= Subscriber content; or subscribe now to access all American Banker content.

DOJ’s 'Operation Choke Point': An Attack on Market Economy

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.


(17) Comments



Comments (17)
As with many government iniatives, this one has a father (or mother) and was likely planned for months or years in private before it was born last year. Do we know which individual or group takes credit for thinking up Operation Choke Point?
Posted by wwhitham | Monday, April 07 2014 at 2:02PM ET
I'm not sure why it's so difficult for some to understand the premise of the article. The government should have no standing to promote nor deny banking services to legally chartered and operating businesses. The legitimate path to the prohibition of any business or activity has always been the same: enact laws that support your position. Short of that, there can be no basis for the government to deny any legal business access to the banking system. This is not about whether or not you like payday lending, it's about fair and equitable access to the banking system. If you don't like payday lending, then go ahead, organize and attempt to have a law passed to prohibit it. Then they can be legitimately denied access to banking services. Operation Choke Point wrongly asserts itself as having judgment that is superior to the law.
Posted by jte81954 | Friday, March 28 2014 at 6:24PM ET
If you look at the list of firms comprehended in Operation Choke Point, it is quite extensive and does not seem to limit itself to firms against which law enforcement action is being taken, but firms where there is, in the judgment of the Operation Choke Point folks, a higher risk of illegality. Banks can support law enforcement. They cannot substitute for law enforcement, especially where no laws have been broken.
Posted by WayneAbernathy | Tuesday, March 25 2014 at 7:11AM ET
Surely you know that is not what my article is about, Rob. I don't know how to be more clear: I applaud the DOJ to the extent it is focused on prosecuting criminal behavior. It is going far beyond that in its attempt to choke off payday lenders from essential banking services. If that is not its intention, it needs to make that very clear.

Bill Isaac
Posted by billisaac | Monday, March 24 2014 at 9:56PM ET
"those firms have not even been charged with illegal behavior."

According to a complaint filed by the DOJ Civil Division in U.S. District Court for the Eastern District of North Carolina, "Four Oaks Bank violated the Wire Fraud statute, 18 U.S.C. S1343, by participating in a scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses with the intent to defraud, using wire communication."

This sure reads like "charged with illegal behavior" to me.
Posted by Rob Randhava | Monday, March 24 2014 at 9:37PM ET
Rob -- The DOJ probably has some parts of its mission beyond investigating and prosecuting crimes, but that is clearly its reason for being. The salient point is that DOJ has no business involving itself in bank regulation. We have more than enough agencies involved in bank regulation and those agencies, unlike the DOJ, are supposed to be free from political influence. If paydays lenders or banks doing business with them are violating the law, I would have no problem whatsoever with the DOJ investigating and prosecuting them. That, however, is not what's happening in Operation Choke Point, which is attempting to force banks to stop providing essential banking services to payday lenders even though those firms have not even been charged with illegal behavior. I would hope you would find this operation obnoxious and frightening.

Bill Isaac
Posted by billisaac | Monday, March 24 2014 at 8:28PM ET
"The DOJ should not be involved in bank regulation to any extent whatsoever. Its job is to investigate and prosecute crimes."

Last time I checked, the jurisdiction of the DOJ was not limited to criminal laws. Am I wrong?

And if I'm not, are you asserting that no laws, within the jurisdiction of the DOJ, could have been broken either by payday lenders or any bank doing business with them? I would think it's a relevant premise to your argument.
Posted by Rob Randhava | Monday, March 24 2014 at 7:42PM ET
@Ed Walker: The larger the federal central planning government becomes the more elitist it becomes as identified in the article, creating more power over the masses. History is replete with Big Government little citizen failures of serving citizens. One can look to 50 years of Washington D.C. polices in the inner cities. Higher crime rates, higher poverty rates, higher rates of broken families, increased education failures, etc... to name a few.

The citizens' free market freedom, not far removed politically motivated bureaucratic controls, is the most effective and efficient solution to serve a society. At least a citizen has a choice who will serve them in the free market, they have no freedom of choice in choosing the bureaucrats, such as those working in the DOJ, CFPB, etc.... This is forced upon them from the Big Bureaucratic Central Planned Government.
Posted by NoSpin_JustFacts | Monday, March 24 2014 at 4:07PM ET
Randy -- I didn't take the position that lawful marijuana businesses should be denied access to the banking system. I simply noted that the same government that wants to deny banking access to payday lenders is at the same time allowing or promoting banking access to firms involved in offering marijuana, cigarettes, gambling, and alchohol -- and is partnering in the enormous profits of those businesses. Surely, you can appreciate the irony. And I hope you are at least somewhat disturbed that unelected government officials without statutory authority are claiming they can decide which lawful businesses will be granted and which will be denied access to essential banking services.

Bill Isaac
Posted by billisaac | Friday, March 21 2014 at 3:04PM ET
Your distinction about funding legal purveyors of marijuana in the states where it is legal is not sustainable. If the laws of a state allow the conduct of activity, be it payday lending or marijuana sales, banks should be allowed to provide financial services to the merchants who legally comply with the state's laws. Payday lending has a history of getting people in debt over their heads through the industry's unconscionable practices of repeat loans but that doesn't seem to bother you while the familiar myths of marijuana rejected in those states do not. This is another example of a big name banker being bought off by the lobbying efforts of industries that the government does have an interest in regulating especially when they are operating online and try to use offshore and indian reservations to do it. At least the marijuana dealers operate solely within their state borders. But this is about social policy, not banking, isn't it? The TARP arguments are not worthy of comment.
Posted by randyh44 | Friday, March 21 2014 at 2:44PM ET
To isawelvis -- I am puzzled by your comment. My article is not about compliance or risk management issues or illegal activities. I have written and spoken extensively on those subjects which you can find by going to The subject of today's article is entirely unrelated and extremely important: Are we going to allow unelected officials who have no statutory mandate to dictate which individuals and companies, who are engaged in lawful activities, will be allowed access to the banking system and which ones will be denied? I would hope that people of all political stripes can agree that would be very bad public policy and would result in grievous harm to our market economy.

Bill Isaac
Posted by billisaac | Friday, March 21 2014 at 2:17PM ET
This article hits all the talking points of the elites:

government causes all problems
regulation is evil
societies shouldn't try to help poor people
DOJ should investigate crimes, which don't happen in the financial sector
bureaucrats suck
The Constitution protects the rights of money and nothing else

All this is in service of a single point: anything that interferes with the sacred rights of the rich to make more money must be hated, scorned, and defeated in detail, but especially when the other side wins elections and expresses the will of the people in Our Democracy.
Posted by Edwin W | Friday, March 21 2014 at 2:05PM 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
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
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
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
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
Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.