Bank Lawyer's Blog

More Depth On Legal Issues Surrounding Marijuana Banking

University of Alabama Law Professor Julie Anderson Hill has posted a draft of a work-in-progress, an article for an upcoming Case Western Law Review Symposium Issue, entitled "Banks, Marijuana, and Federalism." In it, she explores the legal issues surrounding banks providing banking services to state-legal marijuana-related businesses in more depth than you'll see on the pages of this rag. While it requires some polishing (including the addition of a specific discussion of Fourth Corner, the Colorado cannabis co-op, in a section in the later portion of the article that she discusses in passing earlier in the article), I found it to be a valuable addition to the analysis of the risks to banks that want to provide services to such businesses.

Here's a portion of the "abstract" of the article provided by Professor Hill, which summarizes her approach and conclusions:

This article explores the root of the marijuana banking problem as well as possible solutions. It explains that although the United States has a dual banking system comprised of both federal- and state-chartered institutions, when it comes to marijuana banking, federal regulation is pervasive and controlling. Marijuana banking access cannot be solved by the states acting alone for two reasons. First, marijuana is illegal under federal law. Second, federal law enforcement and federal financial regulators have significant power to punish institutions that do not com-ply with federal law. Unless Congress acts to remove one or both of these barriers, most financial institutions will not provide services to the marijuana industry. But marijuana banking requires more than just Congressional action. It requires that federal financial regulators set clear and achievable due diligence requirements for institutions with marijuana business customers. As long as financial institutions risk federal punishment for any marijuana business customer’s misstep, institutions will not provide marijuana banking.

Among the many fascinating (to a nerd like me, at any rate) observations made by Professor Hill was the following potential problem with the Federal Reserve approving Fourth Corner's access to the federal reserve payments system:

If the Federal Reserve provided payment services to a cannabis credit co-op, the Federal Reserve and its employees would be engaging in money laundering. They might also be conspiring to manufacture and distribute marijuana, aiding and abetting the manufacture and distribution of marijuana, and acting as accessories after the fact for the manufacture and distribution of marijuana. 

As long as they don't process payments for payday lenders, online dating services, or Smith & Wesson, they should be safe from prosecution under the "prosecutorial discretion" mantra chanted by the present executive branch monks until the current administration vacates the White House. The problem with that approach is that the statutes of limitation will not have expired by the time new Attorney General Ted Cruz decides to wage a little MJ jihad on every Justice Department and federal bank regulatory agency official who looked the other way when some bankers in Colorado or Washington lit up a fat boy and followed the money.

I also agree with her conclusion that, while action by the U.S. Congress is necessary, it's not enough. A change in attitude by federal bank regulators will also be required, whether of not we get a federal legislative fix. If due diligence requirements make it too risky and expensive to bank these businesses, then marijuana businesses are going to find themselves continuing to face problems that only a third-party payment processor or payday lender could truly appreciate.

CFPB Shocked To Discover The Rules of Discovery

Thanks to Marvin Umholtz, I recently discovered the fact that the CFPB suffers from the same psychological ailment that struck the OCC a few years ago: "transparencyphobia."

A federal judge forced the Consumer Financial Protection Bureau to obey the same rules of discovery in civil litigation that apply to everybody else even if government officials are annoyed by them.

Judge John E. McDermott rejected a motion by CFPB. As a result, the bureau's officials were required to submit to depositions — cross-examinations of witnesses conducted under oath but outside the courtroom — in a case filed by the bureau.

The Adjustment Bureau had sued, in federal district court, a document storage firm that holds attorney-client privileged information for bankruptcy lawyers. The defendant wanted to conduct normal discovery procedures, including depositions of CFPB officials. The CFPB balked, as did the OCC in a case discussed on this blog several years ago (a discussion that brought this blogger anonymous threats of regulatory retaliation). In this case, the judge was no more sympathetic to the government's fear of the spotlight than was the judge who ruled against the OCC.

But CFPB balked, telling the court that the bureau has an inherent right to “nondisclosure” and that “even the disclosure of purely factual material may be protected by deliberative process privilege.”

The CFPB added that “requiring the bureau to designate any individual to appear at deposition would only serve to annoy, oppress, and cause undue burden on the bureau.”

[...]

McDermott's Sept. 15, 2014, order forced CFPB to provide a witness for an October deposition. Samuel Gilford, a CFPB spokesman, told the Washington Examiner that the Morgan Drexen case was the only time a bureau official has submitted to a deposition.

As the reporter notes, that's likely because the CFPB usually pursues defendants through administrative enforcement actions and extracts settlements from them prior to things getting nasty. In only a relatively few cases has the CFPB filed civil litigation. Apparently, the crack trial attorneys at the bureau weren't aware that the federal rules of discovery apply to the oppressor as well as the oppressed. A level playing field is apparently a novel concept to them.

This is somewhat surprising because it's not a novel concept.

“I do not think that there is legal support for the conclusion that there is a blanket prohibition on taking depositions of federal agency employees,” said Jonice Gray Tucker, a partner with BuckleySandler LLP, a Chicago-based law firm that provides legal counsel to financial service companies.

James Copland, director of the Center for Legal Policy at the Manhattan Institute in New York, said all plaintiffs, including federal agencies, should be treated identically. “I don’t think that civil enforcement action should be treated any differently due to a federal agency,” he said.

Moreover, it's not as if legal commentators hadn't been telling the CFPB that it had to comply with federal rules of discovery.

A March 14, 2013, securities enforcement and litigation update published by the WilmerHale law firm in Boston also said that once an agency goes into court, it must abide by federal discovery rules, including submitting to depositions.

The ability of both sides to depose each other, WilmerHale argued, levels the playing field. “Several recent court decisions strongly suggest that the playing field levels once the agency ends up in litigation,” the law firm wrote.

WilmerHale cited five cases since 2012 that affirmed federal agency officials aren't exempted from depositions.

Among the five was a 2012 case involving another federal agency, the U.S. Securities & Exchange Commission, titled SEC v. Merkin. Of that case, the WilmerHale update said “the court determined that 'like any party litigating in federal court, Merkin has the right to take a ... deposition from the SEC.'”

So, what gives? Why did the CFPB try to pull something that seems over-the-top, even for an agency that pushes the envelope of unaccountability? According to Ms. Tucker, it may be a case of "inexperience."

Tucker suggested that CFPB’s aggressiveness may be a result of having “more junior staff attorneys [who] may be less experienced. In addition, some staffers are relative newcomers to consumer financial services issues.”

In addition, she said, “this can present challenges because, in making day-to-day decisions, some of the enforcement staff may not yet fully understand the businesses they are regulating or how much effort goes into responding to their requests.”

That can “result in situations where the staff take positions that are not completely reasonable, or take actions that are perceived as more aggressive than they may have intended,” she said.

 Oh, I think the positions taken were just as aggressive as they were intended. When you truly believe that you're doing God's work, it's always a shock when the heathens don't see things your way. In addition, many of the regulators apparently believe that if the public understands that the way in which they "reason" their way to a decision to screw with a member of the regulated is just as dysfunctional as they sausage-making manner in which Congress makes legislation, they might decide to take up arms and burn the house down. Or worse, adversely affect their government pensions.

Then again, Ms. Tucker's speculation regarding inexperience is consistent with the fact that the Adjustment Bureau's lawyers have also found it very valuable to take basic bank regulatory courses in order to learn what experienced bank lawyers learned decades ago. Perhaps basic courses in civil procedure should be added to the curriculum, along with a few lectures on the principles of due process. It couldn't hurt.

Undue Process

For Patrick Adams, justice has been both delayed and, now, denied.

Regular readers of this blog are familiar with Mr. Adams protracted fight with the OCC, and I won't regurgitate the history of the conflict. In my most recent post, I criticized the repeated failure of the Comptroller of the Currency to render a timely decision in the OCC's enforcement action against Mr. Adams as required by applicable law. An administrative law judge had determined that the OCC's enforcement action against Mr. Adams was not supportable on the basis of applicable law and the factual record, and the OCC had appealed the ALJ's decision to the Comptroller, who repeatedly extended the deadline for his rendering of a final decision, notwithstanding the fact that the applicable statute does not provide for such extensions.

On September 30th, the Comptroller rendered a decision in which he determined that the ALJ was completely wrong on the law and that even though the ALJ's finding of fact were "inadequate" for the Comptroller to be able to reach a "final findings of fact," they were sufficiently adequate for the Comptroller to allege (as he does on page 67) that a trier of fact could have determined that Mr. Adams should be sanctioned with civil money penalties. After spending 67 pages rejecting the exoneration of Mr. Adams by an independent trier of law and fact, the Comptroller then concludes that it is not going to send the matter back down to the ALJ in order to determine an "adequate basis" for a final finding of facts. Instead, the Comptroller dismissed the charges and sanctions against Mr. Adams in the exercise of his "plenary authority over remedies."

In other words, the ALJ was flat wrong and the defendant is guilty as initially charged, but what the heck: we made him spend hundreds of thousands of dollars to defend himself against charges that we weren't able to prove before an independent judge, he's been de facto ostracized from the banking business anyway, and we'd likely lose before an objective federal district court judge if we sanctioned him in final agency action, so why give him a reason to appeal?

Some former federal bank regulatory counsel have suggested to me that the OCC is twisting and spinning the official record in a CYA effort to impede a claim by Mr. Adams for his attorneys fees and costs as a "prevailing party" under the Equal Access to Justice Act. That may or may not be the case. What is clear is that there's an inherent flaw in a system that purports to afford due process to defendants but in which the prosecutor and judge are the same person. In such a system, the fairness of the outcome depends entirely on the personal and professional integrity of the ultimate decision-maker.

If this case proves anything, it proves that the system needs some serious legislative refinements.

Credit Unions Also Weighed Down By Regulatory Burdens

Recently, a group of credit union executives in Cincinnati sat down with Staff Reporter Steve Watkins of the Cincinnati Business Courier and let him know that when bankers complain about the regulatory burden that is crushing them, credit union executives feel their pain (albeit, in a tax-free kind of way).

A group of Greater Cincinnati credit union executives met with me for lunch on Monday at Palomino to talk about the issues that are affecting them, and the regulatory burden was topic one.

They had just met Monday morning with U.S. Rep. Steve Chabot, a Cincinnati Republican, primarily about the possibility of easing the regulatory burden. Patrick Harris, director of legislative affairs for the Ohio Credit Union League, told me the banking sector has had 180 new rules and regulations foisted upon it by Congress since 2010, following the financial crisis.

This isn’t a banks versus credit unions thing. Most of the changes the credit unions want would also ease burdens on banks, Harris said. They’re things like reducing the need to send out disclosures about privacy policies, as well as the ability of some credit unions to tap the Federal Home Loan Bank for funds. How big of a factor is it? We know how regulatory costs have caused banks like the Bank of Kentucky to sell. And it has $1.9 billion in assets. What chance do credit unions with $20 million or $30 million in assets have to comply with those same rules?

“When the small credit unions merge, one of the main reasons is compliance costs,” Cinfed Credit Union CEO Jay Sigler said.

The first thing you'll notice is that they're all sitting down for lunch and a bitch-fest at Palomino. The visual of complaining about the cost of regulations while scarfing down Tuna Puttanesca or Asiago-Almond Crusted Scallops is somewhat incongruous. Maybe the newspaper picked up the tab.

The second thing you'll notice, however, is that the smaller the size of the institution, the more incentive there is to merge. Inasmuch as credit unions, especially smaller credit unions, are sometimes touted as a vehicle most able to offer services to the "underbanked" customers who often might "fall prey" to evildoers like payday lenders, the fact that regulatory burdens are leading many to merge should give banks cold comfort. While the number of competitors may decrease, those who are left standing when the shooting stops are going to be better armed at not only surviving, but competing with commercial banks.

The article also notes that all types of loan demand appears to be relatively flat. While one credit union official observes that business loans are a small part of its portfolio, I think that there will be no let-up in pressure by credit unions for more business loan authority. I also expect that there will be no let-up in counterattacks by commercial bankers, who will continue to demand that if a credit union wants to loan like a bank, it should pay taxes like a bank.

Still, the important point to me is that regulatory burden continues to be a driver of financial industry consolidation across the entire spectrum. In other words, unless there is some serious regulatory relief provided (likely via the US Congress), especially for smaller institutions, the incredibly shrinking financial services industry appears to be ia horror show will continue for some time.

How Safe Is Too Safe?

Consultant Paul Schaus recently wrote an opinion piece for the American Banker (paid subscription required) in which I think he got the substance right but may have been a little off on some of the "shading." The title of his piece, "When Vendor Management Goes Too Far," and his opening paragraph, give the appearance that banks are taking regulatory guidance on vendor management "too literally" and that banks need to "lighten up--at least a bit." I was concerned when I read these opening sentences, because I thought that one thing banks don't need to do is to blow off regulatory guidance. However, reading on, Paul made some excellent points.

One of those points was that the portion of the guidance on third party relationships (for example, OCC Bulletin 2013-29) that states that banks should reserve in their vendor agreements the right to audit the vendor should be interpreted in the light of the "real world."

But bankers are wrong to think they have an inalienable right to audit under regulatory guidance. The largest bank technology vendors have hundreds or even thousands of bank clients. If every bank client demanded a right to audit and then followed through on visits, vendors would be hosting at least several banks per day, every day. They might as well offer group tours.

It may well be enough for banks to receive and review their vendors' third-party reports as part of their vendor management programs. Banks have the right to refuse to accept those audits, but in that case, I would wonder why the bank is doing business with a particular vendor in the first place.

If the vendor does not have third-party reviews, the bank will need to conduct the audit or retain an independent party to do one. But you definitely don't need to perform a surprise audit and show up at the data center without advance notice. Data centers are secure environments; if you are not on the approved list of visitors, you won't get in.

That advice is spot-on. I expressed the same opinion last week on a panel with an attorney for a major technology vendor, a vendor that would never consider giving each of its thousands of bank clients the right to individually audit the systems and controls of the vendor, for precisely those reasons articulated by Paul. That's why major vendors have an annual SASE 16 audit performed by a nationally recognized auditing firm and make the audit reports available to its customers. On this point, the regulatory guidance simply has to be interpreted in the light of the goal of the requirement in the guidance for having an audit performed, not upon a literal interpretation of the express wording of the guidance. I suppose "fundamentalists" might disagree with me, but I've never been a "guidance-thumper" myself.

Paul also addresses a comment he's heard from a number of banks, that when it comes to vendors (like lovers) "size matters." Again, I agree with Paul that this is not a valid interpretation of the regulatory guidance.

This is not the case. The OCC states that a bank must select "an appropriate third party and understand and control the risk posed by the relationship, consistent with the bank's risk appetite." Vendor management includes determining if the vendor's offering fits the bank's strategy, but the guidance does not dictate vendor size.

When bankers argue that they are wary of selecting a less well-known vendor, I often point out that under that logic, consumers would never entrust their community bank with deposits when they could open an account with Bank of America, Citibank or Wells Fargo. The truth is that bigger is not always better — and the biggest provider may not always be the right fit for a bank's needs.

On the other hand, it's my view that "two guys operating out of their garage" are always going to raise more red flags than one of the well-established Mastodon that occupy the particular "space." If a bank, especially a community bank with less sophisticated vendor management policies, processes and in-house expertise, wants to deviate from the "safe" course and hire "the next Bill Gates" over IBM as its vendor, it needs to be prepared to defend that decision to its examiners, who are not likely to be "cutting edge kind of guys." That may ultimately, as Paul worries, "suck innovation out of the banking industry." However, when it comes to vendor selection, how many community banks want to be the guys at the tip of the spear?

The bottom line is that banks simply must take the regulatory guidance seriously. While "overreacting" and "too literal" interpretations of that guidance can cause problems for some banks that do not need to exist, and Paul's observations are certainly valid on the points that he raises, I think that most banks will continue to opt to err on the side of "stifling innovation" as opposed to defending their choices to questioning examiners.

FinCEN: All's Well With Marijuana Banking

Apparently, FinCEN chief Jennifer Shasky Calvery has surveyed the battleground that is marijuana banking, decided that the battle has been won, and is telling the world to "move along now, nothing to see here" (paid subscription required).

There are 105 U.S. financial institutions providing banking services to marijuana dispensaries and other pot businesses, a top federal official is expected to reveal in a speech Tuesday.

[...]

Marijuana shops, which generate large amounts of cash and can be targets of thieves, have been lobbying for more access to the mainstream financial system. The guidelines were meant to encourage financial institutions to do business with the industry provided they met certain criteria, and Fincen Director Jennifer Shasky Calvery is expected to declare that the agency's goal has been achieved.

"From our perspective the guidance is having the intended effect," Shasky will say, according to a copy of her prepared remarks that Fincen provided to American Banker. "It is facilitating access to financial services, while ensuring that this activity is transparent and the funds are going into regulated financial institutions."

Reporter Kevin Wack points out what Ms. Calvery does not: 105 financial institutions is less that 1% of the total number of financial institutions, which means that 99% of all financial institutions won't do business with marijuana businesses that are legal under state law as long as dealing in marijuana is illegal under federal law. Most financial institutions in states like Colorado and Washington, where recreational marijuana sales and use are legal under state law, will simply not do business with purveyors of flammable and/or edible hemp-related products.

So, if the "intended effect" of the FinCEN guidance was to encourage financial institutions to bank marijuana businesses, it's difficult to see how she can make that statement with a straight face. In fact, our inside sources tell us that upon leaving the venue of her speech, Ms. Calvery was kidnapped by "Black Ops" storm troopers of the OCC and waterboarded until she coughed up the names of the Gang of 105.

There will be blood...

On another positive note, Ms. Calvery assured bankers that all those SARs they've been filing, including those "Cheech & Chong SARs" that related solely to the weed-related, are not being eaten by FinCEN's pet goat.

Between January and March 2014, teams across the country reviewed more than 180,000 of the more than 290,000 suspicious activity reports that were filed, according to the speech, which also details how the reports have been used to catch various kinds of criminals.

"So, as you can see, BSA reporting does not go into a 'black hole' as suggested by some in the financial industry," Shasky will say.

Well, knowing that 38% of the SARs filed are not reviewed doesn't exactly fill me with anything other than inertia. How about you? Are you all fired up, ready to go (file a SAR)? As to the 62% of SARs that were actually "reviewed," Ms. Calvery does not tell us with what kind of detail those reviews were performed. A cadre of anal-retentive Einsteins parsing the nuances with electron microscopes is one thing. A crew of high school students getting their community service credits in the bag while sitting in a SAR-filled bullpen sipping Red Bull and giving each other wedgies is another thing.

I'm still betting that there's a goat involved.

We Won't Tell What To Do Until After We Punish You For Not Doing It

The CFPB isn't the only federal government agency that is promulgating new "regulations" by enforcement action. According to yesterday's American Banker (paid subscription required), the OCC's been playing the same game, especially with the BSA.

Few dare talk about their concerns publicly, for fear of alienating regulators. Privately, they say that BSA exams have become more rigorous and focused in recent years, digging deeper into the weeds of processes, systems and controls. Foot-dragging and shortcomings are being met with stiffer monetary penalties and lengthy lists of demands for systems improvements and additional personnel.

Yet it's not clear that even the regulators know exactly what they want from bank BSA programs. Instead, critics say, they're looking to the private sector for the latest in best practices and then seeking to transmit those ideas to the rest of the industry through regulatory decree.

BSA officers report combing through consent orders and regulatory pronouncements with urgency, looking for clues of subtle changes and what's coming next. "We are now in an era of 'regulation by enforcement action,'" says Teresa Pesce, head of the Americas AML practice at consulting firm KPMG.

"Banks feel that they can no longer look at the statutes and regulations to know what to do," Pesce says. "They have to look at the most-recent regulatory guidance or enforcement action against their peers, and then try to plug those holes, as opposed to creating more thoughtful and sustainable programs."

"Thoughtful and sustainable programs?" What's that got to do with covering your backside, avoiding second-guessing from your "superiors" and your "peers," and protecting your government retirement benefits? Let's get with the program here, Teresa.

According to the American Banker's sources, the causes for the uptick in scrutiny on BSA is open to debate.

Some point to the lingering anger of Congress and the public over Wall Street's role in the financial crisis, and the failure of regulators to catch it. Others note that with banks having largely cleaned up their credit problems, quieting the safety and soundness risks that had dominated regulators' concerns in recent years, all those examiners hired at the peak of the crisis now have more time on their hands.

Idle hands are the devil's workshop.

One former OCC official even said much of this may have to do with career advancement by small bank examiners who want to earn notches in their gun by taking down some too-small-to-fight-me community banks, and thereby be promoted to examining the plutocrats of commercial banking. I guess it's every examiner's dream to make yourself such a pest to Bank of America that it hires you just to get you out of harm's way.

FinCEN's Director Jennifer Shasky Calvery claims it's because FinCEN is getting better at using the billions of bits of information that banks feed into its maw every day via various reporting avenues. She even talks about a bank that included a phone number in a SAR that matched a number found in Osama Bin Laden's file cabinet found by Seal Team Six in the follow-up to ventilating the former terrorist-in-chief. Jennifer won't tell us what the people who parse these nuances did with the number. Maybe the NSA used it to order a truck load of peperoni and italian sausage pizzas to be delivered to a kabob house in Kandahar, demoralizing a phalanx of jihadists. Whatever, she wants banks to know that she and her fellow "sheriffs" are cracking down on banks because all of those SARs they're defensively filing are no longer fed to FinCEN's pet goat.

So, bankers, buckle up and get ready for more _regulating-by-enforcement. What's good for FinCEN's good for the country, and the bad guys are moving too fast to bother with that irksome Administrative Procedures Act. The regulators will tell you what you did wrong after you've done it, not before. If you don't like that, well, that's tough nuggies. In this brave new world, the ends justify the means.

Shaming The Shameless

While we're sure it's merely a coincidence, hot on the heels of the letter that Rep. Pete Sessions sent to the Treasury Department's Inspector General that complained about the repeated failure of the Comptroller of the Currency to issue a final decision in the case of Patrick Adams, the Comptroller raised his middle finger to the requirements of 12 USC 1818(h) issued yet another extension of the deadline to issue a final decision, this time extending the date of decision from August 13 to September 30. As one observer pointed out, at least this time the Comptroller gave himself a deadline to issue a final decision. Whether he "sticks to it" remains to be seen.

Mr. Adams' plight has generated some interesting email. Customarily, private practitioners are most harsh in their indictment of the sort of cavalier nose-thumbing at the requirements of federal law by those whose job it is to enforce it that we've seen demonstrated in this case. However, former enforcement attorneys, such former OCC attorney Robert Serino, whose concerns about Mr. Adams were highlighted in the post linked above, have also expressed their displeasure with the way the regulator has ignored the requirements of fundamental fairness (and, as noted above, the deadlines set by federal statute). One former regional counsel for a federal bank regulatory agency wrote to complain about the "shameless arrogance" displayed by the federal government in this case and to assert that in his decades both in government service and on the other side of the table from the government, he had "never seen any type of enforcement action instituted against an individual that remotely resembles the OCC action against Mr. Adams."

Frankly, neither has anyone else with whom I've spoken about Patrick Adams, including former OCC counsel. It's not only questionable conduct, it's almost inexplicable. I say "almost," because after decades of my own experiences with federal regulatory attorneys and enforcement personnel, and after some of the spittle spewed my way in the last few years in reaction to blog posts by a couple of Erik Dorfs currently at home in the bowels of the Mother Ship, nothing much really surprises me anymore.

The Rule of Lawlessness

Former FDIC Chairman Bill Isaac's recent rant opinion piece in The Wall Street Journal (paid subscription required) was a masterful smackdown of the current administration's handling of the conservatorships of Fannie Mae and Freddie Mac. Basically, Isaac accuses the executive branch of acting illegally.

The FHFA as conservator is a fiduciary—or trustee—for the shareholders of Fannie and Freddie. Its job is to, as the law says, "conserve [the enterprises'] assets and property" for shareholders while Fannie and Freddie rebuild their capital base and eventually exit the conservatorship.

That's not what has happened. When presented with the once-unthinkable reality of Fannie and Freddie making enough money to retire the Treasury's senior preferred stock and build enough capital to meet their financial obligations without government assistance, the Obama administration moved in 2012 to confiscate all Fannie's and Freddie's profits and wind down the two mortgage giants. Investors in Fannie and Freddie have responded by suing in federal court.

The government is trying to deny the plaintiffs the right to discovery (sound familiar?) because, according to Isaac, it's afraid of what might be revealed.

This information could include emails and other documents demonstrating that the government's true intent was to seize current and future Fannie and Freddie profits for itself and leave shareholders with nothing. To justify its position against granting discovery to plaintiffs, the government argues that disclosure of current and future plans for the conservatorship could be "disruptive to the housing market and to the nation's economy." Almost laughably, the government also argues against disclosure because that could "create market perception that the Enterprises are not financially viable," and that "this would have a negative impact on sales of debt and mortgage-backed securities." Putting aside the circularity of these arguments, the real absurdity is that the government's own activities have deprived Fannie and Freddie of capital and kept them too weak to emerge from conservatorship. By taking all of the enterprises' profits, the government has left them undercapitalized and permanently unable to rebuild their capital.

Isaac asks an obvious, important question: what's does this hijacking mean for the future? His answer is sobering.

Given the government's dereliction in its duty to conserve value in Fannie and Freddie, an obvious question arises pertaining to any "reform" of housing lending proposed by the administration and enacted by Congress. If the administration plans to wind down Fannie and Freddie with no recourse for investors, or to nationalize them in creating a new federal housing entity, as a Senate housing reform bill would do, where will the capital come from to finance the new system? What investor would put capital into something so uncertain and so unprotected by law as Fannie and Freddie have proved to be?

There can be varied opinions over which reform is best for our country or what, if any, role Fannie and Freddie will have in a future housing market. But there should be no disagreement about the law. Capital follows the rule of law, and if investors can't count on that in the U.S. and in the housing markets, they will put their money elsewhere.

"Capital follows the rule of law" applies beyond Aunt Fannie and Uncle Freddie, as important as they may be to the housing market and the economy as a whole. It also applies to the entire banking business.

Those of us who've been representing banks for a number of years (October will mark my 40th year of wandering in that desert) can't recall a time, outside of the relatively brief episode surrounding the collapse of the savings and loan business in certain parts of the country, when the federal government has treated adherence to the rule of law with such elasticity. From the envelope-pushing "disparate impact" doctrine's foray into fair lending (and the use of every artifice to prevent the SCOTUS from having an opportunity to strike it down), to Operation Choke Point and its "informal" enforcement through "informal" regulatory examinations and supervisory pressure, to cases like those of Patrick Adams, whose David-vs.-Goliath struggle seems to serve no purpose other than sending a message that due process is a pipe dream if you fail to knuckle under to a brow beating, to the avalanche of regulations following the enactment of Franken-Dodd, I cannot recall a previous time when community bankers and credit union boards and management have had such a sense of anxiety that borders, in many cases, on despair.

I understand why capital would flow to the Too Big Too Fail. They get hit with a few hundred million here, a few billion there, and rarely miss a beat. They take a licking and keep on ticking. The Too Small To Save don't have that status, and they know it.

Perhaps it's cognitive dissonance. Perhaps its the blind hope that "this, too, shall pass." Perhaps it's simply the fact that "this is what I know how to do and it's all I know how to do, so I'm gonna keep on doin' it until they force me to stop." However, if you have options as to where your capital will flow, how long before you cash in your chips on the banking business and take it to a business where the regulators who can shut you down and/or sue you don't have to take remedial educational courses to learn the basics?

I'm not advocating a course of action, I'm merely asking a question.

Luetkemeyer Launches Attacks On Choke Point

Although Missouri Congressman Blaine Luetkemeyer made some publicity hay out of the bill he introduced last week (the End Operation Choke Point Act of 2014), it really hasn't got a prayer of proceeding, much less passing. It would prevent federal bank and credit union regulators from prohibiting, restricting, or discouraging a bank or credit union from providing a product or service to any entity that meets one of three safe harbors: (1) is licensed and authorized to offer the product or service; (2) is a registered money services business; or (3) provides a "reasoned legal opinion that demonstrates the legality of the entity's business under applicable law." It's not merely that the definition of "reasoned legal opinion" raises enough questions to fuel a plethora of potential interpretative shenanigans by regulators who want to quash the business, it's the fact that legislative attempts to limit regulatory enforcement discretion always bring out the Chicken Littles among the regulatory bodies, who will warn that this is a giant leap off a cliff that leads straight into the abyss. They'll spin it as legislation in support of "bad guys," and they're often in effective in taking that approach. No pol wants to be on record as supporting businesses that later turn out to include a few crooks.

Nice try, though, Rep. Luetkemeyer. Banks appreciate the effort.

I did, however, appreciate the attempt to forbid the regulators from adopting "guidance" regarding the safe harbor. Instead, regulators would have to adopt regulations in accordance with the APA, and afford the opportunity for public comment. Slamming the door on subterranean regulations adopted as "guidance" is something that many banks would love to see extended beyond Operation Choke Point.

Another nice touch is the provision that attempts to restrict the ability of the federal government to use FIRREA's subpoena power to go on fishing expeditions. That one ought to be resurrected in other legislation if this bill (as I expect) goes nowhere.

Finally, the introduction of the legislation gave opponents of Operation Choke Point (whose motto is: "businesses with nothing to hide can always prove that they aren't engaged in criminal activity") another chance to fire a shot across the bow of the Department of Justice.

“In an effort to drive legally-operating, licensed and regulated companies out of business, federal banking regulators in cahoots with the Department of Justice (DOJ) are placing so much regulatory pressure on financial institutions that certain businesses not viewed favorably by the Attorney General and the Administration are eventually choked-off from the financial services they need to survive. That notion goes against the very nature of our free market system,” Luetkemeyer said. “It is time to stop these backdoor attempts by government bureaucrats to blackmail and threaten businesses simply because they morally object to entire sectors of our economy.”

Of more interest is Luetkemeyer's maneuver in late May to insert an amendment into the appropriations bill (see Section 554) that chokes off funds for Choke Point. It passed on a voice vote. While the Senate is controlled by Democrats, and it may not survive in the Senate, the prospect for another budget gridlock battle may, in fact, make that a more potentially lethal weapon for attacking Choke Point. It may boil down to a matter of what and who gets thrown under a bus in last-minute trade-offs to move the DOJ's appropriations legislation through both houses. It's not anything to count on, but in horse-trading, Choke Point may be regarded as a nag to sent to the glue factory so that someone's thoroughbred can survive. Sausage making is a messy business, so you just never know what might be ground up.