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Fed faces twin threats of recession and financial crisis as its inflation fight raises risks of both

The Fed is also beginning to reduce its massive balance sheet, which is beginning to cause disruptions in the $24 trillion Treasury market.

Staving off both recession and a financial crisis may take more than a hope and a prayer. Chip Somodevilla/Getty Images

There is wide agreement among economists and market observers that the Federal Reserve’s aggressive interest rate hikes will cause economic growth to grind to a halt, leading to a recession. Less talked about is the risk of a financial crisis as the U.S. central bank simultaneously tries to shrink its massive balance sheet.

As expected, the Fed on Nov. 2, 2022, lifted borrowing costs by 0.75 percentage pointits fourth straight hike of that size, which brings its benchmark rate to as high as 4%.

At the same time as it’s been raising rates, the Fed has been quietly trimming down its balance sheet, which swelled after the COVID-19 pandemic began in 2020. It reached a high of US$9 trillion in April 2022 and has since declined by about $240 billion as the Fed reduces its holdings of Treasury securities and other debt that it bought to avoid an economic meltdown early in the pandemic.

As a finance expert, I have been studying financial decisions and markets for over a decade. I’m already seeing signs of distress that could snowball into a financial crisis, compounding the Fed’s woes as it struggles to contain soaring inflation.

Fed balance sheet basics

As part of its mandate, the Federal Reserve maintains a balance sheet, which includes securities, such as bonds, as well as other instruments it uses to pump money into the economy and support financial institutions.

The balance sheet has grown substantially over the last two decades as the Fed began experimenting in 2008 with a policy known as quantitative easing – in essence, printing money – to buy debt to help support financial markets that were in turmoil. The Fed again expanded its balance sheet drastically in 2020 to provide support, or liquidity, to banks and other financial institutions so the financial system didn’t run short on cash. Liquidity refers to the efficiency with which a security can be converted into cash without affecting the price.

But in March 2022, the Fed switched gears. It stopped purchasing new securities and began reducing its holdings of debt in a policy known as quantitative tightening. The current balance is $8.7 trillion, two-thirds of which are Treasury securities issued by the U.S. government.

The result is that there is one less buyer in the $24 trillion treasury market, one of the largest and most important markets in the world. And that means less liquidity.

Loss of liquidity

Markets work best when there’s plenty of liquidity. But when it dries up, that’s when financial crises happen, with investors having trouble selling securities or other assets. This can lead to a fire sale of financial assets and plunging prices.

Treasury markets have been unusually volatile this year – resulting in the biggest losses in decades – as prices drop and yields shoot up. This is partly due to the Fed rate hikes, but another factor is the sharp loss of liquidity as the central bank pares its balance sheet. A drop in liquidity increases risks for investors, who then demand higher returns for financial assets. This leads to lower prices.

The loss of liquidity not only adds additional uncertainty into markets but could also destabilize financial markets. For example, the most recent quantitative tightening cycle, in 2019, led to a crisis in overnight lending markets, which are used by banks and other financial institutions to lend each other money for very short periods.

Given the sheer size of the Treasury market, problems there are likely to leak into virtually every other market in the world. This could start with money market funds, which are held as low-risk investments for individuals. Since these investments are considered risk-free, any possible risk has substantial consequences – as happened in 2008 and 2020.

Other markets are also directly affected since the Fed holds more than just Treasuries. It also holds mortgages, which means its balance sheet reduction could hurt liquidity in that market too. Quantitative tightening also decreases bank reserves in the financial system, which is another manner in which financial stability could be threatened and increase the risk of a crisis.

The last time the Fed tried to reduce its balance sheet, it caused what was known as a “taper tantrum” as debt investors reacted by selling bonds, causing bond yields to rise sharply, and forced the central bank to reverse course. The long and short of it is that if the Fed continues to reduce its holdings, it could stack a financial crisis on top of a recession, which could lead to unforeseen problems for the U.S. economy – and economies around the globe.

A two-front war

For the moment, Fed Chair Jerome Powell has said he believes markets are handling its balance sheet rundown effectively. And on Nov. 2, the Fed said it would continue reducing its balance sheet – to the tune of about $1.1 trillion a year.

Obviously, not everyone agrees, including the U.S. Treasury, which said that the lower liquidity is raising government borrowing costs.

The risks of a major crisis will only grow as the U.S. economy continues to slow as a result of the rate hikes. While the fight against inflation is hard enough, the Fed may soon have a two-front war on its hands.

D. Brian Blank does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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NRA’s path to recovery from financial woes leaves the gun group vulnerable to new problems

The National Rifle Association is spending heavily on legal fees and slashing programs for its members.




The gun group might be less sturdy than it appears. Kelly Nigro/Moment Open via Getty Images

The National Rifle Association’s financial firepower, which arose in part due to its large and loyal membership base, has long been one of the gun group’s main sources of strength.

But the NRA has in recent years faced a financial tsunami, one that came to light after the 2016 election. A swirl of disagreements with longtime business partners, accusations of waste and misspending, ballooning debt and lawsuits from the New York and Washington, D.C. attorneys general have triggered one embarrassment after another. The NRA tried to declare bankruptcy to cushion some of these blows, with no luck.

At this point, the threat of being forced by the authorities to shut down due to alleged improprieties is minimal. But has the NRA managed to weather its financial storm?

As an accounting researcher who focuses on the financial performance of nonprofits, I have been closely studying NRA finances throughout its crisis. I can say the NRA financial picture is, as of early 2023, a mixed bag. The gun group has shored up its financial position over the last few years. However, the way in which that financial recovery came about risks hemorrhaging the NRA’s core supporters.

White men look at a machine gun on display in a crowded room with high ceilings
NRA members get to see many kinds of firearms at the group’s annual conventions – even machine guns. Patrick T. Fallon/AFP via Getty Images

Digging out of a financial hole

The NRA’s financial troubles arose at the same time that scandalous aspects of the organization’s woes – such as longtime NRA leader Wayne LaPierre’s free yacht getaways and luxury suit purchases billed to an NRA contractor – were drawing public attention.

Perhaps the best measure of a nonprofit’s financial health is its unrestricted net assets – the money at the organization’s disposal after leaving out amounts it has to spend on activities promised to donors and what it owes to others. A multimillion-dollar unrestricted net asset reserve for an organization the size of the NRA can provide financial security. On the other hand, a negative reserve is typically a sign of serious trouble.

The NRA’s reserve was negative at the end of 2017, with a deficit of more than US$30 million – a sure sign of the troubles already underway. Such a negative balance indicates that after satisfying donor promises, the organization owes more money to others than the value of its assets.

Things only got worse in the following two years, with the NRA approaching an unrestricted net asset deficit of nearly $50 million in 2019. This degree of weakness even led the organization to suggest that it risked imminent failure. However, there was time for a turnaround.

And that’s what happened. In 2020, the NRA slashed its unrestricted net asset deficit by over $38 million. Ironically, it was shortly after pulling off this marked improvement that it filed – unsuccessfully – for bankruptcy.

This financial resurgence continued in 2021, with the organization reporting it had eliminated its unrestricted net asset deficit, building up a surplus of over $10 million. When also including the money set aside for specific uses stipulated by donors – the group’s net assets – the NRA’s total available funds reached over $75 million.

These developments may seemingly bode well for the organization’s ability to withstand its continuing financial troubles. Below the surface, however, there’s an ominous trend.

Selective cost cutting

How did the NRA get on a steadier financial footing?

It wasn’t through growth. NRA revenue declined in 2020 by 4% from $296 million to $284 million, even without taking inflation into account. Revenue fell another 18% to under $234 million in 2021.

Instead, it cut many core programs, including education and training, field services, law enforcement initiatives and recreational shooting.

Cost cutting can help stabilize faltering companies or nonprofits, depending on which costs they cut. The NRA’s over 4 million dues-paying members may tolerate lean spending only on certain things and only for so long. What the NRA spent on programs fell by $45 million – more than a 35% decline – in 2020. The organization was quick to attribute the change to the nation’s response to the COVID-19 pandemic.

However, program spending declined even further in 2021, when life had begun to return to normal, especially for gun enthusiasts. The NRA spent just $75 million on its programs in 2021, nearly $53 million less than it had two years earlier.

It didn’t cut all costs during these lean years.

Administrative spending in the “legal, audit and taxes” category skyrocketed, from just over $4 million in 2017 to almost $47 million in 2021. Much of this reflects the money NRA paid for its various legal entanglements, largely in fees to its new legal team.

What once was a member-focused organization has quickly become an organization whose primary growth area is legal fees.

Was 2022 a turning point?

Though the NRA apparently shored up its bottom line, its financial neglect of programs like firearms training, competitions and field services could ultimately disappoint its members and donors.

The organization has seen membership dues decline in the past several years, with a loss of more than 1 million members since the start of the crisis. I see a risk of a downward spiral: lower revenue, leading to less spending on programs, which leads to further declines in member dues, donations and so on.

The full NRA financial filing for 2022 is not yet available, but there are early signs that it may have been a turning point.

Journalist Stephen Gutowski has reported at The Reload that NRA membership declines meant that even with its more lean spending profile, the organization was poised to end 2022 at a loss.

I believe that with fewer members and fewer items left to cut, the NRA may take more drastic steps in the years ahead. And, with 2022 having been an election year – prime time for the NRA to take center stage – declining funds prevented an all-out political spending blitz.

Though it may once have seemed like the NRA would suddenly implode due to its weak finances, its decline today is more of a slow burn that’s diminishing its scale and threatens its future. The growth of other pro-gun groups, such as Gun Owners of America and the Second Amendment Foundation, poses further risks for a shrinking NRA.

In my view, the NRA’s risky strategy of cutting program costs while spending more on legal battles could portend a further and continued weakening of the organization in the years ahead.

Brian Mittendorf does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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US enforcement agencies are turning up the heat on crypto-related crime

How governments decide to go after crimes committed with crypto could color the industry’s public perception and how the space is regulated.



How governments decide to go after crimes committed with crypto could color the industry’s public perception and how the space is regulated.

On the evening of Jan. 7, Anatoly Legkodymov, founder of the cryptocurrency exchange Bitzlato, was arrested in Miami. The following day, the United States Department of Justice (DOJ) unsealed a complaint in federal court charging him with conducting a money transmitting business that transported and transmitted illicit funds. According to the DOJ, Bitzlato failed to meet U.S. regulatory safeguards, including Anti-Money Laundering requirements. 

Less than a month earlier, former FTX CEO Samuel Bankman-Fried was arrested in the Bahamas. In a statement, U.S. Attorney General Merrick Garland said, The Justice Department has filed charges alleging that Samuel Bankman-Fried perpetrated a range of offenses in a global scheme to deceive and defraud customers and lenders of FTX and Alameda, as well as a conspiracy to defraud the United States government.

Garland stated, The U.S. Department of Justice will aggressively investigate and prosecute alleged criminal wrongdoing in the financial system and violations of federal elections laws. But is it really a new day? Will U.S. law enforcement be able to go after alleged crypto criminals at home and abroad?

According to Oberheiden PC attorney Alina Veneziano, who represents executive clients under criminal investigation against U.S. Securities and Exchange Commission subpoenas and DOJ fraud allegations, the answer is yes.

Attempts to reign in this new, unrestrained industry were inevitable, Veneziano tells Magazine. She believes that federal government agencies are increasing their investigative efforts toward crypto crime and will utilize all the tools at their disposal subpoenas, summons and inter-governmental sharing of information.

 For example, only last year, the SEC increased the size of its Crypto Assets and Cyber Unit in an effort to investigate more fraudulent crypto asset schemes and better protect investors in the crypto markets. Veneziano also believes the Internal Revenue Service will further enforce U.S. tax laws for cryptocurrencies. 

Former federal prosecutor Grant Fondo also sees an increase in activity. Now a trial attorney and founder of the Digital Currency and Blockchain Technology practice at Goodwin, Fondo believes that this is the result of the current bear market, widespread acceptance of cryptocurrency and the governments obligatory focus on crime.

I think anytime there is a course correction and/or an economic event like a crypto winter, that can also increase activity […] When assets go down, people get hurt, and if people are mixing funds and things, it can create problems, Fondo tells Magazine. Add to that the prolific global adoption of crypto, more people involved and the DOJs concern about any asset used for illicit activity, and Fondo sees beefed up enforcement as an inevitability.

In 2021, the DOJ created the National Cryptocurrency Enforcement Team (NCET) to handle investigation and prosecution of criminal misuse of cryptocurrency. NCET would combine the expertise of the agencys Money Laundering and Asset Recovery Section and the Computer Crime and Intellectual Property Section. In 2022, the DOJ also created the Digital Asset Coordinator (DAC) Network. Under the leadership of NCET, designated federal prosecutors from U.S. attorneys offices around the country would be assigned to the DAC Network. Each offices DAC will be the digital asset subject matter expert and the first, investigative source of information. 

Crypto Enforcement Action

What types of crimes re they going after?

According to a DOJ report submitted to the presidential administration in September, the agency believes that cryptocurrency is the preferred payment method for ransomware and other digital extortion activities. As an example, the DOJ referred to a ransomware attack in May 2021 on the Colonial Pipeline. According to the report, the attack forced the company to shut down a gasoline and jet fuel pipeline for days. This resulted in fuel shortages around the country, including several airports. The attackers demanded and received a ransom paid in Bitcoin. 

The report also says, Cryptocurrency is used to raise funds for terrorist organizations and other nation state threat actors. The DOJ states that its largest cryptocurrency seizure disrupted the funding campaigns of ISIS and other terrorist groups. The agency took down a fraudulent ISIS website operation that purported to sell N95 masks and other protective equipment during the height of the COVID-19 pandemic.

The Department of Justice released photo of a group posting a request for donations and claiming to be a Syrian charity, but allegedly sought funds to support the mujahidin in Syria with weapons, financial aid and other projects assisting the jihad.
The Department of Justice released photo of a group posting a request for donations and claiming to be a Syrian charity, but allegedly sought funds to support the mujahidin in Syria with weapons, financial aid and other projects assisting the jihad. (

The Department of Justice released photo of a group posting a request for donations and claiming to be a Syrian charity, but allegedly sought funds to support the mujahidin in Syria with weapons, financial aid and other projects assisting the jihad.

Veneziano believes that these crimes are not new theyve just adapted to cryptocurrency. We are likely not looking at the creation of brand new crimes but are instead more likely to see the crypto element incorporated into other offenses, such as crypto tax evasion, crypto theft, unregistered crypto offerings, crypto money laundering, etc. Due to the nature of the blockchain, it is likely to be confined to federal offenses as opposed to state crimes, Veneziano says.

Fondo suggests that wire fraud is also a big factor. So, youll notice in a lot of the criminal indictments, they allege wire fraud. Wire fraud is agnostic to the type of asset, whether its a security, a commodity, whatever doesnt matter. Historically, criminals would use the telephone, aka the wires, to commit fraudulent acts. Today, wire fraud refers to crimes committed using any type of telecommunications technology. According to Fondo, if you move digital assets around using the wires, and you commit fraud, its a crime, and most indictments in the crypto space fall into that category. 

For example, in a statement on Dec. 14, 2022, U.S. Attorney for the Southern District of New York Damian Williams announced charges in two separate indictments against the founders and promoters of two cryptocurrency Ponzi schemes known as IcomTech and Forcount, both with conspiracy to commit wire fraud. 

According to the DOJ, victims purchased IcomTech and Forcount investment products using cryptocurrency, cash, checks and wire transfers. They were then given access to an online portal where they could monitor dubious returns. While Victims saw profits accumulate on the schemes respective online portals, most victims were unable to withdraw any of these so-called profits and ultimately lost their entire investments. All the while, IcomTech and Fourcounts promoters skimmed hundreds of thousands of the victims funds, withdrew it as cash and spent the loot on promos for the Ponzi scheme, luxury goods and real estate. 

What other agencies are involved?

Venziano believes that collaboration between government agencies on crimes is nothing new and should be expected in the crypto sphere. Venziano says, Consider a crypto fraud scheme involving a new token. The SEC will be involved if the token is unregistered and satisfies the definition of an investment contract under the Howey test, an analysis based on a Supreme Court decision.

Wally Adeymo, deputy treasury secretary
Wally Adeymo, deputy treasury secretary. (

She continues, The IRS will also be involved where there is tax evasion or the failure to report crypto sales and dispositions. Further, the DOJ may initiate an investigation where money laundering or other illicit activity is present. There is even a call for greater collaboration from the private sector to combat crypto fraud. Additional agencies, including the Financial Crimes Enforcement Network (FinCEN), the Federal Bureau of Investigation, Immigration and Customs Enforcement, the Secret Service and the Department of Homeland Security have all participated in cryptocurrency investigations. 

In the Bitzlato case, the DOJ teamed up with the Department of Treasurys Financial Crimes Enforcement Network. In a joint press conference with officials from the DOJ, Deputy Secretary of the Treasury Wally Adeyemo said that FinCEN is officially identifying Bitzlato as a primary money laundering concern in connection with Russian illicit finance. Adeyemo thanked the DOJ for being such great partners on this action but also on going after this ecosystem more broadly.

Do politics affect who the government investigates?

According to Fondo the answer is yes and no. The DOJ is part of the Executive Branch of government and the president nominates its leader, the Attorney General. The U.S. Senate is tasked with confirming the presidents nominee.

Generally, it is an agency that is agnostic in a sense as to who the president is, Fondo says. When he was a federal prosecutor, Fondo believed that he was completely immune to whoever was in the White House. On the other hand, whenever national actors are involved, Russia or China for example, Fondo says that a potential case escalates in significance. Since the DOJ gets lots of leads and complaints, so they have to prioritize resources and decide which ones to pursue.

A case that involves a national actor, stealing trade secrets, stealing assets, funneling assets (to Russia) to fight, say, the war in the Ukraine, that will rise well above something else thats an otherwise more typical crime. So, in that way, the DOJ is more political.

Fondo also believes that when there is a national scandal, like Enron, Bernnie Madoff or the fall of FTX, the government is more apt to jump in and get more involved. When something hits the press, like a major incident, there is more pressure to get charges more quickly, Fondo says.

Venziano points out that crypto activity isnt limited by geographic borders and can affect overseas markets in a matter of seconds. Crypto activity can certainly affect international politics, demanding cooperation between the United States and enforcement agencies in other nations. Take the Bitzlato case as an example. The DOJ received significant operational and informational assistance from other agencies both domestic and international including Customs and Border Protection and also EUROPOL and Dutch and Belgian authorities, Venziano says.

In the U.S., there are no federal laws on the books specifically regulating the use of cryptocurrency. Different regulatory agencies have taken responsibility and have written rules for the oversight of different digital assets. Sooner or later, Congress is expected to move legislation to the presidents desk, formally defining cryptocurrencies and how they are to be regulated.

In the meantime, Fondo believes that the lack of clarity, and even disagreement among regulators, leads to ambiguity that crypto-centric companies struggle with. In essence, its hard to follow the rules if you dont know what they are, especially on the civil, as opposed to the criminal, side of things.

Nonetheless, he believes that the industry has matured in recent years, and there are a lot of great actors out there trying to do the best they can with regulatory uncertainty, but also trying to meet the demands of the market. But, when theres a situation, a crime is a crime is a crime. If the government sees something that looks like fraud, it doesnt really matter what the asset is, and they think its significant enough and worthy of chasing, theyll do it.

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Top 3 commercial real estate REITs to avoid amid a triple whammy

Commercial real estate REITs have been under intense pressure as the industry faces a tripple whammy of high-interest rates, work-from-home, and white-collar…



Commercial real estate REITs have been under intense pressure as the industry faces a tripple whammy of high-interest rates, work-from-home, and white-collar layoffs. On Wednesday, the Fed decided to hike interest rates by 0.25% and signaled that more rate hikes were coming.

And recent data shows that the percentage of people working from home is still sharply higher than where it was during the pandemic. Worse, many large companies like Amazon, Salesforce, and Meta Platforms are laying off thousands of employees. 

Therefore, with debt maturities coming up, there are concerns that the industry will be in trouble for a while. Further, as I wrote in this article on the SCHD ETF, REITs are now competing with cash, with short-term bonds yielding over 5%. So, these are some of the top commercial real estate REITs to avoid during the sell-off. 

Boston Properties 

Boston Properties (NYSE: BXP) stock price has been in a strong sell-off in the past few months. It is trading at $49.63, which is about 63% below the highest level in 2022. This decline is mostly because of the cities where the company operates. 

It is mostly concentrated in places like New York, Los Angeles, San Francisco, and Seattle. These are some of the most troubled cities in the commercial real estate industry. In the most recent earnings statement, the company’s CEO said:

“Many of our clients are experiencing a slowdown in growth or reductions in top line revenue and as a result are focused on cost control including moderating headcount and space use.”

Therefore, in the near term, I suspect that the Boston Properties stock price will continue falling as investors embrace the new normal of high interest rates. In the long term, investors will likely buy the dip as the dividend yield become more attractive.

Kilroy Realty Corporation

Kilroy Realty Corporation’s (NYSE: KRC) stock price has also been in a freefall. It was trading at $29 on Wednesday, sharply lower than its 2022 high of $79. As a result, its forward dividend yield to 7%. 

The stock’s collapse is mostly because of the triple whammy facing the industry and the fact that billions of dollars are coming due. And like Boston Properties, the company’s operations are concentrated in high-risk cities like San Francisco, Seattle, and Austin. 

The only benefit for Kilroy is that it has staggered debt maturities, which meaning that it has more room to adjust its books. As a result, it has no debt maturities until December 2024, as the CEO noted:

“Net debt the fourth quarter annualized EBITDA remains about six times. And we have no debt maturities until December of 2024 and limited interest rate exposure with all of our debt fixed or subject to cap.”

Vordano Realty Trust

Vornado Realty Trust (NYSE: VNO) stock price has dropped lower than most commercial real estate trust stocks. It was trading at $13.80, down by over 72% from the highest point in 2022. This performance is mostly because Vornado is highly concentrated in New York, where occupancy rate remains low. 

Like Kilroy, Vornado has no maturities this year, with the next one coming in mid-2024. Still, because of its focus on New York, Vornado stock will likely continue falling in the near term. The other commercial REIT stock we recently recommended exiting was SL Green. It stock is down by over 10% since the article went live.

The post Top 3 commercial real estate REITs to avoid amid a triple whammy appeared first on Invezz.

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