Category: Financial Institutions

  • Sorry to Break It to You Geniuses: Under the GENIUS Act the Holders of Stablecoins Actually Have FIFTH Priority in an Issuer Bankruptcy

    Posted by

    Adam Levitin

    In order for stablecoins to operate like money, there cannot be any issuer credit risk. Otherwise coins will be discounted based on the financial strength of the issuer. That will cause transactional friction because buyers and sellers might not agree on the appropriate discount. It also means that different coins cannot possibly be good delivery for each other.

    The GENIUS Act tries to reduce issuer credit risk as much as possible. First, it requires payment stablecoins to be backed by reserves and creates a regulatory oversight system to create some confidence that the claimed reserves are in fact there. That’s basically replicating what the National Bank Act of 1864 did when it created national bank notes and a federal bank regulator to inspect the national banks that issued those notes.

    Second, the GENIUS Act has a provision regarding the insolvency of a payment stablecoin issuer. It aims to reduce credit risk by saying that the holders of payment stablecoins have first priority, coming ahead of all other claimants, for the issuer’s reserves. And second, it directs the bankruptcy court to pay out on the stablecoins as soon as possible, namely within 14 days of “the required hearing.” The idea here is to ensure that there is minimal liquidity disruption.

    Here’s the thing. The GENIUS Act fails miserably at both of these bankruptcy goals. Holders of payment stablecoins actually will rank fifth in a bankruptcy distribution, coming after (1) repo and margin lender claims, (2) the DIP lender, (3) the bankruptcy professionals via the DIP lender’s carve-out, and (4) set-off claims from depositaries and brokers. Those claims will gobble up a huge chunk of any reserves, so recoveries for payment stablecoin holders will be severely diminished.

    Moreover, because of the nature of the DIP lender and professionals’ claims, no distribution to the payment stablecoin holders will be possible until well into the case, if not the very end of it. That might mean waiting months or years for a distribution.

    Let me put it bluntly: a stablecoin issuer bankruptcy won’t be like an insured deposit claim against an FDIC insured bank, where you get 100¢ on the dollar back incredibly fast (perhaps next day). In a payment stablecoin issuer bankruptcy there will be a large haircut on the stablecoins and the payment won’t be any time soon.

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  • Hotel California (Deposit Account Edition)

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    Adam Levitin

    You can checkout anytime you like, but you can never leave. That’s how I’m feeling about one of my banks. I recently decided to close a particular bank account. Turns out that the bank, which allows me to open new accounts on-line, won’t allow me to close accounts except in person. Having to go into a branch is a minor inconvenience, and I’m sure that’s the point: the added friction makes it that much harder to break up with the bank and gives the bank another opportunity to try to sell me additional services. What’s more, it gives the bank another shot at levying some fees on the account for one reason or another.

    If pressed, I’m guessing that the bank would claim some security issue means that they need to verify my identity in-person. That’s nonsense:  they had no problem letting me clear out the balance via an on-line transaction. This is just about making the deposit account relationship stickier and therefore less competitive.

    So if there’s still anyone home and listening at CFPB, this should be low-hanging non-partisan fruit: use your UDAAP authority to put out a Hotel California rule that will make it easier for consumers to voluntarily close their deposit accounts. Think of this as the deposit account version of click-to-cancel. If the consumer is able to transfer all funds out of the account on-line—that is if the bank offers on-line funds transfers and there’s no hold on the account at the time—the consumer should also be able to close the account entirely on-line.

  • Will Corporate Treasuries Have Any Interest In Using Stablecoins?

    Posted by

    Adam Levitin

    With the GENIUS Act signed into law now we get to see if stablecoins can actually walk the walk, not just talk the talk. The story the stablecoin industry has told is one of payments innovation, particularly for international payments, with stablecoins poised to displace the expensive and ungainly wire transfer system. Is this right?

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  • Fannie and Freddie Are Now Explicitly Guarantied

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    Adam Levitin

    When will Donald ever learn to run his tweets by counsel before posting them? He consistently shoots his legal position in the foot. The latest is about the implicit government guaranties of Fannie Mae and Freddie Mac:&nbsp

    I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the US Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President.

    Pro tip: it’s not an “implicit” guaranty if you say it out loud. Once you do, it’s explicit. 🤦

    That’s actually potentially a huge problem for federal accounting purposes. The whole reason that Fannie and Freddie’s enormous book of debt is not on the federal balance sheet, blowing through the debt limit, is that the guaranty has always been implicit: it’s about a wink and a nod. With this tweet, I am not sure that it is possible for Fannie/Freddie to come off the federal balance sheet even if privatized because of the now “explicit” guaranty. (Or as a fallback, there’s a promissory estoppel argument.) As far as I can tell, because of an over-eagerness to tweet, Fannie and Freddie’s obligations now bear the eagle. Maybe the CBO will view this differently, but all that comes to mind right now is the timeless words of Napoleon Dynamite:

    image from media.tenor.com

     

  • The Supreme Court Is Just Making Stuff Up About the Fed

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    Adam Levitin

    The Supreme Court is welcome to have its opinions. But it is not welcome to have its own facts. Fact-finding is at the core of the judicial enterprise, and once the Court starts simply making things up, it loses its legitimacy. 

    The Court took a dangerous step in that direction today with its opinion granting the President's order for a stay of the District Court's injunction of the President's removal of a member of the National Labor Relations Board and of the Merit Systems Protection Board.

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  • Forcing Bank Deposits to Subsidize Stablecoins: the GENIUS Act

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    Adam Levitin

    The Senate is set to take up a vote on this Thursday on the GENIUS Act, the legislation to create a regulatory framework for stablecoins. Whatever else one might think about stablecoins or the GENIUS Act, its insolvency provisions are an absolute mess, both conceptually and in drafting. If the GENIUS Act becomes the law, we're in for a FUBAR situation when a stablecoin issuer ends up insolvent. Even more concerning, if a bank custodian for a stablecoin issuer's reserves ends up insolvent, the claims of the stablecoin investors will come ahead of the bank depositors. That's right. Crypto comes ahead of ma-and-pa. 

    The effect: stablecoins are being subsidized by bank deposits. Now that's GENIUS.

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  • The Trump Organization’s Shake Down of Capital One

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    Adam Levitin

    The Trump Organization is trying to shake down Capital One. And they’ll probably succeed. The Trump Organization has sued Capital One for closing its accounts in January 2021, allegedly because of Donald Trump’s political views. (Or, put differently, Capital One decided that it was not good business to continue being associated with an entity connected to the January 6 insurrection.)

    As a legal matter, the Trump Organization's complaint is risible; Capital One should be able to easily get the case dismissed. But that might not matter because the Trump Organization has them over a barrel: if Capital One doesn’t pay up, the implicit threat is that the Trump administration will move to block the Capital One-Discover merger and generally make life unpleasant for Capital One. (Of course, if the Trump administration were really clever, they wouldn’t have dropped the CFPB suit so fast, but that’s probably just that the right hand didn’t talk to the left.) That’s gangster capitalism and underscores the incredible conflicts of interest that continue to exist for Trump.

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  • Musk and Treasury’s Payment Systems (He Punched the Bursar…)

    Posted by

    Adam Levitin
    Updated Feb. 6, 2025:  Elon Musk and his DOGE team are seeking (and apparently gaining) access to Treasury’s computer systems for managing payments.  Unfortunately, a lot of the media coverage has done a poor job of explaining the particular concerns, in part because there isn't very good understanding of exactly what Treasury does. Let met try to add some clarity here, recognizing that there's still a lot we don't know about what is motivating Musk.
     

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  • Can Trump Fire the Fed Chair? Some Legal Realism

    Posted by

    Adam Levitin

    Fed Chair Jerome Powell has tersely indicated that he won't resign if asked by the President and that he cannot be fired or demoted. Peter Conti-Brown, who is a keen observer of Fed issues, has a nice summary of the state of the law. The basic idea is that as a formal legal matter, members of the Federal Reserve Board are removable by the president "for cause," such as inefficiency, neglect of office, and malfeasance. It's less clear if the President can demote the Chair to a mere Board member and, if so, what would be the standard for demotion, but it would seem strange that the greater cannot include the lesser. 

    But here's the thing:  none of the legal rules matter. 

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  • Unfair and Abusive Automatic CD Rollovers

    Posted by

    Adam Levitin

    Earlier this month the FTC finalized its “Click-to-Cancel” Rule to make it easier for consumers to get out of recurring subscriptions and memberships. The rule was promulgated under the FTC’s power to prohibit unfair and deceptive acts and practices in commerce, but the FTC’s jurisdiction under that power does not extend to banks, and banks have an auto-renew product that is in some instances much more problematic than automatic subscription renewals. What I’m talking about are automatic CD rollovers, which are sometimes done in an unfair and abusive way to rollover unsuspecting depositors into way-below-market-rate CD terms.

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