Banking is once again being dragged into becoming an enemy of the Second Amendment. This time by private interests. Does the gun industry need to respond by creating its own “shadow banking” system that finances and processes payments for everything from guns and ammunition to accessories, fashion and travel services? Should this alternative financial system exist separately from the Wall Street, banking and finance universe? Is that really in the interest of the United States? Or, are we planting the seeds of a new and dangerous trend that will become the next systemic risk to our economy?
Operation Choke Point
It was 2013 when the U.S. banking regulators at the Federal Deposit Insurance Corporation (FDIC) launched Operation Choke Point. The initiative was meant to choke off access to banking services by money launderers. The FDIC targeted areas of business activity as suspect based on guidance from the Department of Justice. Among the activities denoted in the FDIC guidance to bankers was the use of the firearms industry for “gun walk” trafficking and laundering funds.
The “gun walking” was itself a government operated fiasco. The trafficking and laundering incidents were the fault of the Bureau of Alcohol, Tobacco and Firearms (ATF), the US Drug Enforcement Agency (DEA) and the Federal Bureau of Investigation (FBI) imitated in 2009 known and Operation Fast and Furious that trafficked and then lost track of government approved illegal purchases of firearms in the United States desired to be smuggled to Mexico, Central and South America to trace drug cartels.
Complaints about these suspect sales from Federal Firearms Licensed (FFL) gun dealers t the item were ignored by ATF because they were behind it. The operation blew up in the government’s face when one of the weapons trafficked by the US was used to murder US Border Patrol Agent Bryan Terry.
A perfect pooch screw landed in the laps of President Barack Obama, Attorney General Eric Holder and, adding insult to injury in hindsight, FBI Director Robert Mueller.
The irony was that the FDIC’s Choke Point directive, when received by risk averse bankers still reeling from the onerous oversight hangover of the 2008 financial crisis, resulted in a cutting off of banking services to many of the firearms industry manufacturers and retailers than had been attempting to alert the government that something was amiss.
A cloud of oppression descended upon FFL’s, who’s licensee guidance manual from the ATF begins with the admonition that they are America’s first line of defense in safeguarding the country’s firearms laws. Instead, they were victimized losing longstanding commercial banking accounts and access to credit card payment processing services.
Bankers feared the examiners for the FDIC and other banking regulators questioning their business practices despite the good financial risk profiles of these companies. Many bankers took the easy way out of just dropping accounts rather than interact with bank examiners about so-called questionable Choke Point assets and liabilities on their balance sheets.
By 2015, after much damage to the gun industry, the FDIC admitted that it had been wrong to issue guidance to banks arbitrarily denigrating legal business activities and altered the language of what remained of Operation Choke Point to tell banks they should evaluate and report risk on a case by case basis on financial risk principles.
No reference was ever made that the whole thing was an entirely Beltway D.C. agencies tragedy of errors.
We never do officially own up to such mistakes. This is a shame because it leaves a perpetual trail of rumors circulating in the conspiracies of the internet.
The relative business calm that returned to the world of banking and finance was not to last.
In 2015, the kickoff of the 2016 presidential campaign saw an explosion of demand for firearms by Americans as the prospect of radical gun control by a potential presidential win by the candidacy of former Secretary of State Hillary Rodham Clinton began to fill heartland America.
Ordinary Americans were worried by Clinton’s platform rhetoric alluding to attraction to the confiscatory policies of other nations such as England and Australia and her work to further the international governance regime of the International Traffic in Arms Regulations (ITARS) while serving as Secretary of State.
Americans responded by buying handguns and rifles in droves, with the most popular item being variants of the semi-automatic AR-15, coinciding with the release of surplus industrial capacity in the firearms industry as the wars in Iraq and Afghanistan began to wind down.
This fear of Clinton’s gun control agenda would be one of the factors that would drive the candidacy of aspirant Donald J. Trump’s campaign to pull swing voters in key states to his bid for the presidency.
President Trump’s victory in November 2016 would send two shockwaves into the Second Amendment universe.
The first was a decline in demand as Americans, now less worried about their guns being confiscated, caused the firearms industry to recalibrate its manufacturing and marketing from fear of the state confiscation of militia equipment back to fear crime, specifically mass shooting crime. A new wave of demand was fueled by news media coverage of incidents and echo chamber narrative amplification raising fear about mass shootings. Ironically, the agenda was championed by anti-gun lobby groups.
Americans put their AR’s in the closets and began to buy millions of concealable firearms. Now more gun “woke”, more ordinary Americans started taking classes to qualify for concealed carry permits. The net effect was the strengthening of the US gun culture to encompass more women, gays and quiet political orphans. Think of it as the new version of don’t ask, don’t tell.
The change in defensive posture by ordinary Americans has resulted in its share of successes most recently at a church in White Settlement, Texas where the theory of instant response to an active shooter threat was put to the test and the defenders prevailed. Not just one of them, half a dozen people rose to the occasion. One of them, Jack Wilson, found the clear line for a shot with a good backstop and applied good marksmanship. The incident was over just as quickly as it began. It’s important to note that tactically, any one of the other responders in that church could have been the one to find the clean shot geometry. The arc of fire looking for a hole was tactically superior. That’s quite a change from just a few years ago when other church shootings resulted in mass casualties because no one was there who could shoot back.
The rule of thumb that seconds count in the life saving equation is now empirically proven to be common sense truth. Strangely, the very people clamoring for “common sense” gun laws can’t handle the truth and, in macabre statements following the Texas incident, seem to be struggling to say that they don’t believe individual defense is valid even when it clearly saves lives. That it’s better for ordinary people to let themselves die if the police aren’t there to save them. To which all I can say is, what kind of elitist crap is that?
The Search for Resistance
The second shockwave after 2016 was the beginning of a search by gun control proponents for a privatized version of Operation Choke Point to once again cut the firearms industry off from the financial system. Bearing in mind that the key lesson from the previous version of such efforts is that the government cannot be discriminatory, they found it in the manufacturing of politically weaponized reputation risk.
The negative reputation solution was put into practice by activist companies such as Dick’s Sporting Goods making the business calculation to lose revenue and customers executive management no longer valued. The market repositioning trade was to attract fewer but more loyal customers. How well this ultimately works out remains to be seen. In the real world, physical location-based businesses are under severe enough pressure from online retail competition that one would think the retention value of any customer willing to walk though the front door regardless of their political views would be paramount.
Most companies remain wary that business strategies that deliberately send potential business packing won’t work in the long run. But they also know that political fads tend to turn into a multi-headed serpent and their core business mission is to find the last risk path through the storm.
I can’t really say I’m that surprised. These “politics as a tool of acumen” businesses are following a customer segmentation and differentiation model already embroiling the media industry. In an increasingly tribal post-2016 America, it does seem some Americans either just don’t matter or deserve to be hurt. Social and mainstream media have compounded the problem for corporate America because these information channels now excessively amplify the outrageous few while muffling the silent majorities.
This is a “influencer” formula perfect for confusing already risk averse corporate boardrooms that can’t figure out what language to use in their official communications or who gets to use what lavatory on their premises. It exploits the legal department’s fear the company might be the topic of the next internet Twitter storm or box office expose. The lawyers and consultants that advise companies, including banking institutions, are all about creating ways to manufacture “plausible denial” that a firm may have approved of or knowingly participated in any activity that could shine negatively.
We are seeing the emergence of a privatized version Operation Choke Point that is not longer based on law or federal guidance but on discriminatory decisions by corporations and individuals. Corporate boards, executives, consultants and counsel, are taking on the legal exposure that comes with stepping away from neutral relationships with otherwise legal business counter parties to engage in arbitrary business-to-business discrimination. This is the opening of a whole new chapter in testing the limits of “We reserve the right to refuse to do business with anyone.”
When it come to firearms, the choking manifests as demanding behavioral covenants that require the adoption of prejudicial policies by businesses in order to access banking and payment processing services. Only certain types of guns can be sold. The vendor must adhere to age restrictions that are different from the law. Legal requirements or political preferences from one state are forced upon persons in other localities that may have entirely different laws based on requiring agreement to terms and conditions of contract clauses and codes of conduct.
It’s an aggressive set of moves that, like every powder keg initiative before it, will have unintended consequences. I am personally interested to see what happens when a civil liberty lawsuit against a retailer triggers a pass-thru defense asserting that the business covenant that violated the plaintiff’s rights accuses the deep pocket of the financial services firm that made that demand in it’s contract language liable for the damages. Like I said, we are in unknown seas here.
Will American Political Tribalism Consume Banking Too?
It remains to be seen if government regulators will intercede at some point and insist that financial institutions return to truly neutral services policies. I think they should before this goes too far. There are good reasons for regulators to instruct banking and financial services firms not to engage in B2B discrimination by covenant practices.
Firearms, while among the most polarized of industries, are not the only wedge issue business in the marketplace. Other industries like the emerging cannabis industry are also testing law-based and non-law-based business practice innovation. Environmentalism, education, religion and other issues also have their own divisive wedges and fanatic driven proponents. We’ve already been through how hard it can be to, or not to, bake a cake.
While this may work for individual commercial enterprises which are companies within diffuse industries, it has systemic risk repercussions for financial liquidity and economic shock resilience when applied to money and banking.
My observation here is that regulators and bankers both have a compelling interest to not let non-law covenant restrictions get to the point that entire industry segments decide to abandon the banking system and take advantage of non-bank financing technologies such as cryptocurrency and peer-to-peer transaction processing networks that only interact with the U.S. economic through omnibus account gateways.
Think of a future where the gun industry runs completely separated from the rest of the economy. This is very possible and secure using opaque market designs using Arab-style Hawala market isolation principles in use around the world as we speak.
The system is based on disconnected pools of capital where private messaging to deliver goods, services in payments between these isolated capital islands is all that’s needed to effect business.
Hawala, just so you get the drift, is a financing and translation system that predates the Italian central banking models the Western world relies on today. Put that on steroids running at gigahertz speeds with advanced artificial intelligence enhanced encryption and masking in the Dark Net. Software as a service baby! Cryptocurrencies like Bitcoin didn’t invent these financial principles. They are just technologies to ledger the transactions in a computer instead of a double entry green paper book.
Obviously, triggering such a necessity is the mother of invention event because of US tribal politics is a form of economic systemic risk. Quite an asymmetric one.
Industry scale abandonment of the banking systems would be a development in the economy that creates fractal discontinuities in the money matrix that will be much harder for the U.S. central banking system to risk manage. Valuation, pricing and transaction friction will have different rules within each silo where such a thing sub-financing models emerge. And it’s likely such private script markets would, because of technology effects, prove useful for other industries including ones that are not wedge or sin market segments.
This isn’t that far fetched. The last scare that such an alternative “outside the reach” finance and transaction regime might emerge, just as a reminder, was Facebook’s Libra initiative that scared the U.S. bank regulators so much they are scrambling to design a federal Real-Time Payments (RTP) system of their own. My thought leadership input on this is that U.S. regulators may want to make sure federal RTP is neutral because the tech is easy to replicate. Financiers have a history of embracing omnibus pooling and isolation techniques to package and shift transparency and risk in the financial system.
Ordinary People Still Matter
Elitism in America is a form of hubris. One that is subject to asymmetric collapse; also known in business parlance as beta risk. Banks and corporations should note that “little people” are not powerless to influence events. In the landscape of banking, Individuals can make their voices heard by moving their money to banks that do not support political “weaponization” agendas.
There are good reasons for banks to adhere to the neutral financial services principles that returned in the aftermaths of the failed FDIC Operation Choke point ended in 2015. Agenda neutral banks and services are basic services needed to invest or make purchased from the gun industry, or any other politically impacted sectors, like plastic straw manufacturing. Supply and demand always find a path to balance.
It should cause banks to pause with concern. It does not actually take a lot to change the mindset of a bank about its soft issue policies. A “move your money” grassroots campaign by gun owners moving their checking, savings and time deposit accounts to a friendlier bank causes what’s called a “core deposits” runoff in a bank’s balance sheet. Core deposits are, from a regulatory standpoint, the most valuable form of deposit at any bank regardless of size. A drop of a percent of these individual account balances triggers a variety of regulatory scrutiny risks that would be far more troublesome for a bank than continuing to participate in “gun control”.
It’s a risk that affects the safety and soundness profile of a regulated U.S. depository institution. It’s not without precedent. We last saw this type of grassroots challenge to banks during the days of the 2008 financial crisis when individuals supported the survival of healthier community banks that did not bite the risky business apple of sub-prime mortgage lending.
The guiding policy “influence” principle is that financial institutions are risk averse, about any risk. The path to winning is simple; one must become the bigger risk they face. And on that score, the grassroots potential of the gun lobby remains a sleeping lion underestimated by elites.
Legislators Resurrecting Choke Point
It’s not like legislators are not trying to mess with things. Virginia Congresswoman Jennifer Wexton introduced a bill that would mandate banks and credit cards processors flag gun purchases under the ruse of searching for potential mass shooters. This “Minority Report” approach presuming all gun purchases are suspect until proven otherwise once again raises the dark cloud of a new Operation Choke Point discouraging the banking system from dealing with the gun industry and gun owners.
In explaining her bill which gives the US Treasury’s Financial Crimes Enforcement Network (FINCEN) the power to wade through the transaction by transaction records of Americans buying guns, ammunition and accessories, Wexton likens firearms owners to money launderers, fentanyl traffickers and human smugglers. Really? What constitutes a mass shooter risk financial transaction pattern to someone who is afraid of a gun that can hold eleven bullets owned by a someone who also bought a pair of camouflage pants from a store at the mall?
Meanwhile, in the real world, Wexton’s home state of Virginia prepares for a constitutional showdown over gun confiscation that will consume a good portion of America’s attention during the 2020 presidential primary season.
Where’s the Common Sense?
I totally get that Americans are at each other’s throats sometimes. We are a tumultuously vocal culture and we very often jerk our knees before thinking things through. But there are moments when these tribal games of chance can wreak havoc upon all of us greater than we realize. Creating divisive black markets because our banking system stops being open and accessible to legitimate American businesses is not a good thing.
I respectfully suggest that U.S. bank regulators study the phenomenon objectively then consider updating their post-Operation Choke Point guidance by re-iterating to bankers that the 2015 admonition to the industry not to practice blanket dismissal of industry sectors from the ill conceived 2013 government guidelines equally applies to the effects of private covenants that have the effect of resurrecting prejudicial business practices regimes that that government clearly declared was out of bounds in 2015.
The US should consider reaffirming that financial institutions and services firms should practice prudential risk management that places first emphasis on financial soundness of business engagements with legitimate business counter-parties and avoids entering into potential pass-thru risks that could stem from participation in potential civil liberty violations.
The bottom line is that financial neutrality remains paramount pillar of American economy’s stability.