Commentary: Crypto Has Reinvented Bank Runs*​​​

Cryptocurrency is an industry often powered by extraordinary belief, yet losses of faith are increasingly common. The latest example is also one of the biggest: The sudden liquidity crunch for FTX and its subsequent takeover agreement with rival Binance, according to a commentary in the Wall Street Journal. The exact sequence of events that led up to the agreement isn’t totally clear. They seemed to accelerate when Binance’s founder, Changpeng Zhao, tweeted that Binance was going to sell FTX’s own cryptocurrency, called FTT. That appears to have prompted a series of events that culminated in what the Wall Street Journal described as a “run” on FTX by users and a deal with Binance. Runs are a major part of financial history. Until crypto’s emergence, though, they have rarely been part of the financial present. That isn’t because there is universal trust in the traditional finance realm, but rather because there are many mechanisms and guardrails in place to deal with them. The first line of defense is trying to prevent runs from even starting by offering insurance. For U.S. bank deposits under a certain size, this is provided by the Federal Deposit Insurance Corp. U.S. brokerage accounts have a form of insurance from the Securities Investor Protection Corp. Even closely regulated firms can falter, but when they fail it usually isn’t because of a run on customer funds and assets. The exact problems that faced FTX remain unclear. Were they primarily related to the treatment of customer assets or related more to the firm’s own assets? Further complicating matters, the line between a bank and a brokerage isn’t always clear in crypto, where one firm can effectively be your bank, broker, exchange, lender, market maker and so on. That creates many opportunities for things to go wrong. Read more.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI. 

As the Fed Raises Rates, Worries Grow About Corporate Bonds​​​

As the Federal Reserve raises interest rates in an effort to tame inflation, the corporate bond market, which lends money to many companies, has been hammered particularly hard, the New York Times reported. The steep rise in interest rates has caused bond values to tumble: From October 2021 to October 2022, an index that tracks investment-grade corporate bonds is down by roughly 20 percent. By some measures, overall bond market losses have been worse than at any time since 1926. The yield on bonds issued by solid businesses is now about 6 percent, about twice as much as it was a year ago. That number indicates how high of an interest rate rock-solid corporations would have to pay to borrow more money right now; rates are even higher for smaller businesses or those that investors consider risky. Corporate bankruptcies and defaults remain low by historical standards, but a growing number of companies are struggling financially. Businesses in industries like retail, manufacturing and real estate are especially vulnerable because their sales are weak or falling. In many cases, their customers have also been hurt by higher interest rates because the higher borrowing costs have effectively raised the costs of big-ticket items like homes and cars. Before rates jumped, companies borrowed a ton of money last year, with lower-rated firms selling more new bonds in 2021 than in any other year. But that flow has turned into a trickle as interest rates have risen and investors have grown more discerning about whom they lend money to. Banks are still making more commercial and industrial loans, but they are also becoming more discerning and are charging higher interest rates. Most investors, executives and economists expect a recession or anemic growth next year, which could make doing business, borrowing money and paying off loans even more difficult.​​​​​​ Read more.

CPEX22 Started Today, but It’s Not Too Late to Register!​​​

The virtual Consumer Practice Extravaganza, being held Nov. 10-18, promises to be the premier consumer debt event of the year. Leading practitioners will explore the latest consumer debt practices in five session tracks — Student Loans, Technology and the Future, Subchapter V of Chapter 11, Well-Being and Nontraditional Practice — ensuring that there is something for everyone. CPEX22 will also feature a range of special “demo days” showcasing technology and money-saving tools especially designed for consumer practitioners, circuit-specific breakout sessions, and plenaries focused on issues relevant to the entire consumer bench and bar. Register for all this and more for only $100! 

Slightly More Americans Applied for Jobless Benefits Last Week​​​

The number of Americans applying for jobless benefits rose slightly last week, but the labor market remains healthy despite job cuts that have begun to spread across industries most affected by soaring interest rates, such as housing and technology, the Associated Press reported. Unemployment claims for the week ending Nov. 5 rose by 7,000 to 225,000 from 218,000 the previous week, the Labor Department reported Thursday. The four-week moving average declined by 250 to 218,750. Applications for jobless claims, which generally track layoffs, have remained historically low this year, even as the Federal Reserve has cranked up its benchmark borrowing rate six times in its effort to cool the economy and tame inflation. A strong job market is deepening the challenges the Federal Reserve faces as it raises interest rates at the fastest pace since the 1980s to try to bring inflation down from near a 40-year high. Steady hiring, solid pay growth and low unemployment have been good for workers, but have contributed to rising prices. The government reported Thursday that consumer inflation reached 7.7% in October from a year earlier, the smallest year-over-year gain since January. Excluding volatile food and energy prices, “core” inflation rose 6.3% in the past 12 months and 0.3% from September. Those numbers are still high, but came in lower than economists expected, giving a sliver of hope that the Fed will ease up on future rate hikes. Read more.

Wall Street Surges as S&P 500 Soars on Cooling Inflation​​​

Stocks are bursting toward their best day in years Thursday as exhilaration sweeps Wall Street and financial markets worldwide after a report showed inflation in the U.S. slowed last month by even more than expected, the Associated Press reported. The S&P 500 was 4.5% higher in afternoon trading, and the encouraging data also sent prices leaping in markets for everything from metals to European stocks. Even bitcoin clawed back some of its steep plunge from prior days caused by the crypto industry’s latest crisis of confidence. The Dow Jones Industrial Average was up 928 points, or 2.9%, at 33,437, as of 12:23 p.m. Eastern time, while the Nasdaq composite soared 6%. Investors took the data as a sign that the worst of high inflation may finally be behind us, though analysts cautioned it was still premature to declare victory. The most dramatic action may be happening in the bond market, where Treasury yields sank sharply as investors pared bets for how aggressive the Federal Reserve will be in hiking interest rates to get inflation under control. Big rate hikes by the Fed have been the main reason for Wall Street’s struggles this year and are threatening a recession. Perhaps more importantly, inflation also slowed more than expected after ignoring the effects of food and energy prices. That’s the measure the Fed pays closer attention to. So did inflation between September and October. Slower inflation could keep the Fed off the most aggressive path in raising interest rates. It’s already raised its key rate to a range of 3.75% to 4%, up from virtually zero in March. Read more.

More and More Americans Are Struggling to Pay Their Auto Loans​​​

The percentage of automotive loans that are at least 60 days delinquent hit 1.65 percent in the third quarter of 2022. That’s the highest rate of delinquencies in more than a decade, which indicates that vehicle owners are increasingly struggling to make payments on their vehicles, CarScoops reported. The rising rates of auto loan delinquencies is related to a number of factors, including rising inflation. With prices for all products increasing, owners with a loan on their vehicle may have more difficulty paying it now than they did when they entered into their agreement, even if they’re making the same amount of money. “Consumers still want to stay current as best that they can. It’s just [that] this inflationary environment is making it challenging,” Satyan Merchant, the senior vice president of TransUnion, told CNBC. The consumers feeling the biggest impact are subprime borrowers, who have lower credit scores and, often, lower income. The sudden rise in delinquencies may also be related to the end of some loan accommodation programs set up during the pandemic that were designed to help provide relief for vehicle owners who might have lost their job during the pandemic. “There has been this effect where the delinquency that may have occurred over the last few years is really just pushed out or delayed because that consumer didn’t have to make payments or their status was on an accommodation. So now some of those are hitting,” said Merchant. In addition, the prices of new vehicles have been very high. Automakers struggled to build new vehicles during the pandemic, but demand remained strong, causing prices to go up, which dragged the prices of used vehicles up with them. That may be adding pressure on people who took out a loan to buy a car. Read more.

Analysis: Is Consumer Protection on the Chopping Block?​​​

The Consumer Financial Protection Bureau (CFPB) is one of the newest federal agencies. It may also be one of the most endangered, The Regulatory Review reported. In a recent ruling, a three-judge decision by a federal appeals court held that the CFPB’s funding mechanism is unconstitutional. On its face, the court’s decision is relatively narrow, only striking down a single agency rule regulating payday lenders. But the implications of the court’s decision stretch far beyond this one CFPB rule, according to legal experts. If upheld on appeal, the decision could reshape the federal government’s ability to regulate financial markets and protect consumers from fraudulent activity. Money lies at the heart of the case known as Community Financial Services v. CFPB. When the U.S. Congress created the CFPB in 2010, it hoped to insulate its funding from political interference. Instead of subjecting the CFPB to the annual appropriations process — in which agency funding can vary depending on which party holds power — Congress funded the new agency through the Federal Reserve. Because the Federal Reserve is self-funded, the law ensured that the CFPB has a consistent source of revenue. Proponents of this funding structure view it as continuing a tradition of keeping financial regulatory agencies immunized from the normal appropriations process, ensuring they can act separate from political considerations. But a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit has now disagreed. In its ruling, the court cited the CFPB’s “unique, double-insulated funding mechanism” in holding the agency’s structure to be unconstitutional. The court stated that, because the CFPB’s funding flows through another independently funded agency, it violates the U.S. Constitution’s Appropriations Clause, which requires all federal spending to be appropriated by Congress. Given that the 2010 statute that created the CFPB consolidated authority for implementing and enforcing consumer protection laws in the new agency, the Fifth Circuit’s decision will generate “chaos” in financial markets, according to Prof. Adam Levitin of Georgetown Law. Levitin argues that markets as diverse as housing and debt collection will face uncertainty as courts potentially strike down CFPB regulations governing financial institutions’ day-to-day operations. Read more.

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