the reports he is required to file in the Supreme Court.
According to the
Washington Post, Clarence has for many years said on the financial disclosure forms he is required to file that he received income from a real estate firm that has not been in existence since 2006. Apparently no one told him that in filing such reports he should not report income from sources that ceased to exist many years ago. I am sure Clarence will correct this minor oversight on his part.
It has long been said that great minds think alike. The foregoing suggests it is also true for small minds.
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Why We Must Beat Back Private Equity's Deadly Hold on Nursing Homes
The shoddy managing of elder care facilities controlled by Wall Street investors led to 20,000 early deaths over 12 years.
Apr 19, 2023
Unbeknownst to most people with loved ones in nursing homes, it's often nearly impossible to determine if the facility you've entrusted your family member to is owned by a private equity firm–an ownership structure that has been shown to result in worse health outcomes for patients, at greater cost. Within the past two decades, the once-obscure private equity industry has ballooned in size from $1 trillion in 2008 to nearly $4.5 trillion in 2021. Millions of people in the United States have been directly impacted by an industry that was once known mostly to finance insiders like institutional investors and financial journalists.
In February, the Center for Medicare and Medicaid Services (CMS) issued an important rule requiring the disclosure of beneficial ownership of nursing homes that would bring greater transparency to this complex ownership model. This step is critical to preventing further harm by private equity firms and is part of a broader effort to reign in the abuses of the private equity industry in key sectors of our economy.
Whether private equity drove the retail company where you worked into bankruptcy or bought the house you rent, private equity's rapacious business practices are hitting close to home for more people than ever. Whatever industry it enters, a private equity firm's risky business practices often burdens businesses with excessive debt, forces the sale of assets for short-term gain, squeezes workers, and compromises services at the expense of most stakeholders to drive profits to private equity executives.
Evidence of the dangerous role of private equity's takeover of nursing homes has emerged over the last decade, but due in part to the COVID-19 pandemic, its ownership in the industry has faced new scrutiny in the last three years.
The healthcare sector has not been spared from private equity's expansion and extraction. A growing body of evidence shows that the private equity industry is incompatible with providing people with stable, quality, affordable healthcare. In ownership of hospitals, private equity firms have bought and shuttered urban, suburban, and rural facilities, leaving healthcare deserts in those communities. Private equity firms created a business model of surprise medical bills that intentionally billed services out of insurance networks, leaving patients with huge out-of-pocket expenses through no fault of their own. During the COVID-19 pandemic, private equity-owned physician staffing agencies fired physicians in already understaffed emergency rooms who spoke out against the lack of personal protective equipment like masks, and other practices endangering patient safety.
The private equity industry's track record in other areas of the care economy are equally appalling. Stories of the results of private equity ownership in companies caring for vulnerable populations are downright grisly, including deadly neglect and abuse of residential centers for the severely disabled, denying care to medicare and medicaid patients with life-threatening eating disorders, and delaying access to wheelchair repair to bill for more profitable equipment replacement. Another recent study raises alarm over private equity's expansion into hospital at home programs without sufficient guardrails to protect acutely ill patients at home.
Evidence of the dangerous role of private equity's takeover of nursing homes has emerged over the last decade, but due in part to the COVID-19 pandemic, its ownership in the industry has faced new scrutiny in the last three years. At the onset of the crisis, infections and deaths among nursing home workers and residents was an early crisis point before the development of vaccines. As thousands of people died in nursing homes, advocates and policymakers looked for patterns in ownership and management practices of facilities that might shed light on life-saving interventions. Private equity's common business practice of hiding behind layers of ownership and avoiding disclosures became a matter of life and death in the COVID-19 context. Americans for Financial Reform published a study in 2020 uncovering evidence that the nursing home chains in the state of New Jersey that were owned or backed by private equity firms had "higher resident infection and death rates and a larger share of Coronavirus cases and deaths compared to their share of residents relative to for-profit, non-profit, and public facilities."
In 2021, academics at the Becker Institute for Economics at the University of Chicago examined the outcomes of private equity-owned nursing homes over a 12-year period. Their conclusions were unflinching: "Our estimates show that PE ownership increases the short-term mortality of Medicare patients by 10%, implying over 20,000 lives lost due to PE ownership over our twelve-year sample period."
Policymakers must take action to protect patients and their families from private equity greed. President Biden highlighted the need for action in the 2022 State of the Union Address, calling out private equity's role in driving down quality of care while raising prices. The Administration has cited ownership transparency as a critical step to address private equity's now well-documented abuses in healthcare and to implement further safeguards like staff-to-patient ratios. Transparency in the healthcare sector is also the subject of a recent report highlighting opacity in ownership in end of life care, home health, and reproductive health services, among others.
Given the widespread and deadly role private equity firms are playing throughout the healthcare sector, federal protections like CMS's proposed rule, which requires detailed ownership of nursing homes to be made public, are urgently needed–and we can't let them be weakened by industry pressure. You can add your voice by joining AFR's organizational sign-on comment or our individual sign-on. CMS has signaled intentions to issue further safeguards on nurse-to-patient ratios in nursing homes this year. We have to beat back private equity's predatory hold on healthcare companies. We also need fundamental reform with the passage of the Stop Wall Street Looting Act. But the momentum for change starts now, with this measure to protect some of the most vulnerable, our loved ones in nursing homes.
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Private Equity Is Turbocharging Damage of Payday Lending Industry
Payday lending is inherently predatory and private equity is turbocharging its abuses, enlarging the burden it places on low-income individuals and borrowers of color.
Jan 14, 2023
Predatory lending is an easily overlooked business that has damaged communities of color and poorer people for decades. It traps borrowers in never-ending cycles of debt with high-interest loans on coercive terms. But when Wall Street private equity gets in on the predatory lending industry, it amplifies the magnitude of financial exploitation.
Private equity, put simply, is supercharging the payday and predatory lending industries as it does in any other industry. Private equity has the money — big money — to buy control of lenders and reach more people with greater levels of abuse than they could before. That means more of the infamous debt traps that characterize predatory lending.
Over the last decade, private equity brought additional financial resources, and in some cases, a new level of sophistication, to the subprime lenders they acquired, often enabling the payday and installment lenders they acquire to buy competitors. Only a few months ago, private equity firm Park Cities Asset Management took control of Elevate Credit.
Elevate is a notorious predatory lender. “Elevate raked in over a half billion dollars in 2013 alone. And they showered over $210,000 of that cash on federal lobbyists to attempt to hinder regulations of the payday loan industry,” according to the website Payday Lending Facts. In August 2022, a federal judge in Virginia gave final approval to a settlement involving Elevate Credit, where the company agreed to pay $33 million to resolve litigation related to a predecessor company’s dealing with various tribes.
Private equity firms own more than 5,000 payday lending stores in America and provide capital for several startups’ online payday loans, a 2017 report from Americans for Financial Reform showed. The predatory lender, Mariner Finance, had only 57 branches in seven states in 2013. It now has roughly 480 branches in 22 states, nearly a decade after the Wall Street private equity firm Warburg Pincus – headed by former U.S. Treasury Secretary Tim Geithner – acquired it. In addition to that financial power, private equity has access to bond markets to fuel its expansion.
Private equity firms Diamond Castle Holdings and Golden Gate Capital merged Checksmart Financial and California Check Cashing Stores into Community Choice Financial in 2011, and over the years, acquired or rolled up other companies like CURO and Direct Financial Solutions to build what is now a network of nearly 500 locations nationwide.
Predatory lenders owned by private equity firms create incentives for their employees to mislead consumers on loan requirements. Private equity firms often pressure employees at predatory lenders they own to sell what are known as “add-on products.” For example, a lender may insert credit insurance on auto or personal loans or try to add high service fees.
"Mariner’s policies and business practices are set and directed by headquarters, leaving minimal discretion to branch managers and loan officers to extend loans that work best for consumers according to their needs and financial condition,” Pennsylvania Attorney General Josh Shapiro wrote in a 2022 lawsuit against Mariner Finance. “The primary directive is to sell.”
For example, finance companies like predatory lenders often charge consumers all payments for any add-on products as a lump sum at origination. Essentially, even if a product expires years earlier during the loan term, consumers are still required to make payments on these add-ons. They often use illegal debt collection tactics to create a false sense of urgency to lure overdue borrowers into payday debt traps. Private equity-owned payday lender, ACE Cash Express, was one of the first companies in 2014 to be fined by CFPB for that business practice.
Mariner Finance, which specializes in personal loans of $1,000 to $25,000, with interest rates of up to 36 percent that can be inflated by additional fees. Fortress Investment Group owns similar installment lender OneMain Financial, while the Blackstone Group ― founded by billionaire Stephen Schwarzman ― controls Lendmark Financial Services, which in general, charge up to 30 percent in interest rates for its loans.
Payday loan lenders commonly charge fees of $15 for every $100 borrowed, which equals a 400 percent interest rate for a two-week loan. They prey on low-income and minority borrowers with arbitrary fees that are often more than what is permitted by their local states. “A high rate isn’t automatically a form of predatory lending—it may be higher because of your creditworthiness—but an unusually high one is definitely a red flag,” attorney Andrew Pizor with the National Consumer Law Center pointed out.
Predatory lenders target Black borrowers specifically. In Houston, while African-Americans make up only 15.6 percent of auto title lending customers and 23 percent of payday lending customers, 34.8 percent of the photographs on these lenders’ websites depict African-Americans, per a 2021 study by Jim Hawkins and Tiffany C. Penner of the University of Texas. Black Americans make up roughly 13 percent of the total American population, but end up with 23 percent of all storefront payday loans,” Pew Trusts reported.
Payday lending is inherently predatory and private equity is turbocharging its abuses, enlarging the burden it places on low-income individuals and borrowers of color. About 18 states across the country have a 36 percent rate cap or below to fight this problem, but many predatory lenders operate nationally. Congress must step in with a usury cap that applies nationwide. Stronger protections are the only way to stop the damage caused by predatory lenders, who now increasingly have the financial muscle of private equity behind them.
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