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William M. Isaac, former chairman of the FDIC, is global head of Financial Institutions for FTI Consulting and author of "Senseless Panic: How Washington Failed America."
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DOJ’s 'Operation Choke Point': An Attack on Market Economy

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History teaches that when government bureaucracies try to direct economies, stifled creativity, distorted markets and low economic growth are inevitable results. One of the easiest and most insidious ways for bureaucrats to control the U.S. economy is through the banks, directing who gets – and who can't get – loans and other essential banking services. That's happening today, and it ought to alarm and frighten all of us.

I opposed enactment of the Troubled Asset Relief Program bailout legislation during the crisis of 2008 because I believed the legislation would not work, would exacerbate the crisis in confidence, and would create a political backlash that would damage the financial industry and economy for years to come.

Tarp did not resolve, and, in fact, fed the crisis. Moreover, the unnecessary and unwise use of taxpayer money to fund Tarp led to the worst political and regulatory nightmare for the financial industry in modern history – and it's far from over.

Apparently, the government now believes that it is open season on banks. A particularly egregious example of abuse of power involves the Department of Justice, apparently in alliance with at least some federal bank regulators. The DOJ, without color of law, is engaged in a crackdown called "Operation Choke Point" to drive short-term, unsecured lending (commonly called payday lending) out of the banking system.

Some consider payday lending predatory and urge that it be banished. They argue the interest rate is exorbitant, leading some borrowers to become "hooked" on a cycle of debt. Others, including myself, believe short-term lending is needed by tens of millions of people, and it is better to allow regulated financial firms to offer the product than forcing consumers into worse and more dangerous avenues to meet emergency financial needs. What we need is more competition to improve pricing and other terms.

This debate has been going on in Congress and state legislatures for many years. Most states allow short-term lending subject to various regulations. Congress has thus far deferred to the states.

The DOJ and some bank regulators are attempting to force banks out of the short-term lending business, including providing check clearing and other banking services to firms that offer payday loans and check-cashing services. It matters not that these services are lawful. It matters not that Congress and state legislatures have had many opportunities to shut down short-term lending and most have elected not to do it. 

Put aside your views of payday lending, as they are not relevant to the issue I am raising in this article. If government bureaucrats, acting without statutory authority, can coerce banks into denying services to firms engaged in lawful behavior that the government does not like, where does it stop?  The same slippery slope that the DOJ uses today to choke off payday lenders from banking services could tomorrow be used on convenience stores selling large sugary sodas, restaurants offering foods with high trans-fat content or family planning clinics performing abortions.

Ironically, at the same time, government is making life miserable for businesses seeking to meet consumer needs for emergency funds it is encouraging banks to offer services to marijuana dealers. While marijuana sales are authorized in a few states, it remains a felony in most states and under federal law.

Many people get "hooked" spending a lot of money on marijuana. The same is true with gambling, alcohol and cigarettes. Notable differences between these businesses and payday lending are: 1) payday lending is providing funds to people in need, 2) payday lending is not ingested and does not cause bodily harm and 3) government does not derive vast amounts of revenue from payday lending.

The point is simple and incredibly important. Under our constitutional republic and market-based economic system, unelected bureaucrats should not decide which lawful businesses may have access to banking services and which are to be denied.  People who have serious concerns about payday lending or check-cashing services should take their concerns to state or federal legislatures and attempt to enact reforms.

The DOJ should not be involved in bank regulation to any extent whatsoever. Its job is to investigate and prosecute crimes. Bank regulators need to stay out of the political arena and focus all of their energy on ensuring banks are operating in a safe and sound manner and are complying with all laws and regulations. Neither the DOJ nor bank regulators should be allowed to dictate which lawful businesses will be granted or denied access to banking services.

William M. Isaac, former chairman of the Federal Deposit Insurance Corp., is global head of Financial Institutions for FTI Consulting and author of "Senseless Panic: How Washington Failed America." The views expressed are his own.

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Comments (17)
The original concept behind the Bank Secrecy Act was a good one, a strong partnership to go after fraudsters and other criminals endangering the payments system. The law enforcement agencies would lead the enforcement action, banks would provide the specific information and expertise to facilitate those efforts by law enforcement. That partnership is broken when law enforcement refrains from taking action and requires the banker to be the policeman instead.
Posted by WayneAbernathy | Friday, March 21 2014 at 11:23AM ET
Amazing, incredible article and not in a good way.

We all have opinions on the matters addressed but to rewrite history and ignore compliance missteps, inadequate risk management, outright illegal activity with convictions on the record as this author has is unconscionable. If this is the prevailing view in bank boardrooms, the author is right about one thing, it is not over.
Posted by Bruce Horton | Friday, March 21 2014 at 11:23AM ET
Issac claims that TARP "fed the crisis" but provides zero evidence. I wonder how hard he worked to abolish the FDIC when he was Chairman of it, since the FDIC is certainly contrary to the "free market". It is amazing how these paid shills can change their views based on who's writing their paychecks.
Posted by bartharness | Friday, March 21 2014 at 12:49PM ET
Isaac goes to great lengths to explain the problems with TARP in his book, "Senseless Panic." This is a 750 word essay, but if you want to look at his fulsome argument, go to his book. It is a good read.
Posted by WayneAbernathy | Friday, March 21 2014 at 1:03PM ET
Interesting article . . . I have other, related concerns: (i) how agencies sometimes treat "best practices" as though they are required (e.g., the overdraft guidance), (ii) the use of supplementary information to augment/add to (rather than explain) regulations (e.g., foreign wires transfers), and (iii) the use of CRA for social engineering, unrelated to the past practices of the industry. There are pros and cons to each of these, but I question their intellectually honesty.
Posted by pacelli | Friday, March 21 2014 at 1:14PM ET
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