Seizing the Debanking Moment; CFTC Roiled; Regulators Jettison Diversity Programs
Capitol Account: Free Weekly Edition
With Donald Trump taking office, change came quickly in the financial regulation world this week. Acting chairmen took over most of the agencies — and got right to work. Travis Hill laid out a sweeping regulatory agenda for the FDIC. Mark Uyeda, the temporary leader of the SEC, launched a task force on digital assets and rescinded his predecessor’s controversial accounting guidance that has prevented most banks from custodying tokens. Caroline Pham was especially busy at the CFTC. But her decision to replace most of the senior executive staff with close aides roiled the commodities overseer.
The flurry of executive orders signed by the new president also reverberated at the ostensibly independent regulators. They generally followed along with Trump’s directive to shut down diversity, equity and inclusion efforts. Even the Fed scrubbed its website of DEI mentions. Meanwhile on Capitol Hill, lawmakers announced hearings and investigations into claims that crypto companies and their executives have been denied access to financial services. For our Friday interview, we sat down with a longtime advocate on debanking.
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Friday Q and A: Trump put debanking on a global stage this week, needling Bank of America CEO Brian Moynihan at Davos about his firm’s treatment of conservative customers. The remarks supercharged attention on an issue that has already been gaining steam with many Republicans. That’s especially true on Capitol Hill, where several committees are planning hearings and investigations into banks – and regulators – that have allegedly tried to cut off crypto companies. Meanwhile at the White House, the president signed an executive order on digital assets that called for protecting “fair and open access to banking services for all law-abiding individual citizens.”
In other words, debanking is having a moment. This week we sat down with someone who is more prepared than most for the upcoming debate: Brian Knight. He has spent much of the past decade at George Mason University’s Mercatus Center laying out the intellectual groundwork for the arguments that Trump and others in the GOP are now making. In December, Knight left academia to take a more active role in the fight as senior counsel at the Alliance Defending Freedom, an organization that describes itself as supporting “religious freedom, free speech, the sanctity of life, marriage and family, and parental rights.” Ensuring financial access, he says, is a key part of that work.
Read on for Knight’s thoughts on Trump’s comments to the World Economic Forum and the banking industry’s response. He also makes the case for why both conservatives and liberals should care about debanking, and offers a few policy prescriptions for the new administration including several ideas that don’t require action by Congress. What follows is our (lightly edited and condensed) conversation.
Capitol Account: You started a new job last month. Tell us about it.
Brian Knight: The Alliance Defending Freedom is a civil rights organization. My role there is to help combat debanking, deplatforming, with an eye towards protecting freedom of speech and freedom of religious worship…ADF is a public interest law firm. It does litigation, it also does policy work and a host of other things. My focus is primarily going to be policy.
CA: Some might say that debanking is an esoteric issue, but it has caught fire with the crypto industry – and the president. What did you think of Trump lecturing Moynihan and Jamie Dimon about it at Davos?
BK: I've forgotten the joy of a Trump speech in the sense that you never quite know what you're going to get, but it always – or almost always – makes sense. He [thinks], `Hey, here's the CEO of Bank of America asking me a question on a huge stage. Let me get my zinger in.’
CA: Has there been any fallout from the remarks?
BK: That forced [Bank of America] to react in a way that they wouldn't necessarily feel like they had to under other circumstances. They got put on blast in front of everybody. Then you see their Tweet coming out [saying] `We don't do this.’
CA: What’s the response from your side?
BK: Forgive us if we're not entirely credulous about your denial. There are demonstrated examples of this happening. I think it was very effective from Trump's perspective to really drive that narrative, and do it in a way where it immediately put Bank of America and [JPMorgan] Chase – and banks generally – on the defensive.
CA: What is debanking?
BK: Debanking is, at least in my opinion, several different and interrelated phenomena, rather than just one thing…At its simplest… it's an effort to cut someone off from financial services for political or policy reasons that isn't justified by economic reasons.
CA: Meaning what exactly?
BK: You're a gun company, you are a conservative Christian charity, you are Planned Parenthood, and you want a loan. [If a bank] looks at your finances and [determines] this is too risky – that's not what we're talking about. What we're talking about is trying to…interfere with that customer's ability to do what they're trying to do.
CA: This fight seems to have been building up steam for a while.
BK: We saw a rise in prominence of this in 2018, after the Parkland, Florida school shooting, when there was a lot of pressure placed on banks to cut off gun companies. Citibank and Bank of America each announced policies very prominently saying, `We're going to curtail services to companies that make modern, what they call military-style, weapons.’ [The idea was], `We want to be part of the change. We want to reduce access to these weapons. Congress should do it, but they won't. We will try.’
CA: The uproar has mostly come from conservatives. But why are they so concerned about what one might call a free market choice by financial services firms? Can’t a gun company, say, just move to another bank?
BK: This has been a big focus of my research. Banking is not a free market. You have barriers to entry in the sense that the government has to grant you a charter. You have barriers to exit in the sense that we need to protect bank stability – what that really means is we need to protect banks from failing. And in between the birth and the death is a host of regulatory and legal advantages granted to banks. They get access to the Federal Reserve payment system. They get access to the lender of last resort function. They get access to deposit insurance.
CA: So they shouldn’t be able to turn down businesses they don’t like?
BK: An analogy would be: the town gives you a snowplow and a charter to plow snow. The deal is, we'll pay you and we'll give you this plow and we'll let you do business on the side, but you need to plow the roads when we tell you to. Instead of doing that, you pile all the snow in front of the driveway of the neighbor you hate. If the town comes and takes your snowplow away, that's not them being unfair. That's them saying, look, we gave you this tool for a reason and you turned around and abused it…(Friday)
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Taking Charge: Inside the CFTC, some are calling it the “purge.” Others prefer “decapitation.” But most agree that Acting Chairman Pham’s shakeup of the commodity regulator’s top staff is unprecedented in the recent history of the agency – especially for a temporary leader who took charge only days before.
The overhaul, which placed a number of close Pham aides in key positions across the commission, was announced Wednesday night shortly before 7:00 p.m. (Though one wag pointed out that it might have been more appropriate to reveal the news at midnight, considering it was a “massacre.”) Sources inside the agency say that numerous career employees have been pretty shocked about the abrupt action, which they fear portends a less welcoming workplace environment under Pham.
Others at the CFTC, mostly those who have political appointments, were less concerned, pointing out that job changes are expected when a different political party takes over. Even so, several staffers were taken aback by Pham’s zeal, and they wonder if the dramatic move was meant as a sort of audition for the White House as it debates whom to nominate for the permanent chairman job.
A Pham spokesman notes that the agency’s division directors customarily turn over when new leadership comes in, and he stresses that no career staff were removed and nobody was fired. “The director roles at the CFTC are temporary details that are assigned by the chairman,” he says. “When the chairman changes, those details end and the staff return to their permanent career roles.”
Pham, sources say, was told that she shouldn’t use the acting role as a seat warming exercise – and she is clearly taking that to heart. She has also tried to reassure the agency’s workers of her intentions, noting in a commission-wide email on Tuesday that “the success of the CFTC and our dedicated staff will always be my top priority.” The message emphasized “keep up the great work,” and concluded (with a bit of Trumpian flare): “Thank you for your service to the American people and this great Nation.”
Those ousted from their posts include a long list of former Chairman Rostin Behnam’s senior appointees: the general counsel, the enforcement chief and the heads of the market oversight and clearing and risk divisions. The legislative, international and public affairs directors were also relieved of their duties…(Thursday)
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Going Along: Diversity, equity and inclusion initiatives are hardly at the top of the list of financial regulators’ priorities for the second Trump administration. Yet they are suddenly getting an outsized amount of attention, thanks to urgent directives from the White House.
The president’s command, via executive order and spelled out in a memo from the Office of Personnel Management, calls for agencies across the government to close DEI offices, take down their web pages and immediately begin the process of firing the staff. The directives are specific and go straight to internal operations, making them an early test of how the SEC and banking overseers will treat their independence.
The programs, which Joe Biden had backed with his own White House orders, have “demonstrated immense public waste and shameful discrimination. That ends today,” said the document Trump signed on Monday. “Americans deserve a government committed to serving every person with equal dignity and respect, and to expending precious taxpayer resources only on making America great.”
So far, the Federal Reserve and the financial agencies appear to be falling in line, if cautiously. None of the leaders, most of whom are acting chairmen, were willing to speak about their plans. Still, by the close of business on Tuesday the regulators had scrubbed mentions of diversity, equity and inclusion on their websites. While the terms appeared on searches, clicking through mostly resulted in error messages.
At FHFA, for example, a Google search preview noted that the agency “has an ongoing commitment to increase hiring, promotion and procurement opportunities for women, minorities and people with disabilities.” But the content was gone, replaced with an “access denied” message. At the Fed, a page titled “Diversity & Inclusion” with a video message from Chairman Jerome Powell redirected visitors elsewhere.
Also, as required by the order, most of the regulators sent staff-wide emails tonight at 5:00 p.m. announcing the changes. Much of the language appeared to be cribbed from an OPM template. The notes, which differed slightly from agency to agency, mentioned the web site changes, the scuttling of DEI-focused strategic plans and the elimination of training programs and diversity-focused contracts. The topic was also deleted from performance plans. Employees also instructed to report “any efforts to disguise these programs by using coded or imprecise language.” (For those interested, the email is: DEIAtruth@OPM.Gov; the A in the acronym is for accessibility.)
While taking down a website is one thing, firing staff is quite another. Nevertheless, Trump’s push sets quick deadlines. Agencies must develop “a written plan for executing a reduction-in-force action” in their DEI offices by Jan. 31, according to the OPM memo.
Complicating financial regulators’ response is the fact that the diversity programs are typically run out of an Office of Minority and Women Inclusion, which was established under the 2010 Dodd-Frank Act. (The law, for some reason, didn’t include the CFTC; then-Chairman Gary Gensler set one up anyway.) Closing those would contradict a mandate from Congress, though their staffing is a different matter.
The executive order does appear to account for wrinkles at individual agencies, requiring the termination of DEI programs “to the maximum extent allowed by law.” The SEC mentioned Dodd-Frank, as well as various equal opportunity laws, in the email it sent to staff. It underscored that statutorily required programs “will remain in place.” And at a hastily called meeting shortly before the memo went out, managers were told that the commission was still trying to figure out what parts of the executive order applied to the agency and how to implement any changes. The message, one source says, was: we know you have a lot of questions, but we don’t have answers yet…(Wednesday)
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