Deep Dive Episode 159 – Countering the Politicization of Financial Services: Is the Cure Worse than the Disease?
In several recent high-profile cases, banks have conditioned or denied financial services to disfavored industries after campaigns against those industries by advocacy groups. In late-November 2020, the Office of the Comptroller of the Currency responded with a rulemaking that, if adopted, would bar national banks from denying financial services to counterparties on the basis of the “personal beliefs” of management and would prohibit “broad categorical exclusions” of certain industries.
Some have hailed the rulemaking as an overdue counteroffensive against so-called “woke capitalism.” Others worry that it would create a “Fairness Doctrine” for banks and question the potential unintended consequences of the rule for freedom of conscience and orderly bank supervision.
This live podcast explores the issues surrounding the politicization of financial services, including the OCC rulemaking and other recent initiatives. This is a subject on which reasonable minds across the political spectrum—from progressives and libertarians to conservatives—can and do disagree.
Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.
[Music and Narration]
Introduction: Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.
Micah Wallen: Good afternoon and welcome to The Federalist Society’s Fourth Branch Podcast for the Regulatory Transparency Project. My name is Micah Wallen, and I am the Assistant Director for RTP and The Federalist Society Practice Groups.
As always, please note that all expressions of opinion are those of the guest speakers on our calls. Today, we are fortunate to bring you a terrific discussion titled “Countering the Politicization of Financial Services: Is the Cure Worse than the Disease?”
For our panel today, Wallace DeWitt, a senior counsel from Allen & Overy, will be introducing our other panelists. If our audience would like to learn more about all of our speakers and their important work, you can visit regproject.org where we have listed all of their bios. In a moment, I will turn it over to Wallace to get us started. After opening remarks and discussion between the panel, we will then move to an audience Q&A, so please be thinking of the questions you’d like to ask of our speakers as we go. Thank you all for joining us, and, Wallace, the floor is yours.
C. Wallace DeWitt: Well, thank you very much, Micah, and good afternoon, ladies and gentlemen, and welcome to our teleforum. It’s my pleasure to moderate today’s discussion, and our topic, as Micah mentioned is “Countering the Politicization of Financial Services: Is the Cure Worse than the Disease?” In several recent high-profile cases, banks have conditioned or denied financial services to certain disfavored industries, for example, firearms or oil and gas, generally following the onset of internal or external pressure campaigns.
In late November, the Office of the Comptroller of the Currency under the direction of then Acting Comptroller Brian Brooks responded with a rulemaking that would bar national banks from denying financial services to counterparties on the basis of, say, the personal believes of management and would prohibit broad categorical exclusions of certain industries. The rule was finalized on Acting Comptroller Brooks’ final day in office and may well be in the sights of congressional Democrats for repeal under the Congressional Review Act in the next Congress.
Some have hailed the rulemaking as an overdue counteroffensive against so-called woke capitalism, a fraught term that we will be exploring in a bit more detail today. Others worry that the rule would create a Fairness doctrine for banks and question the potential unintended consequences of the rule for freedom of conscience and order of the bank supervision. This is a subject on which reasonable minds across the political spectrum can and do disagree.
Conservatives as varied as Rod Dreher, Sohrab Ahmari, the Claremont Institute and Senator Hawley have called attention to various manifestations of woke capitalism, de-platforming, cancel culture and the like as a social disease in need of government intervention. Those of a more libertarian bent, say, for example, David French, view these issues — or tend to view these issues through more explicitly Lockean or Goldwater lens or Gold-wasrian I guess is the adjective for Barry Goldwater — emphasizing the private property rights and even conscience rights of private businesses to exclude whom they will from their own property or business models. Today, we will be addressing not the politicization of everything but rather the politicization of one very important thing, namely, the financial services sector.
I’m pleased to be joined by John Berlau, Senior Fellow with the Competitive Enterprise Institute and recent author of George Washington, Entrepreneur: How Our Founding Fathers’ Private Business Pursuits Changed America and the World. Speaking of cancel culture, I think John has probably run into his own fair share of questions on that topic this year. And I’m also joined by Brian Knight, Director of Innovation and Governance and Senior Research Fellow with the Mercatus Center at George Mason University.
John, I’d like to turn to you first. You have sharply criticized the OCC rule in some public commentary and a recent National Review article whose title says it all, “Why a Fairness doctrine for Woke Capital Will Backfire on Conservatives.” Now, terms like “woke capitalism” and “cancel culture” have been used a bit promiscuously and cover a fairly wide range of different phenomena, everything from Nike’s promotion of Colin Kaepernick’s national anthem protest to the boycott, divest, and sanction Israel movement to the platforming controversial speech from social meeting to denial of commercial lending services to disfavored industries.
So John, the first question’s to you. What do you mean by “cancel culture” in the context of financial services, and is “cancel culture” from your perspective a threat? And if so, do you think it requires or demands a government response?
John Berlau: Well, thanks for the very kind introduction, Wallace. And yes, as the author of a book in praise of George Washington, even for his innovative business ventures, I have had to deal with both the idiocies of cancel culture and the threat it poses. Yet, I also think we have to be very smart in our responses, particularly in proposing government action to counter cancel culture and especially given who is now running the government. As an example, after social media companies de-platform people and removed a bunch of posts and accelerated this in the wake of the Capitol Riots, Will Chamberlain, who’s the editor of the new incarnation of Human Events, tweeted an interesting idea for a supposed conservative. He said, “Let’s nationalize Facebook and Twitter.”
Now, nationalization of an industry goes against conservative and libertarian principles no matter who is in power, but it is especially problematic now that the progressives have the leverage of power. Needless to say, were the Biden administration and the Democratic Congress to nationalize social media sites, their first priority would not likely be to restore conservative accounts. It would likely be to remove more of them.
Similarly, our response to the apparent politicization of the financial sector needs to be viewed in the same light. For any proposed solution, we need to ask, one, does it undermine conservative principles that we are trying to prevent being canceled? And two, would it be even practical under current circumstances?
The recent fair access rule from the Office of the Comptroller of Currency finalized in January, as you said, I would answer a definite no. In response to large banks announcing that they were ceasing lending to industries such as guns and energy, as well as the Obama administration’s Operation Chokepoints in which the government pressured banks not to deal with certain un-woke industries — this was a policy that the Trump administration rightly canceled — rightly canceled the policy. But now the OCC is by regulatory fiat is countering private cancel culture or attempting to by adding types of industries to the protected classes in fair lending laws in a rule that would force banks to provide financial services, including large commercial loans that carry significant risk, to any legal industry unless the banks can show that what the OCC defines as quantitative impartial risk-based standards or an objective risk-based analysis of an individual customer for the bank not to do so.
In OCC’s words under the rule, if a covered bank offers cash management services or commercial lending and specifically provides such services to a large retailer, the bank would be required to offer such services to any lawfully business —I’m still quoting— e.g., an electric utility or a family planning organization, on proportionately equal terms, unquote. Former Acting Director Brooks has utilized civil rights rhetoric to say that this rule would prevent the, quote, redlining of certain industries. Although the OCC says the rule is presumed—there’s a presumption to apply only to large banks—it doesn’t exempt banks of any size if these banks meet a test of raising the price of a financial service in a certain geographic area.
Now, even assuming the Biden administration doesn’t use this if it’s still in effect to force banks to lend to its own favored industries—the family planning services industry mentioned and fledgling green energy companies—this rule would be very harmful to the small and midsized banks that exclude some industries not necessarily because of politics but because they specialize in working with certain types of industries. This rule would cancel the great American tradition of niche banks emerging to serve nascent industries, a tradition that continues in spite of the red tape banks face.
You can see this in banks named after specific business customers they serve. There are more than a dozen banks with the word “farmers” in their name according to the OCC’s most recent list of active national banks. M&F Bank, the second oldest minority bank, was original named Mechanics and Farmers Banks to reflect its clientele. These customer bases changed many times, but the need for many banks, particularly new banks, to specialize in dealing with certain industries does not.
Today, there are banks that specialize in serving agriculture as well as unique types of industries, such as churches and houses of worship. Saying these banks suddenly have to serve all categories of industries and venture into businesses they are unfamiliar with or come up with a risk-based justification to satisfy the OCC not to would wreck their business models as well as add great risk to the safety and soundness of American banking. And ironically, this rule would be especially harmful to the niche banks forming as a result of the recent deregulatory efforts from the Trump administration for fintech and industrial lending banks. And these are policies that both Brian and I support.
For instance, I think it’s great that OCC this month gave the first bank charter in history to cryptocurrency asset custodian Anchorage. But the fair access rule means that this digitally focused bank would potential have to offer loans to every paper company that applies. Who benefits from that?
You know, in sum, we need to shelf this rule through any legal means necessary, the Congressional Review Act, lawsuits or other regulatory action. And we have to — and to counter cancel culture in the financial sector, we have to look at other government and marketplace strategies that don’t empower big government as well as potentially violate important constitutional provisions such as freedom of association and, in some cases, free exercise of religion as this would. In fighting cancel culture, we simply can’t cancel the freedoms we are trying to preserve.
C. Wallace DeWitt: John, let’s talk about the OCC rule in a bit more detail. So in reviewing the rule release myself, it occurs to me that it will be difficult for bank supervisors at the OCC to distinguish between the following two statements. So statement one, “Our bank refuses to serve the dastardly and immoral firearms industry.” And statement number two, “Our bank refuses to serve the dastardly and immoral firearms industry because it will soon be relegated to the dustbin of history and is consequently a bad credit.”
If the present OCC rule or something similar came down the pike — if it were to go into effect, how do you think the OCC or the government generally would be likely to police perceived bank biased against a particular industry? And to borrow from the title of our session—and I suspect I know your answer—is the cure worse than the disease?
John Berlau: That’s a very good question. I would say yes — I mean, particularly with this rule itself that it says you can’t redline certain industries. You can’t simply say I’m not lending to guns. I’m not lending to yoga studios because that’s not our expertise of business. You have to give potentially an individual justification for every gun shop, every yoga business you reject. You have to — you can’t draw redlines among industries.
So this is pretty broad, so that doesn’t even enter into the question in many cases what the intent was. Although, it says it can’t be based on — your justification can’t be based on believe. But even on a more narrow rule I would say it would be difficult to tell whether — what is the reason, whether you’re politically biased against an industry or you think it’s a bad risk and frequently both.
There was an article in Bloomberg Businessweek about — bemoaning abortion clinics not getting money, both because of the — but it said it was hard to tell because are they a business risk, or is there just believes against the practice? And I just want to think about — I think there’s good reason for making, you know, freedom of association generally the presumption unless there are specific wrongs to — compelling reasons for exceptions to freedom of association — that it’s just, if you think about the way fair lending rules are applied, how would the OCC police this if suddenly there were rules that you can’t exclude types of businesses?
Would they say you’d have to have quotas for certain types of business? Would they come in and say, “You’re doing coal companies. We think you need to do renewable energies”? And they might do that. They also might look at, well, was this bank on a — this board member of a bank on a particular pro-life — also on the board of a particular pro-life group? Did he or she give money to this group, to this think tank? And there are all these things that would make this — politicize the sector even more. So yes, in this case I think the cure is worse than the disease.
C. Wallace DeWitt: Now, John, in your work you’ve evoked an analogy to the fairness doctrine in broadcasting, which if I recall was abolished by the late Reagan administration and led, among other things — the abolition anyway led among other things to the efflorescence in the ‘90s of conservative talk radio, among other things. What relevance does the old Fairness doctrine have to our context here and our current cancel culture debate?
John Berlau: Yes, I think it actually has in the debate realm a lot of relevance. Brian talked about banks being privileged as far as having charters and licenses and getting deposit insurance. Although, they’re also band aids getting deposit insurance. But I do agree that we should open that up, and I think we both applaud the moves by the OCC and FDIC and the Trump administration to make it so that more niche types of banks, industrial lending companies, fintech companies can get bank charter and have access to the banking system and provide more financial inclusion.
Similarly, particularly in the days before you had social media you had cable, but you still broadcast dominated that a TV or radio station — a license, I mean, there were arguments that these were public airways. This is in the public interest. You’re shielded from competition. But Reagan thought it was still better to have — in the ‘80s not to have a big bureaucracy policing what would be on the air and what needed — and what is fairness as far as equal time. And when he did this it looked like, you know, that the big broadcasters had an entrenchable — almost a monopoly.
Reagan — among the people who opposed it were Phyllis Sclafly’s Eagle Forum, the NRA, Trent Lott. He was a prominent Republican conservative politician at the time –Reed Irvine’s Accuracy in Media. They all said, “What are we going to do without these five minutes of response time?”
Plus, I guess Democrats maybe had a better idea of what was around the corner. They were biased toward government control, so there were bills to roll back Reagan’s FCC from doing this — from getting rid of the fairness factor. And Reagan vetoed that bill, and the fairness doctrine was repealed. And then one year later you get Rush Limbaugh starting his show in Sacramento, and it soon went national. So instead of five minutes of response time, you had three-hour blocks on AM radio that we have today.
Reagan had no way of knowing this, but he had enough faith in principle in the free market that he thought if you get rid of this barrier, then conservatives would compete. So he opened it up rather than mandated what established businesses could do. And I think we need to look at things like that in this area and our current culture of cancel culture as well.
C. Wallace DeWitt: Well, thanks very much, John. I’d like to bring Brian Knight into the discussion. To quote from Acting Comptroller Brooks in the pages of Game and Fish Magazine, which publication I regularly peruse for it’s financial regulatory incites, of course, quote, “We can’t rely on all bank executives to be as strong and courageous as American sportsmen.” I can assure you that having shot pheasant and quail with Brian in recent months he is surely as strong and courageous as any bank executive in our fair land.
Brian, you have also written extensively on the topic of the politicization of banking, including a major paper in late 2019 entitled “Private Policies and Public Power: When Banks Act as Regulators Within a Regime of Privilege.” I’d like to start by posing a variant of my first question to John. Namely, Brian, do we have a problem with the politicization of finance, and why should we care fundamentally about the private business dealings of private entities?
Brian Knight: Well, thanks, Wallace. So I do think we have a problem, and I want to confine my comments at least right now to banks because they are unique. As John kind of stole my thunder a little bit there, banks exist within a profound regime of regulatory privilege. They enjoy government-imposed barriers to entry. They enjoy regulatory advantages over non-bank competitors in several important industries, including lending, money transmission, and deposits broadly defined.
They enjoy exclusive access to valuable government services, including the Federal Reserve payment system and FDIC insurance. And they very frequently enjoy barriers to exit where either through the Fed being the lender of last resort or through other sometimes quite extraordinary government projects we allow many banks to beat the reaper, even though under I’m sure a market environment they would go under. And we can ask, well, why? Why do we have this?
And I think that’s the important question is why do we have this regime of privilege? And if you look at the reasons why, if you look at how these privileges are justified to the American people, it’s to have banks facilitate lawful commerce or to protect the economy from the risk of bank failure or to protect depositors. And what you don’t have is a justification for banks enjoying the privileged position—and it’s a critical position in the economy and has always been viewed as such—is to allow that to serve as a secondary regulatory system where, if you can’t win at the ballot box or if that pesky Constitution gets in the way, you can just use the banks to cut off services.
So I think what we have here — so this law, you had the hypothetical of the bank saying, “We refuse to deal with this dastardly firearms industry.” The question you didn’t ask or the distinction you didn’t make that has been made to paraphrase is, “We refuse to serve the dastardly firearms industry because we want to hamper the ability of the firearms industry to function because we think they should be more tightly regulated than they are.”
And so in that scenario what you have are banks either sort of on the motion of their own leadership or to placate some activist group or constituency seeking to cut off services or gate services to impact a downstream market that’s otherwise legal. And I don’t think that there’s any justification for them doing that based upon the privileges that they’ve been granted, the reason those privileges have been granted.
C. Wallace DeWitt: But let me play devil’s advocate, then, a little bit, Brian. So some banks will respond that being forced to do business with controversial industries could pose a reputational risk to the bank which itself could lead to safety and soundness issues. Is that a legitimate concern in your view, or are you worried that the invocation of reputational risk is simply another pretext?
Brian Knight: So that’s a great question. Let’s unpack the work that reputational risk is doing in that scenario. It’s effectively, if I serve customer A), customer B) won’t want to do business with me. And reputational risk has expanded from its original sort of core of “If you the bank do bad things, like open up a bunch of fake accounts, people won’t want to do business with you, even if it doesn’t cost you or them any money. And so you need to be careful about that” to “Banks will be judged by the company they keep.”
And I think it’s worth asking is that legitimate? Is that a legitimate thing to do? In many areas of the law, we don’t allow sort of customer pressure to be a dictating force. Secondary boycotts are frequently illegal and don’t enjoy First Amendment protection. A secondary boycott is I’m going to boycott company A because company A does business with company B, and company A will pressure company B to give me what I want. So if you’re saying, “We’re not going to do business with companies that serve the coal industry,” the coal industry is your target. The bank is the lever; the coal industry’s the target.
And we actually have a history in this country of removing banking from that type of fight. In the ‘70s when we amended the Equal Credit Opportunity—and now President Joe Biden was the lead senator on that—an official from the Department of Justice mentioned that one of the nice things about making religion a protected class is it would relieve pressure on banks who had large Arab governments as clients because those banks were getting pressure to cut ties with their Jewish customers. And it isn’t that the banks themselves were anti-Semitic, but they felt the economic pressure. And the government intervention allowed them to say to those Arab governments “I’m sorry. I can’t do that. Neither can any other bank in the United States. So if you want someone to do that, you’re going to have to leave the American banking system.”
I would argue generally that because of the — maybe just generally because life is just too politicized but certainly given the unique and artificial and non-free market elements of our banking system, there’s a good argument to be made that it should not be a venue by which people are allowed to fight out these regulatory issues. Those regulatory issues should be dealt with through the political process with all of its safeguards.
C. Wallace DeWitt: So Brian, for my final question for you in this first portion of our panel I guess I’ll quote from the original woke capitalist himself, Comrade Lenin. From your perspective, what is to be done? Do you have any favored policy solution, whether something like the OCC’s rule or something else of your own device?
Brian Knight: Well, so let me preface this by saying I believe we are firmly in no solutions, only trade-offs territory. No solution is perfect. Everything’s going to have a cost. So what do you do?
To my mind, the OCC rule, what it was trying to do was really grounding itself in anti-trust principles. And I understand why they did that. I think a better model is to borrow conceptually from — okay. So the best model would, of course, be get government out of banking. Make it a truly free market. Okay. The odds of that happening are extremely low. And living in the realm of the possible, one of the best options available, I think—and I put “best” in quotation marks here—is to sort of prohibit banks from using a desire to impede the functioning of another market or to placate or gain favor of some advocacy group who wishes that in their decision making.
And so it’s not a duty to serve. That’s a very important distinction that I think we really need to get our heads around. It is not saying “You must serve coal,” or “You must serve guns,” or “You must serve abortion clinics,” whatever. It’s “You cannot allow the desire, either your own desire or the desire to placate a group that has this desire in effort to interfere with or damage the downstream market to be part of your consideration.”
And so a bank saying, “Look, we just don’t know how to risk price guns. We just don’t understand them,” that’s legitimate. That’s fine. But if you’re saying, “Well, look, we have big customers who don’t like guns, and so we’re going to cut ties with our gun customers to placate the larger customers,” that’s objectionable because the bank — or potentially objectionable because I don’t think that the banking system should be used as this tool of de facto regulation where, even though something is legal, the sort of government imposed chokepoint of the banks—and by government imposed, I mean the regime of privilege—is used as a de facto tool to de facto regulate.
C. Wallace DeWitt: So I’d like to thank — at this point, I’d like to thank you, John and Brian, for your initial commentary. And while we’re lining up comments from the audience today, I confess personally I’m trying to find some sort of Hegelian synthesis of your two positions. I’d like to combine John’s skepticism as to government capacity to solve such a problem with Brian’s concerns as to the gravity of the problem and the position of banks within the economy, which I think your point is well taken, Brian. There’re more central than a lot of other industries would be, obviously.
From my perspective, the OCC rulemaking is at some pains to show that the problem of woke capitalism is bipartisan. I understand that from a political cover perspective this is an optimal thing to say in such a rulemaking. But ultimately, I think the argument is clearly facetious. While one can certain imagine a circumstance in which a small community bank somewhere denied financial services to a sanctuary city or an abortion clinic, for practical purposes the OCC rule is plainly addressed to national banks whose cancel culture instincts are generally going to run in the opposite ideological direction. That is it’s going to be running towards energy companies, private prisons, gun manufacturers, factory farms and conservative opinion outlets, among, perhaps, others.
And to inject a bit of Machiavellian realism into this discussion, no matter whether the OCC rule actually comes into effect and no matter how cogently it’s argued—and it’s a very well-argued rulemaking in a lot of respects, and it shows the influence of its author— in my view, there’s simply no prospect that any federal bureaucracy will consistently vindicate the interests of any of the above industry in the face of sustained left inflected advocacy campaigns. So I’m torn here between your two positions — and not to put you two at opposite ends of polls necessarily. But to me, I feel that we shouldn’t delude ourselves that artful drafting of midnight rulemakings is going to carry the day here.
I don’t know where that leaves us. Am I Cicero just yelling, “O tempora, o mores,” and going and hiding and putting my head in the sand? I don’t know. But something tells me that woke capitalism is just another float in the great American parade of horribles. And there’s very little — to John’s point, there’s very little, precious little that government can do, particularly when government is not in the hands of somebody like a Brian Brooks to resolve this question. And in fact, there may even be — it may even be misused in the opposite direction. So on that somber tone, I’m wondering whether we have any questions from the audience, Micah, for our two panelists?
Micah Wallen: Not quite yet but — and Wallace, back to you while we’re waiting for some questions to line up.
C. Wallace DeWitt: Terrific. So let’s have a bit of a free-fire zone. There’s been a lot of exchanges of views today. Brian, John, did you have any points you’d like to raise while we’re waiting for the audience to pipe up?
John Berlau: Well, yes, I’m glad and I would like to, like Brian, reduce banks’ privileges and allow more competition. One of the things he said I’m — and I’m glad he would allow — he recognizes that sometimes it’s justified as a business model for banks to categorically exclude certain industries if they don’t know how to risk price them. I just want to point out that this rule probably would have been better if Brian Knight had been drafting it, if there had to be a rule. It does not really — from the people — from the bankers and other expert types I’ve talked to on this rule would not really allow banks to do that.
I think Comptroller Brooks, who, again, I admire a lot of the other things he has done with the OCC fintech charters and other things, he has talked about — he has said plainly that banks shouldn’t redline certain businesses. So you have to — for each, you can’t categorically exclude an industry by saying it’s your business model. You have to — the rule makes the point on individual — let me just get the language — on individual objective risk-based analysis of each individual customer. That’s what I’m talking about the digital companies, every paper company that happens along it would have to produce the digital — the crypto bank now would have to say, “Well, we don’t think this one” and things like that and go through the red tape for each of these.
I would just say I think there are things that can be done. First of all, you need to get rid of — sometimes, these banks, of course, are pressured by the politicians. So we applaud it, and we were some of the first — when I say “we,” the Competitive Enterprise were among the first to point out Operation Chokepoint and wanted to get rid of it. But we don’t think really the government should force banks to loan to certain industries or not to loan to certain industries or pressure them to deal with this.
And I think in the case of here where banks stop dealing in some things, there are contract issues that can — should be enforced in courts, and then there could be some legislation clarifying this. But I think this rule from the OCC that would forbid categorical exclusions by trying to divine intent or even if it’s a business model is the wrong way to go.
Brian Knight: So Wallace, I want to respond to something you said and that is, aside from just the general somber tone of despair —which, hey, I understand— is the question of, well, how much do we trust the Biden administration to enforce this? I mean, the answer should be very little. But I guess the other thing while we’re evaluating, you know, costs and benefits—and I want to be clear that I’m not just talking about the current OCC rule. As I said, I would have gone a different direction—but just the general concept of should banks be allowed to withhold services with an eye towards, either directly or indirectly, limiting downstream markets because of sort of political or policy differences?
The question is, one, how much do we think that the Biden administration — if this rule didn’t exist, how much do we think that the Biden administration would spare us from the politicization of — further politicization of financial services? And the answer has to be they wouldn’t spare at all; right? They’re already doing it. We’re already in the process of it.
So in terms of cost and benefit, I don’t think it’s like, oh, but for this rule they would have left it alone. And the rule might not be a good rule. I’m not here to argue for or against that. But the other thing, as I mentioned, is that there is something to the — there is a value to giving banks the ability to push back on these advocacy organizations by saying, “Look, to do what you want me to do would be against the law, and I can’t do it.” And yeah, your enforcement of that law during certain administrations would be weaker than in others, but it would at least exist. And then, you know, to really show my heresy here, I also think that there should be something of a private action because I do think that one of the values — I think John and I — I appreciate John’s point about freedom of association, and I do think that that’s valuable.
It’s not all powerful, though. It’s not an all-encompassing value, and we have to balance other values as well. And one of those values that I think bears in mind is that people should not be subject to the misuse of law. And I would argue that when banks take it upon themselves either on their own or under pressure to play the regulator, they’re misusing the law, and there’s something to be said for people not being subject to that and us pairing back the ability to do that.
C. Wallace DeWitt: John, not to parody one of your positions, but there is a — your emphasis on free market solutions raises in my mind these sort of flippant argument one often sees on the internet that if you’re not satisfied with Twitter or Google’s policies, well, go make your own Twitter. Go make your own Google.
I think we all saw what happened with Parlor last week in response to people’s dissatisfaction with Twitter. In the context of a moral panic— and it strikes me as clear that for the last several years at least the United States is in the throws of a great moral panic on a number of fronts— do free market principles work? And I ask this because, while in theory you could imagine a world in which any bank who says, “I’m not going to deal with gun companies,” could have their lunch eaten by a bank that says they will, in practice in looking across the national bank landscape I don’t see a single — it’s hard to find courageous institutions that have stood up to the tide of wokeness and solidly placed their faces against it. Do you disagree?
John Berlau: Yes and no. I will answer with a firm yes and no. I think, yeah, it can be despairing looking at the current cancel culture that sometimes it seems like it’s so easy for corporate chieftains, although not necessarily small businesses, to be intimidated. But just keeping in mind red tape is usually more harmful because the big guys can comply with it then to the big guy — I don’t know. By the way, is Parlay or Parlor? I had — well, whatever it is they have a breech of contract suit against the Amazon webhosting services. And I think there was some action on that today, but we will see what happens there.
And if some states or even the federal government wanted to change contract law so that was more — so that web hosting companies couldn’t do this without enforcement, I think that should be the step that could be encouraged. I’d have to see the individual legislation, but I do think as far as things like what clients might deal with I think it is very difficult as far as whether banks want to deal with a certain line of business as we talked about before to prove intent. And what we said at the time about chokepoint is the judgement — and wrote in our comments recently to the OCC is, as my colleague Ian Murray wrote, that as far as whether some industries pose a reputational risk, the decision is best left up to individual — is, quote, best left up to individual banks which have a much better idea of the risks involved in their client relationships.
And also, I would point out that conservatives should form their own shareholder activist groups to counter this, and maybe there are some breech of fiduciary duty suits for a publicly traded company when a CEO categorically excludes dealing with a company that could add to the bottom line. But it looked despairing when Reagan — when you had Dan Rather and Peter Jennings monopolizing Reagan into the fairness doctrine. And then we saw with Rush Limbaugh after the fairness doctrine was — shed a ray of hope around the corner. So maybe we could see something here. The free market doesn’t give you everything you want, but it’s better than red tape that forecloses what you can have.
Brian Knight: Hey, Wallace?
C. Wallace DeWitt: Yeah.
Brian Knight: Can I respond to that?
C. Wallace DeWitt: Sure. Please, please.
Brian Knight: I appreciate John’s optimism. I don’t share it at all. And one of the big reasons is because banking is not a free market. So whatever the free market might have done for us, banking is not that. To be a bank, you have to get the government’s permission. You have to get multiple agencies’ permission. You have the government hanging over your shoulder. If you don’t want to be a bank but you want to compete with banks on some metric like lending, you’re at a significant regulatory disadvantage.
And so I think that that is one factor where whatever we might think about Parlor and Twitter and all that stuff, you don’t have to go get a charter from the government to be Parlor. And then another thing to John’s point about shareholder movement, I think one of the problems is if you look at the reality of who owns equity, it’s technically owned by large asset managers. I think 70 to 90 percent is owned by large asset managers like Blackrock. And so yeah, there are underlying individual investors usually through like retirement funds or whatever, but the technical owner is Blackrock. And lots of luck competing with Blackrock on that.
And then, of course, you have corporate law tends to be fairly favorable to business judgment rule. So management has pretty big latitude to make their choices. And so in that regard, I appreciate what John is saying, but before we say, well, the free market will solve it, let’s make banking a free market. And until and unless we’re going to do that —and spoiler, we’re not going to do that—we need to view it for what it is and not necessarily a, quote/unquote, free market that’s susceptible to those things.
The other point I would make is the other problem is that — and for some questions, markets aren’t going to tell you who’s morally right. They’re going to tell you who’s rich. And if you have a disfavored relatively economically weak group and a favored economically strong group, then even a rational — this sort of Friedman-esque rational bank will favor the economically strong group. And sometimes that’s fine, but if the product the economically strong group is trying to buy is putting the screws to the weak group, then I don’t know. You may have some problems there.
I think one of the nice things about our system — the counter-majoritarian elements of it are well-understood and well-regarded for good reason. There’s a counter-elitist element to our system, too, because at the end of the day you’ve got to win elections. And so whereas if instead you let sort of the management class of large financial institutions make decisions, you will get decisions that reflect their preferences and not necessarily those of the broader public or a public that’s entitled to not necessarily financial services but a public that’s entitled to having decisions be made through the proper channels.
Micah Wallen: This is Micah. I just wanted to mention, Wallace, there was two questions that came in, but they were written in the chat. So I wanted to read the first one because it’s somewhat related to these.
C. Wallace DeWitt: Please. Yes.
Micah Wallen: So I’ll read it for those on the phone. It says, “You discussed the issue of external pressures of other customers or the public opinion. How do we deal with the issue of, though, internal –” the question says, “woke employee demands for not doing business with these, quote, evil industries?”
C. Wallace DeWitt: Yeah. I think that’s an excellent question. I tried to allude to this briefly in my initial remarks. The circumstance that seems most likely to be in a lot of cases is actually not the outside activist shareholder scenario that we’ve been just discussing, the three of us. But the New York Times scenario from this past summer when — I can’t remember if it was Tom Cotton or one of the Republican senators wrote an editorial or an op ed for the New York Times which resulted in the summary dismissal of the op ed editor the following day after a Caine mutiny of the millennials in the newsroom. I actually do think this is a concern. It may grow as a certain generation departs the scene and as another rises. John and Brian, do you see that as a vector of cancel culture in the financial industry as well?
John Berlau: Wallace, if I may, I’ll answer that question and I’ll respond to — there are lots of what Brian — and I appreciate what Brian said about banks having privileges, and I would agree to reduce those privileges and allow in more competition. But there are lots of industries where you do have regulatory barriers. Broadcast licenses — and not everyone can get a license to broadcast on a local television frequency or digital frequency — even digital frequency as they are now. Do you put restrictions like the fairness doctrine on what they can say?
It’s sort of like do you require wearing a helmet because, if there’s socialized medicine, everyone pays for your injuries? So you go down that road you just get more and more government red tape on the — and you still have some competition within the banking and the broadcasting field, even with government regulation. And on the employees, you do have employers like Brian Armstrong of CoinBase who just said that “There will be no politics here. The corporation will be to advance agendas. If you have a problem with that, I’ll give you a buyout.”
So you do have things and you do have external pressures like Twitter’s stock going down since they did some of the purges that will pressure them to respond. And the idea what we need to do is lift more regulatory barriers and make sure contracts are enforced so that there is more of a free market, not less of a free market justify more red tape.
Brian Knight: So Wallace, if I could, I think there’s a couple of important distinctions between the fairness doctrine and what’s going on here. One is that there’s clearly a very strong First Amendment — it’s inherent in the fairness doctrine. Generally speaking, the decision to provide deposit, lending, money transmission services is not considered a First Amendment issue. And courts have disfavored frequently this sort of attempt to boycott through the denial of basic services.
The other point is because the fairness doctrine it limited people who received a particular service. But there were alternatives, including now the internet where you can throw up a — YouTube may cut you off, but you can throw up your own website. Whereas, if I decide to compete with banks in lending, I’d better be licensed at the state level where I’m subject to a significant regulatory disadvantage because if I’m not licensed at all, if I just set up my own loan shop, please send me a care package in prison because I violated to law, same deal with money transmission. Because the activities are regulated in and of themselves, there’s an issue there and because of the insulation from market pressure, you don’t necessarily have the same structures.
And then the third point I’d make, I just want to reiterate is it’s worth asking why do we — not creating new red tape, but why do we have the system we currently have? And if we want to get rid of it, great, but we need to acknowledge political reality that that’s unlikely to occur. So we have the system we have. Why?
And is this behavior consistent with that? Is it inconsistent with that, or is it actually antagonistic to the purpose? And if it’s antagonistic to the purpose or even potentially inconsistent with the purpose, then it’s not a case of us imposing quid pro quo regulation. We’re not saying that because you got a PPP loan you have to embrace green energy. We’re saying, “We gave you this power for a reason. Please do not misuse it.”
C. Wallace DeWitt: Micah, do we have a — why don’t you read the other question that we’ve got in the hopper as well? We’re running short on time. I want to make sure we address everybody’s questions.
Micah Wallen: Absolutely. Yeah, we have one more question sent in, and this was getting a little bit back to what we did before was the question of does the analysis change with the news today of several more banks saying they decided to close former President Trump’s accounts — does the analysis change — I think this question is directed at John. Does the analysis change at all when it’s not focused on, like, an industry, like not serving gun companies? Does the analysis change at all when it’s directed at politically controversial individuals or even potentially for other companies like the Goya company who voiced their support for Trump — banks refusing to deal business with a company that has support for that controversial individual? Does the analysis change at all?
John Berlau: I would say yes, and I would say broader than that the analysis changes when it’s an issue of instead of not dealing with or not dealing, not providing new services it’s an issue of where you cease dealing with an existing customer. I think that does. There are contract provisions that need to be enforced, and there could also — I would not be opposed to something where necessarily — I’d have to see it — where there would be a rule where it says I have to offer a customer some form of notice.
So I think with freedom of association, which I’m for, even like in a restricted country club, you can’t willy-nilly necessarily kick someone out, particularly if it’s a mutual organization — they’re the owner with the club. You have to have some — there has to be some sort of process there. So I think in the case of existing bank customers, there is — it is a different question. And the contract rights have to be upheld. Plus, I think there could be some rules as far as what is the notice there. So that’s my answer to that question.
C. Wallace DeWitt: Yeah. I think there’s going to be some real complication in this area. And to me, it brings back to mind some of the famous Supreme Court cases on the First Amendment. It is rarely a pleasant individual whose rights are being vindicated in a First Amendment suit. The most obvious example being the Nazi marching in Skokie, Illinois back in the 1980s that were the subject of a major First Amendment case.
I do expect that with the profusion of sort of on the fringes individuals — I’m not lumping in the former president Trump in this group necessarily — but there have been lots of stories of people who make their livings online being denied payment services, being denied bank accounts, and losing — essentially being thrown off the grid because of the nature and character of what they have said, which I’ll underline so as not to be canceled myself are fairly ugly utterances in a lot of cases that get them into hot water. I do think that this is going to be a challenge perhaps particularly for the payments industry, how to navigate sending payments to those who are generally subject to opprobrium and pariah status.
John Berlau: Wallace, if I may answer something quickly, I think also this gets tangled up with a law that really needs to be reformed, the Bank Secrecy Act, where banks — the government is basically making banks spies. Where if a bank deals with someone who’s even accused of a crime, even if these are politically trumped-up charges, that the bank itself could be in trouble. So I think that needs to be — we should look at the laws that may sometimes lead to canceling, when they should for many reasons scale back and reform the Bank Secrecy Act and not make banks sort of the deputies of law enforcement that they are. So we should look at what government rules are contributing to the canceling to take place and get rid of those.
C. Wallace DeWitt: Terrific. We are coming up to the end of our hour. I’d like to thank my friends John and Brian again for I think a fairly lively discussion today. We can’t see the faces or hear the laughter of the folks in the audience, but I’m imagining them sitting there with rapt attention in their attic La-Z-Boys watching their zoom screens as we’ve discussed this topic today. I’d like to thank Micah Wallen as well for organizing the teleforum. And with any luck, nothing we’ve said today will cause The Federalist Society to lose its tweeting privileges. So I think we might skate on that, gentlemen. Anyway, well, thanks very much everybody and we’ll talk again soon.
Brian Knight: Thank you.
John Berlau: Thanks so much. It’s been a pleasure.
Micah Wallen: And on behalf of The Federalist Society I’d like to thank all of our experts for their valuable time and expertise today in this really great discussion. We welcome listener feedback by email at firstname.lastname@example.org. Thank you all for joining us. We are adjourned.
Conclusion: On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at www.regproject.org.
This has been a FedSoc audio production.
Senior Fellow and Director of Finance Policy
Competitive Enterprise Institute
Director of Innovation and Governance and Senior Research Fellow
Mercatus Center, George Mason University
Allen & Overy LLP