The general outline is the DOJ and bank regulators are putting the screws to banks and other third-party payment processors to refuse banking services to companies and industries that are deemed to pose a “reputation risk” to the bank. Most controversially, the list of dubious industries is populated by enterprises that are entirely, or at least generally, legal. Tom Blumer’s extremely informative post summarizing what is known to date about Operation Choke Point reproduces the list, which includes things such as ammunition sales, escort services, get-quick-rich schemes, on-line gambling, “racist materials” and payday loans. Quite obviously, some of these things are not like the other; moreover, just because there are some bad apples within a legal industry doesn’t justify effectively destroying a legal industry through secret executive fiat.
In principle, of course, the logic of Operation Choke Point could be extended to groups not currently targeted. Notably absent from the FDIC’s hit list, for example, are abortion clinics, radical environmental groups, or, well, marijuana shops, for that matter. Something similar was done to cut off credit-card payments to support the operation of WikiLeaks.
The larger legal and regulatory issue here is the expansive use of the vague and subjective standard of “reputation risk” to target these industries. In a letter to Janet Yellen, the chair of the Federal Reserve, last week, House Financial Services Committee Chairman Jeb Hensarling expressed concern over the growing use of “reputation risk” as a vehicle for attacking legal businesses. Is there any discernible principle as to why, for example, a payday lender or firearms dealer poses a “reputation risk” and an abortion provider does not?
So far, one of the porn stars has sued to try to determine why his loan application was denied. Given that Operation Choke Point seems to be doing exactly what was its alleged intent — to choke the life out of the businesses in the covered industries — I expect more lawsuits to come that will shed some light on this initiative.