regulation Archives - Bankers Anonymous

June 11, 2022June 11, 2022

Does Texas Believe in Free Speech?

Texas leaders need to go back to middle school.

My sixth grader recently learned, and then recited to me, the 10 Amendments to the Constitution, beginning with the first and best known: The freedoms of religion, assembly, petition, press, and speech. The key point of all of these is a limitation on what government can demand from private citizens and businesses. You’re welcome for the refresher.

In a special legislative session in September 2021, the Texas legislature passed HB 20, which empowered the Texas Attorney General to regulate large social media companies based on what messages they promote or discourage.

The point of the bill, made explicit at the time by Governor Abbott, was to redress a perceived imbalance in social media coverage of political voices. “Silencing conservative views is un-American, it’s un-Texan and it’s about to be illegal in Texas,” Abbot tweeted.

I joined @SenBryanHughes to announce a bill that would prevent social media companies like Twitter & Facebook from censoring conservative speech & beliefs.

Silencing conservative views is un-American, it's un-Texan and it's about to be illegal in Texas.https://t.co/JsPam2XyqD
— Greg Abbott (@GregAbbott_TX) March 6, 2021

Unfortunately, this is a grave misunderstanding of the First Amendment. As a constitutional matter, the government can not tell private companies what they can and cannot publish.

But don’t take it from me, a member of the fake news community. Take it from State Representative Giovanni Capriglione (R-Southlake). He was one of the few Republicans to vote against the bill.

The problem of regulating social media companies, as Capriglione told me, “It is a slippery slope when we let the government say what we can say and think. Unfortunately this bill broadens that. And we let the government get into editorial moderation.”

Immediately following passage of the bill, Net Choice and The Computer and Communications Industry Association (CCIA) – private advocacy groups that count these social media companies as clients – filed to stop the bill from going into effect, winning an injunction in December 2021.

So here’s what happened this past week. Texas Attorney General Ken Paxton’s office won on appeal, lifting the injunction, putting the HB20 back into effect. At least until the next move, the AG of Texas can regulate large social media companies for, in effect, not being conservative enough. All Texans, all Americans should be worried about this, both on the left and the right.

Let’s remove this from traditional left/right politics. For example, you may personally prefer a better financial columnist in your paper each week. Your leaders in government may also want that. But your government does not have the right to regulate a media company just because the financial columnist is bad, and the better columnists are being “censored.” That’s not how it works. The First Amendment protects the media company from having any government regulate them based on a bad financial columnist. It’s as simple as that.

Matt Schruers is the President of the CCIA, which won in December, and then lost last week, the injunction against HB 20. They argue this is a basic First Amendment issue. “Ostensibly conservative officials are doing very unconservative things with respect to businesses that take positions that they do not like.”

I agree with Schruers and Capriglione. Private companies, like private citizens, get to express what they want. Government, in turn, does not get to force any particular message or messenger on private companies

Media companies in particular depend upon message curation, free from government dictates. Media curation free of government interference is a sacred part of the First Amendment.

All media companies engage in some curation, mostly to avoid their platforms becoming cesspools of spam, pornography, and disinformation. But also, media company control over what and who it allows on its platform is key to their function.

Capriglione says, “For me the conservative policy is that if the company isn’t doing what you like, you stop buying their product, or you create your own company. And you let the free market solve this. We don’t need the government to decide.”

As an example of what HB20 is aimed at versus what Capriglione says we need, look no further than recent headlines about Twitter, Elon Musk, and President Donald Trump.

A major thing that clearly inspired HB20 in the first place was the removal of Trump from Twitter, following the January 6, 2021 insurrection at the Capitol building.

Elon Musk, the presumptive incoming majority owner of Twitter (although on any given day who knows with him!?) has declared that deplatforming Trump was a mistake. Jack Dorsey, the founder of Twitter and a significant shareholder, says he agrees with Musk. It is reasonable to assume Trump will rejoin Twitter soon, and that’s fine. It should be up to Twitter to decide, not the government.

Trump’s team tried to build Truth Social as a new social media platform, which was mostly a grift and a failure. And that’s also fine. But the key point is that it would never be appropriate for the government to insist that Truth Social give equal voice to “progressive” voices. That’s not how we regulate media companies in this country! This is undoubtedly obvious to true conservatives, but somehow not yet to the Texas leadership that voted for and signed HB20, and the judge who lifted the injunction last week.

As a result, Capriglione continues, “I still think if you follow the constitution you can only come to one conclusion on how this should be done.”

Capriglione says, “Literally the beginning of the First Amendment is ‘The government shall pass no law…’”

Schruers said it well, “There are Republicans who regard that kind of government intrusion to be inappropriate. But there are other Republicans who would happily use the power of government to force private companies to disseminate the perspectives and viewpoints that they want.

I don’t think that’s particularly conservative, but there you have it.”

As Capriglione told me, “I’ve got an A+rating from the NRA. I’m 100% pro-life. I’m the one who wrote the bill to create the gold depository in Texas. [On HB20,] all you have to do is read the Constitution. It’s that simple.”

So what’s the next move? CCIA announced on May 13th that they and Net Choice filed an emergency appeal to the Supreme Court. A week later the Supreme Court granted a temporary pause, to allow another district court in Texas to address the rule.

Schruers commented as part of the filing: “It is unconstitutional for the government to dictate what speech a private company must disseminate whether it be a newspaper, TV show or online platform. The First Amendment is crucial to our democracy and the Supreme Court must now protect that principle from government actors who are too willing to sacrifice it on the altar of partisan posturing.”

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related post

Texas joins recent trend to demand business be politically correct in Texas.

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March 29, 2020March 29, 2020

Comprehension Not Disclosure

Despite all reports to the contrary, I have not suspended my campaign for National Personal Financial Benevolent Dictator (NPFBD).

In fact, today I add a new plank to my platform.

My latest plank is regulation through comprehension, rather than through disclosure. I’ll unpack what I mean by that below.

I’m in the process of renewing the Home Equity Line of Credit (HELOC) on my house.

As you can imagine, my mailbox and email box filled to the brim with dozens upon dozens of disclosure document pages for my signature. These are virtually unreadable and they will go unread by me. Nevertheless, I will sign them.

Lauren Willis, a law professor whose criticism of financial literacy programs I recently described admiringly, has a replacement for these disclosure documents, and I’ve stolen her idea for my platform.

She argues in a 2017 paper “The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension” that financial products regulation should focus less on disclosure and more on creating a system of consumer comprehension.

Here’s what she means. Financial service providers – of credit cards, insurance, investments, and mortgages – would need to regularly show to regulators that a large majority of their customers could pass a simple comprehension test about their product.

Placing the burden on financial firms to stay consumer compliant is analogous to requiring car companies to prove they can meet emissions standards, or toy manufacturers can meet child safety standards.

As long as, say, 80% of credit cards users could ace a quiz about what their interest rate is and the cost of their late fees, and maybe also what the mandatory arbitration clause means, the credit card company would be in the clear. Or, as long as 70% of insurance buyers could accurately describe the meaning of their deductible, premium, their coverage and exceptions, they are good. Provided that 85% of mortgage borrowers correctly describe in a quiz their terms and what their payments will look like if the adjustable rate changes in 3 years, the product is fine.

I’m making up these numbers and these requirements just to provide some sense of what a consumer-comprehension quiz would look like. The point from Willis is two-fold: Disclosing terms in tiny print over 30 pages never helps. It leaves the burden on the consumer. Instead, the burden should be on the firm to show – with a consumer comprehension audit – that customers know what they are buying. After all, isn’t that the original point of these non-effective disclosures in the first place?

Our default system is free market. And I’m a free markets guy. I like classical economics’ trust that prices and quantities will reach equilibrium as long as we minimize frictions like taxes and government interference. Few people will purchase a $10 tomato when a $1 is available, says classical economics. Firms able to offer $1 tomatoes will sell many more units than a purveyor of Gucci tomatoes. I understand this concept very well.

But the last forty years of behavioral finance has taught us that classical equilibrium theory doesn’t work as well in areas like personal finance, because of predictable inherent biases and errors of thought. As a result, people are unknowingly purchasing $10 tomatoes when they should, logically, be buying $1 tomatoes. The inefficiency endures because of human error in predictable, repeatable, ways. And if we know these errors in advance we should build in protections.

And yes, regulation like this could be expensive to firms.

But the alternative is not free market efficiency. The alternative is people paying for $10 tomatoes out of predictable ignorance.

As NPFBD, I am used to people not understanding the brilliance of my proposals at first glance. But I am both benevolent and a dictator, so I will further explain and address your concerns.

One objection: Some people just can’t be taught, because math is hard. And financial concepts are especially hard. Ok, true. But Willis’ proposal focuses on setting a target for average comprehension. Like maybe just seventy percent of customers have to pass the “comprehension audit.” Not everyone. Just a good majority. That seems reasonable and flexible to me.

Another objection: Comprehension seems costly for firms, as they would be required to create educational programs around their products. Maybe. But wouldn’t it also seem that firms facing the potentially high cost of consumer education would be greatly incentivized to simplify these same financial products? Wouldn’t firms pivot towards selling things that any fifth grader could understand?

I am certain, for example, that variable annuities would rightly disappear from the face of the earth if insurance companies were forced to educate consumers about how they actually work. Because, quite simply, they cannot be explained in simple terms.

You know what else is costly? 25% of sub-prime mortgage borrowers defaulting in the same year, sending the world financial system into a tailspin, and requiring an unlimited bailout of all of Wall Street.

Another objection: True financial complexity cannot be captured in short consumer-education segments. Willis addresses this by analogy with energy-efficiency regulation. Simple labelling with stars currently informs us consumers of energy-efficient dishwashers and refrigerators. I don’t have to be an electrical engineer to understand the energy-efficiency star system. I just need to know enough about how the labelling of stars on my dishwasher works. A simple and consistent labelling system for credit cards, mortgage, and investment products could go a very long way to building consumer comprehension.

This is a results-oriented approach to regulation. It’s not about the number of pages of fine print. It’s about proving – with reasonable room for variation – that people using the products actually know what they’re getting and at what price.

I’m knowledgeable enough about behavioral finance to know that the unfettered free market will lead to worse results for many. But I’m cynical enough to recognize that traditional financial product regulation – in the form of more disclosures – creates an ever-increasing paperwork and liability burden on businesses, but without addressing the core problem.

I don’t read disclosures even on my own HELOC application. In fact, nobody does. This creates a “You pretend to disclose, while I’ll pretend to be protected” universal cynicism toward the regulation of personal financial products.

As your NPFBD, I’ll focus less on disclosure and more on consumer comprehension instead.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related post

My Campaign For NPFBD – Focus on retirement investing

Renewing my HELOC in 2015 – Judgement vs. Objectivity

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January 4, 2019

Bummer About All That Cash, Man

One of the hottest-developing industries in the US, marijuana-related businesses, is still practically shut out of the modern payment system because of an unusual patchwork regulatory situation. The result is that dealing with the cash, banking, and financing parts of this business are stunted and twisted into strange shapes.

Schedule 1 Substance

The root of the weird regulations and patchwork solutions is that federal law classifies marijuana as a “Schedule 1” substance, the same as heroin, ecstasy and LSD. Even though marijuana is legal for recreational use in 9 states and for medical use in another 31, regulated financial institutions really, really don’t like the risk of dealing with businesses making money from a Schedule 1 substance. They can’t afford to run afoul of federal laws and regulations. Even in legalized states, sometimes as few as one bank in a whole state, and never more than a handful of banks, offer traditional deposit-taking banking services to marijuana-related businesses.

In addition, major credit card companies like Visa, MasterCard, and American Express consistently refuse to process any payments from any company that touches the product. That means retail customers can’t ever pay with credit or debit cards. Even new fin-tech person-to-person payment services like Venmo, PayPal, and the Cash App regularly shut down services for marijuana-related businesses when they catch a whiff of it. Bank-based lending to the industry essentially does not exist either.

And remember, the industry is not just retail stores, but everything that touches a marijuana plant, from growers to cultivators to processors to cartridge makers to transporters to retailers. It all operates at the fringes of the traditional banking, payments, and finance sector.

Necessity Meets Invention

Morris Denton, CEO of an Austin-area medical cannabis dispensary Compassionate Cultivation, the first licensed dispensary in Texas, confirmed to me that the banking and finance side of running his business remains “a big pain in the butt.” Very few banks are willing to either take the risk or engage in the regulatory headache of working with businesses like his.

Sometimes out of necessity comes invention. For example, a Scottsdale, Arizona-based fin-tech and reg-tech company called Hypur offers a suite of products for the few banks and credit unions willing to serve the industry. As a finance nerd interested in the way traditional banking operates and evolves, the Hypur offering sounds kind of radical and awesome.

As VP of Hypur Tyler Beuerlein describes it, their data and software feed allows a bank to monitor, in real time, every single transaction of their marijuana-based business customers. According to Beuerlein, this super-intrusive data feed is what’s necessary to lower the risk that banks face when dealing with the industry. From a compliance perspective, they empower the marijuana-industry serving banks to know the source and size and timing of every single customer transaction. According to Beuerlein, if a marijuana business made exactly $23,750.22 in sales today, their bank (via Hypur’s data feed) can know that precise amount in real-time.

Cash Problems

To understand both why that’s cool and different, you have to picture some of the tremendous complications that come from a nearly all-cash industry. And also picture the fairly weak information banks typically get from their small business customers.

Cash-based transactions – far less traceable than electronic payments – create a whole series of risk for banks, already super-anxious about federal regulations. How do you prove to the feds the source of a business’ cash is legitimate? How do you comply with anti-terrorism laws? A successful marijuana business typically manages big piles of cash that can’t be easily dealt with.

Folks in the legal (and quasi-legal) marijuana industry describe strange problems that arise when you run an all-cash business. Like, vaults full of paper money that require powerful fans to keep the money from getting wet and rotting. Over time that cash literally tends to stink like marijuana. One industry veteran described a man who dug a hole for a shipping container in his backyard that he filled with currency. As every bar manager knows, cash has a nasty habit of walking out the door at the end of the night in the pockets of your employees. Big piles of cash also attract thieves who can target your cash at your business location, or when the money is in transport.

Banks in the US generally will not let you initiate large deposits of cash if you cannot account for exactly where it all comes from. Even if the bank agrees to work with you, you can’t simply show up with your previously earned $40,000 in cash and expect the bank to open up your business checking account.

We can all imagine the problems of consumer all-cash transactions, but business-to-business payments are likely even more a hassle, since they’re that much bigger.

When I listen to a description by Beuerlein of Hypur’s data-feed to banks that serve the marijuana-related businesses, it’s interesting to think about how every bank that serves small businesses would in theory want this, even outside the marijuana industry.

Typically banks that make loans to small businesses get very sketchy, partial and intermittent information. If a loan is paid on time, a bank might request a copy of annual tax filings. If a problem arises, maybe the bank demands quarterly or even monthly accounting statements from the business. Those statements are going to be voluntary, prepped by the businesses, and frankly leave a huge amount of discretion to the business owner on what gets reported. It’s interesting – ok, maybe just to finance nerds like me – to think about the banking possibilities of seeing real-time transactions of a borrower. To a banker, that’s like the holy grail of lending.

One of the ironies of heavy business regulation – like what currently weighs on the marijuana business – is that it actually spurs entrepreneurial solution-seeking. When regulation creates enough pain points for businesses, other businesses will step up to try to solve those problems.

Meanwhile, when the Schedule 1 classification gets lifted, this whole regulatory problem changes and mostly goes away. Of course I don’t know if that’s happening 1 year or 10 years from now. (hint: It’s closer to 1 year than 10 years.)

A version of this post ran in the San Antonio Express News and Houston Chronicle

Please see related posts:

The business case for marijuana legalization – January 2018 – With a Beto O’Roarke Cameo!

Legal Pot in Texas – The Money Case – February 2016

Weird tax laws around marijuana businesses

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February 20, 2017

On Regulations – The Cato Warning

We need to get more sophisticated in our conversation on government regulation, or interference, in private business. Despite President Trump’s statements and possibly intentions to the contrary, we’re witnessing a massive increase in federal interference in civil society.

A simple way to understanding business-versus-regulation is this: Businesses usually resist the extra cost and hassle of governments making, changing, and then enforcing rules, some of which seem arbitrary, blunt, and excessive.

To an energy company owner facing the EPA, a financial services company facing the CFPB or SEC, or a pharmaceutical company facing the FDA, regulations will seem profit-reducing at best and business-destroying at worst.

And yet, as consumers, we typically don’t want energy waste dumped in our waterways, financial shysters running amok preying on the vulnerable, or untested drugs unleashed on the sick.

Reasonable people in a reasonable society can and should debate the right level of government interference with business.

Gary Dudley and Charlie Amato, for example, founded the San Antonio-based insurance giant SWBC forty years ago, and have seen a dramatic rise in the cost of compliance with federal regulations over that time.

Dudley told me recently “Everybody can agree we need to protect consumers from being taken advantage of. But the CFPB (The Dodd-Frank created Consumer Financial Protection Board) for example has a little too much power, in my mind. If you attack the financial institutions, you drive costs up, and consumers end up paying for that.”

In the past five years alone, Dudley says, ”The number of compliance officers on our payroll has increased by four times. A reduction in regulation,” Dudley continued “would go a long way toward helping businesses like ours employ more people and boost the economy.”

So, many people believe local, state, and federal regulation of businesses in the United States has gone too far as a rule. As a profit-seeking capitalist myself, I’m open to that idea.

President Donald Trump agrees with that idea as well, and I guess that’s why he promised to business leaders in January: “We think we can cut regulations by 75 percent. Maybe more.”

Beyond the semantic question of what “75 percent” really means here, I think we have to reach for a deeper understanding of how government interacts with business to properly interpret Trump’s promise, tactical style, and effects.

I say that because there’s another consequence of regulation that should make everyone skeptical of government interactions with business. By this I mean a sort of libertarian view of the regulatory state. I’ve been reading my Plutarch recently, so I’ll call this the “Cato” view of government rules and regulation, named for the Roman Statesman who famously spoke out against the encroaching power of would-be dictators like Pompey and Caesar. The Cato view goes like this:

Every regulation acts as a bureaucratic bottleneck that a business must resolve via interactions with public officials. You don’t need to resort to outright bribes (although some will!) to understand the power that a public official wields at that bottleneck.

We’re talking about delays, paperwork, inspections, licensing, fees, fines, exceptions, certifications, committee hearings, and waivers. You get the idea.

In the Cato view, public officials empower themselves by exploiting those bottlenecks, to the detriment of everyone else in society. Businesses and consumers alike pay the costs, one way or another, of officials’ empowerment.

The Cato view, broadly understood, is what worries the heck out of me about President Trump’s approach to doing “deals” for business. He talks about “eliminating 75 percent of regulations,” but his core policies and style threaten to generate regulatory bottlenecks instead.

Restrictions on immigration, “America First” trade policy, carrots-and-sticks for on-shoring manufacturing, and Twitter-bullying of specific businesses all lead to bottlenecks that expand – rather than reduce – the power of public officials and the regulatory state.

Whatever your view of the Executive Order dubbed the “Muslim Ban,” there is no denying this creates an extraordinary bottleneck, in the Cato sense of the world. This bottleneck is why more than 100 tech CEOs filed a brief in the Ninth US Circuit Court of Appeals against the Executive Order. Tech CEOs understand the “Muslim Ban” hampers their ability to hire and attract the best talent in the world.

And they know, and we know, what would happen next, with this kind of ban, right? The Trump administration, in its eagerness to show it can do deals, would create special immigration waivers for those tech companies. Provided, of course, those companies “play ball” with the administration in other ways. Otherwise, they should expect delays and intransigence from federal regulators.

Whatever your view of Trump’s proposal for “America First” tariffs on goods coming from Mexico or China or other supposed trade rivals, there is no denying this border tariff creates extraordinary costs for importers. Can some group of importers cut a deal to get those costs reduced, because of a particular favored-company or favored-industry status? Do you have any doubt they will try? That’s what the corporate lobbying industry is built for!

A new set of import tariffs, as consistently promoted by the Trump administration, creates extraordinary opportunity for bottlenecks, and therefore, public-official empowerment through “deals” and “solutions.”

Whatever your view of the deal cut by Trump and then-Indiana Governor Mike Pence for the Carrier plant to maintain some manufacturing jobs in Indiana, there is no denying the message sent to other companies: If you want to get waivers, exceptions, or tax breaks, be sure to follow what the Trump administration would like you to do with respect to on-shoring, or domestic “job creation.” What manufacturing CEO would not try to get in line to curry favor with the Trump administration? Maybe they too can get a “deal” on some tax incentives? Right?

That deal may have given the appearance of “job creation” by government officials – who will certainly claim that success – but it also resembles an exploitable regulatory bottleneck, in the Cato view of the world.

When the Twitterer-in-Chief attacks a particular company like Ford or Nordstrom, it’s an extraordinarily blunt attack by the federal government against civil society.

Some of this is not particular to the current administration, but rather is inherent in government regulation. We’ve seen some of this before now. Some of it, however, is new, and forms the core the administration’s policies, tactics, and style. Regulation and interference come in a variety of forms, and we need to understand them as such.

Cato tried to warn the Roman Republic about the overreach of its leaders. Consider yourself warned about the Trump administration and its true approach to government interference in business.

A version of this ran in the San Antonio Express News and The Houston Chronicle.

Please see related posts

Book Review: The Fall of The Roman Republic by Plutarch

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