Why Big Banks Should Be Common Carriers

We recently published a series of articles about Jamie Dimon, the extraordinary CEO of JP Morgan Chase (JPMC).  Mr. Dimon argues that banks ought to be free to offer any mix of financial products they desire; we disagree with him and believe that banks ought to be limited in the financial products they're allowed to offer and should also be limited in their exposure to any one business.

Why do we disagree with such a successful, famous corporate leader?  Because banks are based on confidence.

If depositors are confident that the bank can give them their money, they won't ask for it, but if there's the slightest whisper that the bank might be in trouble, they'll all want their money at once and the bank goes down even if it is, objectively speaking, in fine good health.

The more business areas a bank touches, the more areas in which bad news can shake confidence in the bank and lead to a run - once again, taking down the entire bank even in areas where there are no actual problems.

Federal Deposit Insurance (the FDIC) was designed to address this problem, but it too is no panacea.  During the crisis, JPMC picked up $180 billion as depositors fled weaker banks even though the government had guaranteed that they wouldn't lose their money.  The banks went under anyway.  Yes, the depositors were guaranteed and got their money back - at taxpayer expense.

Bankers are at least as greedy as you and I are.  They'll always be happy to put other people's money at risk to earn bonuses for themselves just as senators and congresspersons are happy to give away our tax money in return for campaign contributions.  Banks have to be regulated for their own survival because if enough of them go down, or a big enough one does, they take the financial system with them.

Another Danger of Unregulated Banks

The New York Times gave another reason why We the People need strict bank regulation - banks can destroy any business or individual by refusing to do business with them.

The whistle-blowing Web site WikiLeaks has not been convicted of a crime. The Justice Department has not even pressed charges over its disclosure of confidential State Department communications. Nonetheless, the financial industry is trying to shut it down.  [emphasis added]

The Times points out that Mastercard, Visa, Pay Pal, and Bank of America have refused to forward money to Wikileaks.  Banking regulations allow banks to refuse to deal with anyone because they're supposedly private businesses.

In that sense, banks have more freedom than you and I have.  If you're renting an apartment, the Civil Rights Act requires you to rent to anyone who comes by no matter how you feel about the person.  You can be accused of racism or sexism or homophobia or all manner of other social crimes and fined under the Act.  By putting your property in the public market, you are stripped of your right to choose who you want to deal with.

Banks, on the other hand, have no trouble telling unwanted customers to take a hike.  Since they're required by law to report customers who act suspicious in their financial dealings, they've been cutting off the bank accounts of national embassies because, they claim, they can't be sure that the embassies aren't sponsoring terrorism.  Is it not perfectly reasonable to be concerned that the Embassy of Iran is using funds that came from - well, Iran?  And that's against the law!

What's worse, banking regulations require banks to avoid doing business with business with organizations which "might" do undesirable things.  This gives banks an excuse to cut off organizations which might compete with them or embarrass them.

What could you do about it if your local branch manager decided to cut you off because your financial activities were "suspicious?"  Could you prove they weren't?  By definition, it is impossible to prove a negative.

The normal answer to this problem is competition.  In the days of Jim Crow, discrimination against blacks had to be enshrined in law because otherwise, businessmen who were more greedy than they were racist would gladly take the money of blacks whom their competitors wouldn't serve.  This made racists poorer and the fair-minded richer; quite embarrassing to the KKK, so they had to get selling to blacks outlawed.

But if "suspicion" is enough to get banks in trouble, going to another bank is no help.  If your bank has closed your account because it thinks something might be wrong, that fact alone is enough to make any other bank equally suspicious and equally liable under the law.  After all, if you knew that somebody was being investigated for theft, wouldn't you be reluctant to hire them even if they had not yet been convicted?

You may not have much sympathy for the Embassy of Iran, but the problem is not going to end there.  Mr. Assage, the founder of Wikileaks, said that he plans to relese embarrassing information about Bank of America.  Should we be surprised that BofA wants to make it harder for Wikileaks to operate?

Even the Times is worried about this:

But a bank’s ability to block payments to a legal entity raises a troubling prospect. A handful of big banks could potentially bar any organization they disliked from the payments system, essentially cutting them off from the world economy.

The fact of the matter is that banks are not like any other business. They run the payments system. That is one of the main reasons that governments protect them from failure with explicit and implicit guarantees. This makes them look not too unlike other public utilities. A telecommunications company, for example, may not refuse phone or broadband service to an organization it dislikes, arguing that it amounts to risky business.  [emphasis added]

The Times agrees with us that banks are not like any other businesses.

Banks are Common Carriers

In arguing that it might be a good idea to treat big banks like telephone companies which aren't allowed to deny service to organizations they dislike, the Times is drawing on the legal principle of "common carriage" that goes back to Roman times.  The Economist explains:

...the idea of "common carriage", a principle that is, in fact, far older than the telephone.

Excerpts from Justinian's "Digest" of Roman law suggest that 6th-century sea captains, innkeepers and liverymen could not refuse board to any cargo, man or horse. William Blackstone, in his 18th-century "Commentaries on the Laws of England", was more explicit: to open a house for travellers implied "an engagement to entertain all persons who travel that way". English common law came to see innkeepers, boatmen, warehouse owners and granary operators as "common carriers": transport trades compelled to serve all comers, and to charge reasonable rates.  [emphasis added]

The "common carriage" principle grew out of the fact that most transportation businesses were government-regulated.

Consider trucking.  For a long time, it was illegal to operate a trucking line without a license from the Interstate Commerce Commission.  As one would expect, the existing businesses always opposed the granting of any new licenses, just as cab drivers oppose granting any New York City taxi medallions.  This led to high prices and outsize profits for people who managed to get into the trucking business in the first place.

Banking is even more heavily regulated than the trucking business.  CNN reports that Wal-Mart, which has had no trouble entering the trucking business, has been prevented from entering the banking business:

Wal-Mart has attempted to acquire its own banking license several times since 1999. In 2007 it dropped plans to acquire an industrial-bank charter in Utah after heavy lobbying by the banking industry. Banks argued that Wal-Mart might steer lending toward favorable suppliers and away from competitors. [emphasis added]

Wal-Mart got a banking license in Canada in 2010 and has operated a bank in Mexico since 2007.  It clearly understands the banking business, but it's been blocked in the US.

In arguing that Wal-Mart might not want to lend to its competitors if it were in the banking business, the bankers are saying that if it were a bank, Wal-Mart might use its financial strength to damage its competitors.  They're completely right - in fact, it would be bizarre if Wal-Mart did not plan to do exactly that.  Isn't that kind of the point of entering the business in the first place?

But in admitting the power banks have to hurt other businesses, the bankers themselves present a powerful argument for treating licensed banks like common carriers and requiring them to do business with all comers no matter what.

There are enough banks in the US from which Wal-Mart's competitors can borrow money that we suspect that the bankers' argument is more than a little self-serving.  Knowing the huge cost savings Wal-Mart has enjoyed through its mastery of world-wide logistics, banks believe that a Wal-Mart bank would undercut their prices as it has undercut so many other retailers.  So do we.  In fact, we hope for it just as we longed for a Wal-Mart before they moved into our area.  Lower cost banking services is something we'd all welcome, but it's anathema to existing banks.

Knowing the immense cost government regulation impose on the economy, we'd by far prefer that anyone be allowed to enter the trucking business, or the grocery business, or the banking business.  People in these businesses, in contrast, welcome government regulation as a means of keeping competitors out and of damaging smaller competitors who don't have the legal staff to cope with regulation.

In the case of banking, we've explained why we don't see many alternatives to government regulation.  Given how difficult it is to open a new bank, therefore, we find ourselves thinking that federally-chartered banks and credit-transfer companies like Master Card, Visa, and Pay Pal, ought to be regarded as common carriers who have to do business with anyone.