THIS WEEK'S 
REPORT:

The BAN Report: CRA Reform Advances / Fed Crackdown on Wall Street / Buffett Slams Gamification of Wall Street / Productivity Plummets / RIP Greyhound Racing

CRA Reform Advances

Modernizing the Community Investment Act (CRA) has been discussed for years without any consensus on moving forward. While most believed that CRA had to be modernized, many activists feared that modernization would mean less community lending and investing. While it’s too early to opine on whether the Agencies got it right. The new ruling includes:

  • Expand access to credit, investment, and basic banking services in low- and moderate-income communities. Under the proposal, the agencies would evaluate bank performance across the varied activities they conduct and communities in which they operate so that CRA is a strong and effective tool to address inequities in access to credit. The proposal would promote community engagement and financial inclusion. It would also emphasize smaller-value loans and investments that can have high impact and be more responsive to the needs of LMI communities.

  • Adapt to changes in the banking industry, including internet and mobile banking. The proposal would update CRA assessment areas to include activities associated with online and mobile banking, branchless banking, and hybrid models.

  • Provide greater clarity, consistency, and transparency. The proposal would adopt a metrics-based approach to CRA evaluations of retail lending and community development financing, which includes public benchmarks, for greater clarity and consistency. It also would clarify eligible CRA activities, such as affordable housing, that are focused on LMI, underserved, and rural communities.

  • Tailor CRA evaluations and data collection to bank size and type. The proposal recognizes differences in bank size and business models. It provides that smaller banks would continue to be evaluated under the existing CRA regulatory framework with the option to be evaluated under aspects of the new proposed framework.

  • Maintain a unified approach. The proposal reflects a unified approach from the bank regulatory agencies and incorporates extensive feedback from stakeholders.

The proposed rule is 679 pages long and I frankly didn’t have time to read it yet! But, over the next few months, it will get reviewed by many in the industry. The American Bankers Association didn’t have much to say except:

We look forward to reviewing the proposal in detail and offering comments to achieve workable rules that help spur needed investment across the country without imposing unnecessary costs. This work will not be complete until the increasing array of non-bank financial services providers are held similarly accountable to the communities they serve.

The last part is interesting, as it seems like the banks want to level the playing field between themselves and non-bank lenders, especially since so much lending has been transferred from banks to non-bank lenders.  

Fed Crackdown on Wall Street

The SEC and the Justice Department are ramping up the pressure on banks and market participants to identify and report market manipulation, or other corrupt activities. The arrest of Bill Hwang on 11 felony charges, of which would be effective a life sentence, shows they are aggressive and looking for more unlawful activity.   

Bill Hwang’s lawyers couldn’t believe it.

The fallen billionaire investor was sitting in federal custody in Manhattan, less than 48 hours after his legal team had visited prosecutors to talk them out of criminal charges. The effort seemed to be going well until the feds scooped up Hwang at daybreak on April 27 to face 11 felony charges—and potentially, the rest of his life in prison. “In no event was an arrest necessary,” his attorneys said in a statement expressing frustration that morning, noting Hwang had been voluntarily answering the government’s questions for months.

All of Wall Street should pay close attention. The Hwang case marks an upswing of federal investigations into a slew of suspected trading abuses. Three other broad inquiries have emerged in recent months to examine so-called block trades, short sales, and well-timed wagers. They all center on the same question: Are markets rigged?

Biden administration officials have spent the past year laying groundwork to pursue white-collar crime more aggressively, rolling out policy changes—some disclosed, some not—that will make probes easier to start, faster to finish, and more punishing. The U.S. Department of Justice has quietly ratcheted up pressure on big banks to look for market abuses and then turn in staff and clients, and there’s growing willingness among prosecutors to use tough federal laws against Wall Streeters that were designed to target gangsters. Meanwhile, there are signs that the Securities and Exchange Commission is seeking larger civil penalties. Senior leaders at the agency have stopped accepting ad nauseam meetings with defense attorneys looking to talk their clients out of trouble.

While it’s not clear it’s related to deferred-prosecution agreements, other firms that have reached such deals have been going to lengths to help authorities in recent months. JPMorgan Chase alerted authorities to possible insider trading by prominent clients just ahead of Microsoft’s acquisition of Activision Blizzard in January, a person familiar with the matter said. A month later, Credit Suisse Group AG—one of the biggest losers in the Archegos collapse—gave federal prosecutors in Manhattan a presentation pointing out issues related to the incident, potentially helping investigators as they look into how rival banks make market-moving trades, people familiar with the matter have said.

The fact that the government is using the RICO statutes, which were designed to bring down organized crime, shows they are very serious about going after Wall Street. And they are levying big fines against banks that don’t keep proper records and are not prompt about reporting things like suspicious trades.

Buffett Slams Gamification of Wall Street

At the annual shareholder meeting last weekend, Warren Buffett bemoaned how Wall Street seems to be turning the stock market into a gambling parlor.

“Wall Street makes money, one way or another, catching the crumbs that fall off the table of capitalism,” Buffett said. “They don’t make money unless people do things, and they get a piece of them. They make a lot more money when people are gambling than when they are investing.”

Buffett bemoaned that large American companies have “became poker chips” for market speculation. He cited soaring use of call options, saying that brokers make more money from these bets than simple investing.

“It’s almost a mania of speculation,” Charlie Munger, 98, Buffett’s long-time partner and Berkshire Hathaway vice chairman, chimed in.

“We have people who know nothing about stocks being advised by stock brokers who know even less,” Munger said. “It’s an incredible, crazy situation. I don’t think any wise country would want this outcome. Why would you want your country’s stock to trade on a casino?”

While I think there are other investors that have a better track record than Mr. Buffett (i.e., Jim Simons and Carl Icahn), almost everything that comes out of his mouth is sensible and well-reasoned. His take on Bitcoin and cryptocurrencies is spot-on:

He described his views on farmland and rental properties versus bitcoin as “the difference between productive assets and something that depends on the next guy paying you more than the last guy got.”

“The apartments are going to produce rent and the farms are going to produce food,” he said. “If I’ve got all the bitcoin, I’m back wherever [anonymous bitcoin founder Satoshi] was.”

Virtually all bonds produce cash flow to their owners. Stocks either promise investors dividends or capital appreciation, which is tied to the earnings of the company. We now have trillions of assets now tied up in cryptocurrencies, NFTS, etc., which do not pretend to ever hope to produce any cash flows for their owners, and function more like non-tangible assets like art.

Productivity Plummets

Something odd happened in the first quarter, in which US productivity plummeted.

Productivity, or nonfarm business employee output per hour, decreased at a 7.5% annual rate from the previous three months, according to Labor Department figures Thursday. That compared to a 6.3% gain in the fourth quarter and the 5.3% projected decline in a Bloomberg survey of economists. 

While productivity growth rates can be extremely volatile in normal business cycles, the pandemic and subsequent recovery over the past two years has made the figures more prone to fluctuations. It’s likely to take several more years to gauge whether underlying productivity trends have shifted in the wake of Covid-19.

Fierce competition for a limited supply of workers has led businesses to bid up wages to attract and retain talent. By another measure, employment costs are now rising at a record rate. To help limit the impact of rising costs on balance sheets, firms often adopt new technologies or invest in equipment to make their workers more productive. 

More generally, rising productivity can help offset the inflationary impact of wage increases. 

Despite the rapid increases in wages, though, they’re still not keeping up with inflation. Real average hourly compensation fell an annualized 5.5% from the prior quarter after falling 0.5%.

It’s hard to tell if this is alarming or not, but it is certainly a warning sign. The productivity rate is tightly related to the GDP growth rate, which was disappointingly down 1.4% in the first quarter.

RIP Greyhound Racing

Back in the 1980s, there were over 50 greyhound racing tracks around the country. As of the end of the month, only two in West Virginia will be left.  

It’s been a long slide for greyhound racing, which reached its peak in the 1980s when there were more than 50 tracks across 19 states. Since then, increased concerns about how the dogs are treated along with an explosion of gambling options have nearly killed a sport that gained widespread appeal about a century ago.

A racing association found that betting on greyhounds plunged from $3.5 billion in 1991 to about $500 million in 2014. Since then, many more tracks have closed.

In some states like the dog-racing mecca of Florida in 2021, it was voter initiatives that ended the sport at the state’s dozen tracks. In others like Iowa, state officials allowed casinos to end subsidies that had kept greyhound racing alive as interest declined.

“Do I think the industry is dying? Yes,” said Gwyneth Anne Thayer, who has written a history of greyhound racing. But “it’s happening way faster than I thought it would.”

The Dubuque track closure and the end of racing in West Memphis, Arkansas, this December will leave racing only in West Virginia, where tracks in Wheeling and near Charleston operate with subsidies from casino revenue.

Apparently, the West Virginia tracks will stay open, and the state is behind keeping the industry alive. The experience of greyhound racing shows that there is a zero-sum element to gambling. As gambling expands into more and more areas, people may shift their gambling dollars.