Talking Crypto and Elections With 'The Mooch;' Bank Rescue Politics; Gensler Defends Budget on the Hill as Republicans Get in Some Shots
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The bank collapses, and the Biden administration’s interventions to aid depositors, continued to dominate the regulatory conversation in Washington. And it became clear that new rules will be coming for big lenders. The White House issued its own policy proposals, all that can be done without congressional action. Congress, however, is eager to get involved. At hearings in the House and Senate this week, both the regulators and the leaders of Silicon Valley and Signature banks got roughed up. We also took a look at a new academic study on the SEC’s plan to send retail stock trades to auctions — a proposal that would upend the way orders are executed today. The paper takes issue with the agency’s contention that investors will save more than $2 billion annually under the new regime. For our Friday interview, we sat down with a well-known (and out-spoken) New Yorker who has a lot to say, especially about crypto and Sam Bankman-Fried.
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Friday Q and A: It seems just like yesterday when Anthony Scaramucci hit peak Washington fame with his 11-day stint in Donald Trump’s White House. But, believe it or not, that was almost six years ago. In the meantime, the Mooch hasn’t slowed down. In fact, his life seems to have only gotten busier – and, if possible, crazier. Who else, for instance, would have sold a piece of his investment management business SkyBridge to one Sam Bankman-Fried? Even so, Scaramucci is higher on crypto than he’s ever been. He’s also still running SALT, the A-list investment conference. And he’s a podcaster.
While Scaramucci says he’s pulled back a bit from politics, he certainly remains up on everything that is going on. The New York native is, of course, still outspoken and highly opinionated about some of our favorite topics – digital assets, the environmental, social and governance movement and financial regulation, to name a few. So we were excited when he agreed to sit down with us for an interview via Zoom while he was heading into work on Wednesday. Read on to learn his feelings about SBF, crypto regulation and wokeness. Plus, he tells us about his favorite book of the year thus far.
What follows is our (condensed and lightly edited) conversation:
Capitol Account: We understand you were at Davos talking about the benefits of crypto. Was that a tough sell, considering the FTX collapse and all the other turmoil in the industry?
Anthony Scaramucci: I’m wildly bullish on the crypto currency industry and Bitcoin because every time I go to Davos, I try to take a seismic test of what's going on at Davos and then do the exact opposite. Let me give you some color on that. In 2007, the World Economic Forum said trees were going to grow to the sky and we had solved for all of our monetary problems – we were just going to have unlimited growth. In 2008, we had the global financial crisis…And in 2023, they said that crypto was dead. They’ve taken the Jim Cramer approach…or the Gary Gensler approach, that they want to destroy crypto. Therefore when I left Davos, I said: this is obviously going up because these people are so negative on it.
CA: What do you think of the current debate about digital assets oversight?
AS: The regulatory environment in the United States is terrible. The regulatory environment in the U.K. is terrific. Why is it terrific? Well, they've lost some standing because they Brexited. And the people in London are smart people. They want to keep, in my opinion, the mantle of financial services leadership for London.
CA: What should the U.S. government be doing?
AS: There’s a very simple way to solve it – you just follow United States history. You’ve got to have reasonable people, somebody like a Franklin Roosevelt. Roosevelt looked at the situation in the 1920s [with Wall Street] and said, `these guys, many of them are lawless’…He went to the industry and he said, `you guys know this industry better than me, you know how to clean up the industry.’ He hired the fox to guard the henhouse. He put Joseph P. Kennedy in charge of the SEC. [Roosevelt] knew he was a rank criminal, and he knew he would be able to catch the other criminals. The SEC could very simply go to people, even the Sam Bankman-Frieds, if you will…and say: `Where is all the criminality? Where is all the riff-raff in this industry? And if you had my regulatory hat on, how would you legislate?’
CA: There does seem to be a lot of bad actors in the space.
AS: Lawlessness in the industry, which I find despicable, is hurting the industry. There’s no question about that. But the regulatory overreactions of the lawlessness is going to set the country back several years.
CA: Are you talking about the SEC?
AS: The good news about this country is we recirculate the elite every few years. Gensler will be kicked out of that job. He’s obviously incompetent, he's got the entire agency in disarray and he's a publicity hound. He's more focused on going after Kim Kardashian than he is on appropriately regulating the industry. Once he's gone, maybe we can get somebody in there that's facts-based, reality-based, wants the United States to maintain its mantle of financial services leadership globally, and doesn't want this industry to leave. I don't know, I think that could happen.
CA: Tell us about your relationship with Bankman-Fried.
AS: It was a full betrayal by both Sam and his family members. They purchased 30 percent of my company. Despite my personality and reputation, I'm a cautious guy. They wanted to buy 100 percent of our business, I wouldn't let them do that. They paid cash for it. The bankruptcy estate now owns 30 percent of SkyBridge. At some point we will be able to unravel that transaction.
CA: What do you think was so seductive about him? How could he fool so many people?
AS: Sam had a brilliance about him. There was an awkwardness to him, as a result of which there was a projection of some simplicity, perhaps some innocence. I don't think anybody saw the underlying malevolence. And, he was making a lot of money but he was relatively unaffected by it. He was driving around in a Toyota Corolla. He was wearing a T-shirt…I got it wrong – alongside of twenty-five of the smartest venture capitalists in the world.
CA: Are you less involved in politics than you used to be?
AS: I took a back seat after the 2020 election. I have given to the candidates that I like. I've given money to people like [California Rep.] Ro Khanna. He's a Democrat, but I think he’s a very smart guy and he's very pro-crypto. I am talking to Senator [Cynthia] Lummis' team. I will be active, but I won't be active the way I was with Governor [now Sen., Mitt] Romney or President Trump, but I'm going to be active in the sense that as an industry we need to coalesce…We have to find exceptional candidates that are pro-crypto. I'm going to be spending time, energy, capital and using my bully pulpit, to help.
CA: How is the broader finance industry feeling about the election?
AS: Wall Street has had enough. Wall Street is trying to be more apathetic, and trying to hide more. Wall Street got very involved after the financial crisis, and I don't think it's worked out well. You find that the donors that are at the executive levels of these Wall Street firms have really taken a back seat because they've decided that it doesn't really help them if they're supporting a candidate – and if anything, it agitates the other side.
CA: What about so-called woke corporations and ESG?
AS: It’s ridiculous. The backlash of that is coming. Vivek Ramaswamy is not going to be the president, but he's telling you something about what's going on in the culture. People don't like it, they’re being scolded…The wokeness is driving people crazy. It's hurting the society. Unfortunately, guys like [Gov. Ron] DeSantis understand this and they're going to use it as a cultural warrior strategy. I don't like it in candidates either way. I want candidates that are less focused on left or right and more focused on right or wrong. What makes sense for the country? What are the right policies? Enough of the virtue signaling.
CA: And you’re doing a podcast?
AS: I have a new podcast called “Open Book” where I'm interviewing authors. I’ve got an eclectic mix of people coming on, including Barbara Eden from “I Dream of Jeannie,” the 91-year-old superstar. She sent me a genie bottle and she listens to my podcast. I interviewed James Stewart on, who was the lunatic running Viacom, the old man?
CA: Sumner Redstone.
AS: Yes. That is one of the best stories ever. The truth is stranger than fiction. You’ve got to read that book, “Unscripted.”
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White House Weighs in on Bank Rules: The Biden administration issued a host of policy recommendations Thursday for boosting oversight of banks, signaling that we’re hitting the peak political stage of this month’s mini-crisis (if we weren’t there already). What’s most notable about the White House announcement is that it spends a lot of time blaming the Trump administration for the failures of Silicon Valley and Signature banks. And it calls on regulators to toughen rules for mid-sized lenders that were softened in a 2018 rollback.
While it never hurts to get some presidential backing, it’s not likely that the banking watchdogs needed the prodding. In fact, Fed Vice Chair for Supervision Michael Barr and FDIC Chairman Martin Gruenberg already made clear during two congressional appearances this week that they’re working on much of what the administration set out. Still, the recommendations certainly underscore that this is now a top priority.
Here’s a brief rundown on the White House requests, which it stressed can all be done without any action by Congress:
Capital and liquidity: Banks with between $100 billion and $250 billion in assets must have a lot of “high quality” liquid holdings so they can meet customer withdrawals during periods of stress, the White House said. (SVB, of course, had invested in a ton of Treasuries that are usually considered high quality and liquid). The administration also noted that SVB and Signature had large unrealized losses on some investments that exceeded the firms’ capital cushions. While it’s not entirely clear what the White House is recommending, it sounds like officials might want regional lenders to take a capital hit from unrealized losses going forward.
Stress testing: The administration asserted that Donald Trump’s regulators set a way too long transition period that delayed mid-sized banks from being stress tested after they passed the $100 billion threshold. The current watchdogs should look to speed that up. Regulators were also directed to reinstitute annual exams for banks the size of SVB, rather than doing them every two years. And the White House suggested that stress tests analyze how banks would fare if interest rates are rising – the real-world scenario that created big problems for SVB….(Thursday)
Gensler Treks to Capitol Hill: Gensler made his first appearance before the Republican-controlled House Wednesday afternoon, facing sharp questions on his climate rule and aggressive regulatory agenda. The SEC chief testified before an Appropriations subcommittee on the Biden administration’s $2.4 billion budget request for the agency – which would give the regulator some $265 million more than it received in 2023. Not surprisingly, the Republicans are looking to slash that. “After years of funding increases, we have an SEC that is heavy-handed with enforcement and examinations, and one that doesn’t think twice about proposing new regulations to completely rethink our markets,” noted Steve Womack, chairman of the financial services and general government panel.
For his part, Gensler told the lawmakers that much of the additional money will be used to bulk up both enforcement and examinations, as well as for new technology. Overall, the plan would give the SEC 170 new full-time positions. One of the reasons is crypto, which Gensler noted has the agency “stretched thin.” The SEC chief also downplayed the increase, pointing out that the commission’s funding doesn’t cause a hit to the taxpayers. It comes from transaction fees.
In what may come as news, the chair told the panel that he is committed to passing a Dodd-Frank Act rule that would rein in incentive-based compensation that could encourage top financial executives “to take inappropriate risks.” This is a six agency effort that floundered during the Trump administration, so don’t hold your breath. But the failures of SVB and Signature have put it on the front burner, at least as far as Democratic lawmakers are concerned.
Gensler also addressed scope 3 emissions – those that come from a company’s supply chain – offering sort of lukewarm comments that may cause some to wonder whether he is backing away from the most controversial aspect of the climate proposal. “We are considering what to do there, because we really did get a lot of comments on this,” he said in response to one question. Later, he added that the scope 3 “discussion is an ongoing one by the staff and the commissioners.” It’s worth noting, however, that Gensler took pains numerous times to describe the climate plan as a limited and narrow disclosure regulation.
Here’s a recap of some key moments:
Climate: Gensler took a lot of incoming on why the agency was setting rules in an area that many Republicans contend is way beyond the SEC’s authority. Michael Cloud of Texas even helpfully printed out the 1933 and 1934 securities laws and brought them to wave at the chair. “You want to guess how many times climate appears in these documents?” he asked, before answering his own question. “It’s zero.”
IG report: John Moolenaar and several other Republicans grilled Gensler about last fall’s internal watchdog report that detailed high attrition among staff, as well as senior managers’ concerns that the fast pace of rulemaking was damaging morale. “It really raises questions, and confidence, in your ability to lead the organization,” Moolenaar said. Gensler said that the SEC attrition rate is comparable to other agencies, and added that the commission’s employees are highly sought after by private firms that pay a lot more.
Union deal: The recent collective bargaining agreement that allows the rank and file to come to the office four times a month also caused some consternation. “How do you expect to effectively consider comments and perform adequate analysis on over 50 proposed rules with a workforce that barely comes into the office?” asked Republican Dave Joyce. Gensler was sanguine, replying that employees are “fully engaged” and did very well throughout the pandemic when everybody was virtual. “I’m old enough to think this is new technologies adapting – and people find different work-life balances,” Gensler said…(Thursday)
Attack on Auctions: Gensler’s ambitious plan to send retail stock trades to auctions largely hinges on his contention that it will save investors big money – as much as $2.35 billion a year, by the agency’s own estimate. But a new academic study that’s now rocketing around Wall Street pointedly questions that analysis. It found that not only is the SEC’s cost-savings projection way off, but that it was built on highly problematic data.
The paper, published this week by Notre Dame’s Robert Battalio and Indiana University’s Robert Jennings, conducts a “fade analysis.” (While that sounds complicated, it’s pretty simple.) In a nutshell, the review looks at the risk of stock prices moving against investors from the time they submit orders until their trades are executed. The professors concluded that “the fade” retail investors would get under the SEC plan would likely be so significant that many auctions would be considered failures – meaning the prices would be worse than if the orders were never sent in the first place.
The two academics assessed the costs of the auctions, not the benefits. But the numbers are stark. For auctions that last 100 milliseconds, which is the shortest period of bidding that the SEC would allow, “adverse movements” in share prices could cost retail traders from $1.73 billion to $1.88 billion annually. For 300 millisecond auctions, the longest time that the commission would permit, the figures rise to between $2.17 billion and $2.55 billion. Here’s the summation:
“We conclude that the potential costs of failed auctions may be on the same order of magnitude as the potential benefits of successful auctions. In several of the scenarios we examine, the commission’s auction proposal has the potential of creating a net loss for retail investors even if one accepts the commission’s estimated benefit.”
An SEC spokesperson said the agency “benefits from robust engagement from the public” and intends to review all comments it receives. “Generally, we respond to comments received as part of the final rulemaking, and not beforehand,” the spokesperson said.
One big reason why Battalio and Jennings’ findings conflict with the SEC’s analysis is because the professors used different data. They based their research on retail trade information from May 2022 that was provided to them by unnamed market makers (who, we should note, are the biggest opponents of the auction plan). In an interview, Jennings said he can’t reveal any names, but added that he and Battalio often rely on the proprietary information for their equity market studies.
For its work, the SEC used a combination of datasets, including something known as the BJZZ algorithm. It employs a complicated process to assess whether orders come from small investors. (Though this seems confusing, pay attention because this is where things start to get interesting.)
BJZZ scans orders that market makers pass on to entities known as trade reporting facilities. The algorithm searches for trades that are executed at sub-penny price increments because that can be a tell-tale sign of a retail investor. BJZZ also conducts a separate simultaneous analysis to root out institutional orders. While the algorithm is used fairly widely, it definitely has issues – something the SEC concedes. (In a footnote deep in its nearly 400-page rule proposal, the commission points out that a recent study found that BJZZ correctly identified retail trades only 35 percent of the time…(Wednesday)
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