Defenders of federal preemption place big banks ahead of consumers

• Key insight: The supposedly noble heritage of the National Bank Act and the federal preemption power that goes along with it has never stood up to serious scrutiny.
• Supporting data: Swipe fees — almost $200 billion for debit and credit last year — are set by Visa and Mastercard, not banks.
• Forward look: This year, by trying to wipe out state measures to reform the payment system, the OCC wants to preempt measures that do not even regulate banks, an odd use of the National Bank Act.

Of all the rationales that powerful economic interests invoke to justify their activities, the most common may very well be they do good by doing well. "What was good for our country was good for General Motors, and vice versa," the auto executive Charles Wilson famously intoned in 1953.

The defenders of the recent actions by the Office of the Comptroller of the Currency to sabotage state reforms of our costly, inefficient payment system fall squarely into this category. The national bank charter, write Eugene Ludwig and John Dugan, is "one of the great institutional successes of the American economy." (The national bank charter is under assault across the country, June 15). That statement might be true for the megabanks who dominate the ranks of the nationally chartered — JPMorganChase, Bank of America, Wells Fargo among them — but it's a pretty weak case for the rest of us.

Typically, the former comptrollers and current bank lobbyists posit a noble heritage of the National Banking Act at the expense of the facts and circumstances. But they also glorify federal preemption of state banking laws without considering its proper boundaries. And they ignore the raw political power — rather than any solid legal ground — that underpins the OCC's actions.

The invocation of Abraham Lincoln is, likewise, the stock-in-trade of national bank defenders since the first version of the legislation passed in 1863, and Ludwig and Dugan are no exceptions. But his greatness cannot hide the fact that the National Bank Act was a corrupt product of wartime exigencies. Congress was not, as the authors insist, "responding to a fragmented financial landscape."

Congress passed the law with an eye toward raising money to prosecute the Civil War. The new banks were required to invest their reserves in Treasury securities, at a stroke creating a new source of financing for armies that were still two years away from crushing the slaveholder rebellion. It also created a national currency in the form of their banknotes. Congress also helpfully taxed away note issuance by state-chartered banks, destroying competition.

SCOTUS

Bank group urges OCC to leave state preemption unchanged

In a letter to the Office of the Comptroller of the Currency, the American Bankers Association rebuffed state regulators' calls to rescind the agency's broad state preemption rule, defending federal law's supremacy in the dual banking system.

By Ebrima Santos Sanneh

May 29

The American public cultivated a deep suspicion of concentrated financial power, especially at the national level, since early in the republic, making passage no easy thing. The campaign in support of the bill — today, we'd call it "astroturfing" — owed itself to the financial ties between Salmon Chase, the Treasury secretary, and the lobbyist brother of Jay Cooke, the Philadelphia financier. Cooke had grown wealthy peddling the federal securities whose value would rise if national banks had to hold them.

The power of OCC preemption that national banking created has also proved to be a much more malign force than its defenders are willing to admit. Until this year, that effort probably peaked in 2004, when the OCC swept away state measures against predatory lending, contributing to the global financial crisis a few years later. The OCC can and has gotten preemption wrong, one reason why it has lost litigation on the subject.

This year, by trying to wipe out state measures to reform the payment system, the OCC wants to preempt measures that do not even regulate banks, an odd use of the National Bank Act. The Illinois Interchange Fee Prohibition Act addresses our notoriously costly swipe fee system for credit cards by banning these charges on taxes and tips. But those fees — almost $200 billion for debit and credit last year — are set by Visa and Mastercard, not banks. Ludwig and Dugan speak of interchange as a "core activity" of national banks; it's striking, then, that they outsource the price-setting role to Visa and Mastercard. A cleaner explanation is that the OCC is determined to protect the profitability of big banks.

And that determination has much more to do with political power than it does with the faithful execution of a law passed 162 years ago. But don't take my word for it. The current comptroller, Jonathan Gould, recently argued that "the parameters of preemption are all downstream from the political consensus that's necessary to maintain it." He urged banks to "educate" members of Congress — Washington's preferred euphemism for "lobby" — to preserve the profit-enhancing role of preemption.

It's a shocking, even brazen statement. Gould does not argue that the limits of preemption lie in the law, in national banking legislation. They lie in whether the big banks can throw their weight around enough politically to make them stick. That moment of unintentional truth-telling, rather than any law, tells us all we need to know about national banking, preemption and the politics of financial regulation.