Congress to Wal-Mart: No Bank. Not for You.

Some of us hoped that losing their majority might cause the Republicans to rediscover their limited government principles. Others predicted it'd be more of the same -- that the GOP would just try to out big-government the Democrats.

Here's another piece of evidence for the cynics.

I've found that anything described as "bipartisan" almost always means bad news for libertarians.

Comments

[andy]

Libertarian dogma aside, why is this such a horrible thing?

Please explain to those of us to whom the wickedness of this proposal is not self-evident.

[Schutz]

Yeah- did a little reading on ILCs and I still do not understand why they are special and why to ban them. Anyone have any sources on this?

[Lost_In_Translation]

Also, why must a line be drawn between banking and commerce. Money is just a relative measure of the goods and services created by people and much easier to exchange. A Wal-mart bank wouldn't necessarily be a bad thing, especially as it has more liquidity than most banks anyway, meaning it can back up its loans relatively easily and securely. I say the regulations that are imposed on regular banks are sufficient to make sure Wal-mart doesn't tie up its retail business with its banking business.

[P Brooks]

* "We are seeking to prevent the expansion of a historically small special niche into a full-fledged alternative banking system, which dissolves the line between banking and commerce," Frank said in a statement.*

Translation: Lobbyists from existing banking companies have come to us and begged us to shield them from competition; we are happy to oblige, as they have offered, in exchange to shield us from competition in our industry (political influence peddling).

[Graphite]

But if not Congress then who, *who* I ask, will look out for the Mom 'n' Pop local banks?

[JKP]

How would Bank of America and Chase Manhattan be able to charge great interest rates if Wal Mart was always there, ready to undercut them?

Save BoA! Write your Congressman today!

[Abdul]

Wait a minute . . . didn't Wes Clark say that the Jews controlled this sort of thing?

[Cab]

Graphite - that was great

[JasonL]

Typically idiotic and short sighted. Would you rather have a Walmart bank or a bunch of pseudo banks in the form of check cashing outlets operating on the small end?

[Phillip Conti]

IN AMERICA, WE have a two-party system," a Republican congressional staffer is supposed to have told a visiting group of Russian legislators some years ago.
"There is the stupid party. And there is the evil party. I am proud to be a member of the stupid party."

He added: "Periodically, the two parties get together and do something that is both stupid and evil. This is called-bipartisanship."

[Garth]

A neighbor of mine told me over a year ago that Wal*Mart had already entered into some kind of shady deal in which it was financing cheap houses for poor people who would then have to shop at the "company store" and that plans were afoot to create a Wal*Mart banking behemoth that would process all of these people's financial transactions.... essentially creating a seperate financial system..... "Wal*Money" I suppose.

I wasn't sure exactly what might be wrong with that unless Wal*Bank would refure to allow it's specie (Wal*Checks, Wal*Bucks) to be used a competing locations, or at some kind of discount elsewhere... Got your glasses at Lenscrafters instead of at the Wal*Mart version then your money was only worth 80% of face value.

Possible?

[Lamar]

Certified WalMart hater wondering why the gov't feels the need to limit this type of banking arrangement. Is there some unfair advantage over other types of banks? Being anti-WalMarter doesn't mean I don't require a reason other than the usual shrill "but it's WalMart"!

[JKP]

A neighbor of mine said how he doesn't understand why everyone's all up in arms about money markets; of course you need money when you go to the market.

I don't like my neighbors.

[anotheranon]

I'm not an expert, but Google spit this out:

http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum04/industrial_loans.html

It sounds like the concern is that a non-financial institution (like WalMart and the other commercial outfits effected by this) might abuse the FDIC-insured capital that exists in a subsidiary bank. When a financial institution owns the bank, they're not concerned because both the parent company and the subsidiary are subject to the sort of oversight that the FDIC likes to have for its insureds, but when a non-financial company owns the bank it is not subject to that oversight.

The nightmare scenario, I suppose, is that the non-financial parent company borrows money from its FDIC insured bank (money which belongs to the banks depositors), and then defaults on the loan, breaking the bank, and leaving the FDIC on the hook for the depositors money. The FDIC never had a chance to step in while the parent company's financial situation deteriorated because the parent company wasn't subject to oversight by the FDIC.

As I said, I am no expert, but that is what I inferred from the linked article.

[Sam Franklin]

This is about economic consolidation and the degree to which economic consolidation is compatible with free markets and free minds (esp. free markets).

Your angle may be a management-pleasin' one, Radley, but I think you are engaging in some creative misdirection here.

[Son of a!]

Target already has an ILC, so I fail to see how Wal-Mart acquiring one is such a big deal.

[Pro Libertate]

Ugh, this is so silly. Banks hate competition. They hate credit unions, finance companies, and, of course, ILCs. Politicians wanting to take advantage of Wal-Mart Hate? made this sort of development quite likely. Sigh.

I looked into this back in my banking lawyer days for some clients and concluded that it was much ado about very little. If you're really hurting for some dry commentary, I posted a few thoughts about Wal-Mart's ILC wishes here at Hit & Run last year.

By the way, fear of too much banking power being in one company's hand is assuredly not the issue here. Mega banks are not only the de facto trend--and they are far too "mega" to be at all threatened by Wal-Mart--but they are also the de jure trend. The Gramm-Leach-Bliley Financial Modernization Act (and some similar legislation) has greatly expanded the powers of banks and bank holding companies. Not to mention that Wal-Mart or any other entity can do quite a bit of financial services business (e.g., money services, personal and mortgage lending, etc.) without being a bank.

Although I don't really favor this approach, one "solution" could be to just give the FDIC more oversight over ILCs.

[lunchstealer]

NO BANK FOR YOU!

Is invoking the Soup Nazi a Godwin violation?

[Sam Franklin]

By the way, fear of too much banking power being in one company's hand is assuredly not the issue here. Mega banks are not only the de facto trend--and they are far too "mega" to be at all threatened by Wal-Mart--but they are also the de jure trend.

The issues are:

- are these trends a good thing?

- should these trends continue?

- are these trends a bad thing?

Yeah, it is kind of stoopid that it takes something as blatant as Wal*Mart for Joe SixPack to engage with economic consolidation issues, but sometimes that is what it takes.

While I am willing to believe that this prohibited (type of) merger would fail to put a dent in the current degree of bank consolidation, it would certainly make future increases in consolidation more difficult and less likely.

"Consolidation is just not the issue" doesn't cut it here. Conclusory. It is "bipartisanship" that is not the issue here.

[Sam Franklin]

Further to previous:

besides the issue of whether this fosters bank consolidation, even more importantly it raises the issue of greater consolidation between banks and larger importers/retailers.

That kind of horizontal integration is kind of new to the US, at least at this scale. potentially it is even a bigger problem than consolidation within the banking sector itself.

For example, what if Wal*Mart offered a discount on its merchandise for people who did a certain threshold amount of banking at its ILC? What would that do to other banks? Other retailers?

[Edward]

"I've found that anything described as 'bipartisan' almost always means bad news for libertarians."

Anything described as reality almost always means bad news for libertarians.

[Pro Libertate]

A good measure of whether Wal-Mart could actually succeed in retail banking is how well the in-store banks are doing. My impression is that the in-store banking relationships haven't proven all that lucrative. People don't go to Wal-Mart to bank, and, for your average retail customer, an ATM serves their needs much more than a bank branch. Most banks rely on commercial checking and lending, a business in which Wal-Mart has no apparent advantage. From where I'm sitting, the ILC charter would serve the company in exactly the same way it serves Target, other retailers, and various auto credit companies--as a means for handling payment processing internally.

Wal-Mart certainly does serve the same demographic that uses money services businesses (e.g., check cashing, money orders, pay-day loans), so being a player in that industry makes a world of sense for Wal-Mart. But a bank charter isn't necessary for that. Don't forget, too, that even with an ILC or a full-fledged bank charter, Wal-Mart's banking operations are subject to regulatory oversight--state and federal.

[Son of a!]

Hasn't Wal-Mart specifically stated that it wouldn't use its ILC to offer consumer banking? That this has always been about cutting costs on credit card processing fees?

[Pro Libertate]

Son of a!,

Yes, and on multiple occasions. I stopped following this issue a while back, so I suppose something to the contrary may have come out, but I doubt it.

[Sam Franklin]

Hasn't Wal-Mart specifically stated that it wouldn't use its ILC to offer consumer banking?

1. and if they change their mind? Automatic sanction? Sanction, but only if the DoJ feels like it? Slap on wrist? More substantial sanction? Who decides?

2. wouldn't anything that cut credit card fees automatically implicate "consumer banking" (under any reasonably broad construction of that phrase)?

Most banks rely on commercial checking and lending, a business in which Wal-Mart has no apparent advantage.

3. Great, so Wal*Mart gets more leverage over the companies that stock its shelves. Not good for competition among suppliers. "hey Wal*Mart, I make a good product at a good price that your shoppers would like." "Yeah, it is too bad you don't have a pile of money sitting in our commercial bank -- you go get that pile of money and then we talk, 'kay."

Wal-Mart's banking operations are subject to regulatory oversight--state and federal.

4. The bigger Wal*Mart is, the more influence they have over people who hire and fire regulators. money talks. bulls**t walks.

5. PL, I have come to expect better out of you!

[Son of a!]

Sam Franklin:

I has this long, boring rebuttal, but I'll summarize:

1-3: I'm not really worried if any of this comes to pass.
4: Wal-Mart's more influential than Citigroup?!
5: N/A

[Sam Franklin]

I'm not really worried if any of this comes to pass.

Yeah, I guess my reaction is that radley's post would have been more interesting if he explained why the apparent consolidation problem is not a problem from a free market perspective.

I know Radley doesn't care about consolidation here. What puzzles me is why he doesn't care.

I would be more interested in his thoughts on bipartisanship if this blog had the motto "free partisan ship, free minds."

And, finally, yes i do think that Wal*Mart has the potential to be more influential than Citigroup, and that this can only be stopped from happening now because once they are more influential than Citigroup we would probably need to elect Hugo Chavez as president a couple times before they were stopped (and that would be bad).

If Wal*Mart could act as a market counterweight to CitiGroup then maybe I could be persuaded that this denied merger would actually have been a positive good. I didn't hear radley engaging things at that level, tho.

[Pro Libertate]

You know, I don't think Wal-Mart has even a small percentage of the political influence of the large banks. There's a gigantic multiplier effect with the banks that Wal-Mart doesn't have, and they are much more entrenched in the political establishment. I don't recall A&P or Sears ruling America with an iron fist, if you want a historical example. The banks do exert quite a bit of influence, on the other hand. Like they always have. Just ask the Medicis or the Rothschilds 🙂

Anyway, I'd consider the current political power of banks and other retailers (as well as consumer advocates and other groups) in my anti-consolidation calculation, Dave. Whether or not I think Wal-Mart's entry into banking matters, it simply lacks the political power and the goodwill to achieve very much. For Wal-Mart to do any real banking on a national level, an ILC charter won't work. It would have to get a national charter or a state charter as a bank or a thrift. I don't see that happening any time soon, nor is Wal-Mart crazy enough to want to try.

One observation about banking: Community banks still keep popping up and thriving, despite the giant mergers and the Pac-Man-like acquisitions of the big banks. For what it's worth, I've always thought that the whole get-big-to-take-advantage-of-economies-of-scale argument only works to a certain extent in banking. Smaller institutions can still win in local markets, using good service, for example, to offset their higher loan rates (higher because the cost of funds for smaller banks is higher). It's a strange business, in any event.

[Sam Franklin]

Well, I can't say I agree, PL, but: (1) you have erased the disappointment I momentarily felt about yer skillz; (2) thanks for taking the time for such a responsive and thoughtprovoking reply; and (3) will take under consideration.

Reflecting on this all day, I am still worried not so much about the interbank consolidation (cuz that can't be much worse than it is) as I am about the potentially synergistic effect of combing a Sears with a Citibank (as it were).