Since the termination of Operation Choke Point, some have questioned whether Obama-era federal regulators really did engage in systematic and top-down attempts to squeeze off access to financial services for businesses that were lawful but disliked. Now Rep. Blaine Luetkemeyer (R-Mo.) has released documents produced in connection with a lawsuit against the Federal Deposit Insurance Corporation. They show extensive pressure by numerous FDIC regional directors and other officials on regulated banks to terminate customer relationships with payday lenders (the banks were generally already not themselves engaged in such lending). They also include repeated wordings about how higher-ups wanted the pressure applied and that banks’ decisions to cut off customers should be styled as if it were a voluntary choice. [Luetkemeyer press release; Norbert Michel, Forbes; John Berlau, Forbes; trade group Community Financial Services of America]
- “Fractional reserve banking is at the root of business cycles” is no more persuasive than “fractional-reserve banking is inherently fraudulent” [George Selgin, Cato Alt-M] And Cato’s 36th annual monetary conference will be held in DC Nov. 15 with the theme: “Monetary Policy: Ten Years After the Crisis”;
- Some fear anticompetitive effects from patterns of common ownership of corporate equities among index funds and institutional investors. Not so fast [Thomas A. Lambert and Michael E. Sykuta, Regulation magazine]
- “10 Years Later, Assessing the Dangerous Legacy of TARP” [John Allison, Real Clear Markets]
- “Why Bitcoin Is Not an Environmental Catastrophe” [Diego Zuluaga, Cato]
- Vern McKinley reviews book by advocate of postal banking revival [Regulation; earlier here and here]
- “America has strong protection of private property rights, is bound by the rule of law, and pays its debts.” Well, for the most part [Gerald O’Driscoll, Jr., Cato Journal reviewing book on FDR gold episode]
- “California’s Unconstitutional Gender Quotas for Corporate Boards” [Ilya Somin, Stephen Bainbridge, Jerome Woehrle, Ann Althouse]
- Useful tool, or abuse of power? “Leveraging allows regulators to use their gatekeeping authority to secure concessions that they might not be able to achieve otherwise—and to do so quickly and cheaply.” [William Kovacic and David Hyman, Cato Regulation magazine]
- The conflict minerals law fiasco: “between 2010 and 2012, the monthly incidence of battles, looting and violence against civilians strongly increased in the mining areas targeted by Dodd-Frank” [Nik Stoop, Marijke Verpoorten and Peter van der Windt, Washington Post “Monkey Cage”, Dominic Parker, PERC (summarizing two recent studies), my earlier]
- “Return of Bill Lerach: Disbarred attorney consults on case alleging hedge funds mismanaged Kentucky pensions” [ABA Journal]
- “The Politics of Pay: The Unintended Consequences of Regulating Executive Compensation” [Kevin J. Murphy and Michael C. Jensen, Cato Institute Research Briefs in Economic Policy series]
- “Increasingly, our [financial] regulatory structure has been adopting processes that are inconsistent with adherence to the rule of law.” What to do? [Charles Calomiris, Cato Journal]
- Federal judge Preska of Southern District of New York rules structure of Consumer Financial Protection Bureau unconstitutional, creating split with D.C. Circuit which upheld CFPB structure;
- “Australia Attempts to Fight Tobacco Black Markets by Banning Large Cash Transactions” [Scott Shackford]
- “Restoring Accountability to the Business of Banking” [John A. Allison and Lydia Mashburn, Washington Examiner]
- NAM is among backers of Main Street Investors Coalition that will push back against corporate governance and shareholder activism forces on Left [Bainbridge; Alicia McElhaney, Institutional Investor]
- Supreme Court agrees to hear SEC enforcement action case on scope of liability for false statements [Greg Stohr, Bloomberg; Peter J. Henning, New York Times DealBook; Lorenzo v. Securities and Exchange Commission]
- “Why the Fall in IPOs Is a Threat to Popular Capitalism” [Diego Zuluaga, Cato]
As we mentioned in a brief earlier item, New York Gov. Andrew Cuomo has “directed the Department of Financial Services to urge insurance companies, New York State-chartered banks, and other financial services companies licensed in New York to review any relationships they may have with the National Rifle Association and other similar organizations. Upon this review, the companies are encouraged to consider whether such ties harm their corporate reputations and jeopardize public safety.” [Cuomo press release] Maria T. Vullo, Superintendent of Financial Services for the state of New York, issued a guidance memorandum. In language not altogether typical of safety-and-soundness financial regulation, Vullo wrote:
While the social backlash against the National Rifle Association (the “NRA”) and similar organizations that promote guns that lead to senseless violence has in the past been strong, the nature and the intensity of the voices now speaking out, including the voices of the passionate, courageous, and articulate young people who have experienced this recent horror first hand, is a strong reminder that such voices can no longer be ignored and that society, as a whole, has a responsibility to act and is no longer willing to stand by and wait and witness more tragedies caused by gun violence, but instead is demanding change now.
Brian Knight writes at FinRegRag:
This request could easily be construed is a thinly veiled threat. While the NYDFS statement does not explicitly say that NY FIs (financial institutions) that may face regulatory sanction for failing to cut ties with the NRA, it doesn’t rule out the possibility either. If the NYDFS had no intention of threatening regulatory sanctions, they could clearly have added language taking the threat of enforcement off of the table. They didn’t, which indicates they want NY FIs to think there is a potential the government will come after them if they don’t end their relationships with groups like the NRA.
These instructions to NY FIs could also be seen as an attempt to suppress political speech that some New York policy makers disagree with. Whatever one thinks of the NRA, it is an organization engaged in legal political speech and advocacy. Cutting off the NRA’s access to financial services could change the political debate by reducing opposition to political efforts to tighten gun laws. The NYDFS release says, “This is not just a matter of reputation, it is a matter of public safety, and working together, we can put an end to gun violence in New York once and for all.” Given that the NRA does not make a product that could pose a direct risk to public safety, this release is clearly referencing the NRA’s political advocacy.
Knight compares the initiative to the Operation Choke Point episode, in which federal regulators steered banks away from dealing with various controversial but lawful lines of business, including some that were politically fraught. But in that episode, at least, the target enterprises were primarily engaged in the sale of goods and services and thus might in principle have faced financial risks related by fraud or unfulfillable obligations to customers.
The NYDFS order appears to be inherently about political speech. After all, there is no allegation that the NRA is committing fraud against its members. Rather, the argument is that the NRA’s positions are so dangerous that they are harmful to the community and pose a risk to the reputation of any FI that works with them. This could fairly be seen as an attempt to restrict the NRA’s ability to operate in the political arena and marketplace of ideals.
The guidance memorandum might thus accomplish by indirection what it would be plainly improper for the state to attempt directly:
There is no law that says a FI (financial institution) cannot do business with a gun rights group and such a law would almost assuredly be unconstitutional. However if the regulator declares that such an affiliation poses a reputational risk to the FI (that the regulator, not the market, determined existed), it has leverage to force the FI to comply.
The NRA has filed a suit against the governor and New York officials saying the program amounts to “coercion” aimed at depriving the association and its constituents of First Amendment rights. More: Scott Greenfield.
Meanwhile, in other news of regulatory retaliation — see also our tag on that — U.S. President Donald Trump reportedly urged the U.S. Postal Service to double its rates for handling packages shipped by Amazon.com, linked in his mind through founder Jeff Bezos with his journalistic nemesis the Washington Post. Postmaster General Megan Brennan is said to have “resisted Trump’s suggestion in private conversations in 2017 and 2018, telling him that package delivery rates are set by contract and reviewed by an independent commission” and that the Postal Service does not get a bad deal from its arrangements with Amazon and other e-commerce firms. [Reuters]
It would take a heart of stone not to laugh: after spurning Wells Fargo Bank, the city of Seattle has gone back after finding no other bank wants its business. “The City Council in February 2017 voted 9-0 to pull its account from Wells Fargo, saying the city needs a bank that reflects its values.” Aside from the scandal over fabricated customer accounts, “Seattle was the first to make the Dakota Access Pipeline — fully operational since last June — a major reason for severing ties with the bank.”
It turned out, however, that other large money-center banks like JP Morgan Chase have also riled anti-fossil-fuel activists with their own involvements in project finance. “Glen Simecek, president and CEO of the Washington Bankers Association, a trade association of banks across Washington, said he wasn’t surprised the city had a tough time attracting a new partner” citing “disdain” by members of the city council. “It is a challenge, I don’t envy bankers trying to walk that line. They want to serve the city, but the challenge of an activist city council makes that harder to do.” [Lynda V. Mapes, Seattle Times]
The only way to make the story funnier would have been for Wells Fargo to have said no.
- Using regulation to stomp political adversaries endangers rule of law: Gov. Cuomo directs New York financial regulators to pressure banks, insurers to break ties with National Rifle Association (NRA) [J.D. Tuccille, Reason]
- My opinion piece on New Jersey governor’s scheme for a state bank has now escaped its WSJ paywall; WSJ readers respond [letters] And Sen. Kirsten Gillibrand [D-N.Y.] has now introduced a plan to get the federal government into retail banking via the post office [Daniel Marans, Huffington Post, quoting Gillibrand’s interesting claim that “Literally the only person who is going to be against this is somebody who wants to protect payday lender profits.”] More: Nick Zaiac on postal banking;
- “From Kelo to Starr: Not Merely an Unlawful Taking but an Illegal Exaction” [Philip Hamburger on federal government’s acquisition of a dominant equity stake in AIG]
- Court’s opinion on consumer debt contract formed in New York specifying Delaware law undermines “valid-when-made” doctrine that promotes liquidity of secondary debt market [Diego Zuluaga, Cato]
- “Some blockchains, as currently designed, are incompatible with” the European Union’s General Data Protection Regulation [Olga Kharif, Bloomberg via Tyler Cowen]
- And if you’re interested in the legal constraints holding back the extension of banking services to the cannabis industry, tune in to a Cato conference on that subject May 10.
- For best effect, read it aloud: “Do YOU appear in the form of water droplets? Are YOU found on grass and windows in the morning? If so you MAY be dew condensation.” [Andy Ryan]
- “Bezos could get out of Trump’s kitchen by telling the editors and reporters at his newspaper to shut up about the President.” [John Samples]
- Wave of ADA web-accessibility suits hit banks: “N.Y. lawyers sue 40-plus companies on behalf of blind man in a month” [Justin Stoltzfus, Legal NewsLine] More: Jonathan Berr, CBS MoneyWatch;
- “Law schools should not continue hiring faculty with little to no practical experience, little to no record of scholarship, and little to no teaching experience. ” [Allen Mendenhall, Law and Liberty]
- U.K.: “Couple claiming compensation for food poisoning exposed by holiday selfies” [Zoe Drewett, Metro]
- Federal judge: “every indication” that prominent Philadelphia personal injury firm “essentially rented out its name in exchange for referral fees” [ABA Journal]
“Politicians Want to Start a Bank. What Could Go Wrong?” is the title of my new Wall Street Journal op-ed about New Jersey Gov. Phil Murphy’s very bad idea.
The article will be paywalled for many, but you can read some of the journalistic coverage of the bank issue: Matt Friedman, Politico, Samantha Marcus/NJ Advance Media. Some articles I cite in my piece along with relevant links/research: The Economist on German Landesbanken, Aaron Fernando, The Progressive (citing German example, and noting current campaigns for city-owned banks in Los Angeles, San Francisco, Seattle, and other cities); Erica Jedynak letter, MyCentralJersey.com (“A 2011 report based on research provided by Federal Reserve Bank of Boston and other state agencies recommended the Massachusetts legislature not pursue the idea”).
Research on public-owned banks across the world suggests [that lending is politicized]. A 2002 paper from a Northwestern University economist found that areas with stronger political parties get lower interest rates from public banks. Political interference is likely the reason that public banks have been found to underperform compared to private banks in underdeveloped countries, according to a 2012 paper written by Taiwanese researchers.
On corruption rankings, Transparency.org on Germany; Five Thirty-Eight and Harvard Safra Ethics Center on U.S. states. On New Jersey’s outstandingly bad record for corruption: Olivia Nuzzi, Daily Beast and Philip Bump, Washington Post.
- High cross-border remittance costs for globally mobile workers slow ascent from poverty, and know-your-customer and money-laundering regulations have made things worse [Money and Banking]
- “The Supreme Court should find ALJs to be ‘officers of the United States’ and thus make them subject to presidential appointment and removal.” [Ilya Shapiro on Cato merits amicus filing in Lucia v. Securities and Exchange Commission]
- “Settlement of Lawyer-Driven ‘Merger Tax’ Litigation Stumbles in New York” [Greg Herbers, WLF]
- “Financial Regulation: The Apotheosis of the Administrative State?” 2017 National Lawyers Convention Federalist Society panel with Richard Epstein, Hal Scott, Peter Wallison, and Arthur Wilmarth, moderated by Judge Carlos Bea;
- With advances in Oregon and even California, deregulation of commercial insurance lines is having a moment [Ray Lehmann, Insurance Journal; Lehmann’s 2017 Insurance Regulation Report Card for R Street Institute] Perennially troubled Massachusetts, on the other hand, continues slide in same survey [Agency Checklists]
- Tech companies have been experimenting with old and lawful device of dual class stock and SEC shouldn’t be allowed to use raised eyebrow power to stop that [Bainbridge, WLF]