In June, Facebook announced plans to effectively create its own alternative currency called Libra — and, eventually, a financial system to go with it. The proposal was so galling in its hubris that it sparked bipartisan outrage across our polarized political spectrum. Libra was, of course, cloaked in corporatespeak that implies lower costs and more freedom for consumers and businesses through “innovation” or “inclusion” or “synergies.” But given Facebook’s abysmal track record, lawmakers are justified in their skepticism.
What should really concern them, though, is that Libra is only the latest example of a larger, more troubling trend: the gradual blurring of the line between finance and commerce that’s taken place over the past few decades. This trend has carried significant implications for customer privacy, competition, financial risk and concentrated economic and political power. Stopping Libra would be a positive sign that policymakers are starting to take these issues seriously, but more still needs to be done to unwind the excessive intertwining of finance and industry.
In his 1936 message to Congress, FDR warned of the risks from “domination of government by financial and industrial groups, numerically small but politically dominant.” With such concerns in mind, our nation has held that it’s critical to separate banking from commercial business — even enshrining this principle in policy. In practice, however, legal loopholes created by lawyers and lobbyists undermine this rule by letting financial and commercial companies combine under the same corporate structure.
First, industrial companies opened their own banks because, as the bank robber Willie Sutton once put it, “that’s where the money is.” These “industrial loan” companies are allowed to take customer deposits without the same oversight that applies to most banks. That’s an attractive proposition because deposits are a cheap source of funding, government-provided deposit insurance covers their losses up to a certain amount and retailers are able to drum up business by financing customer purchases.
Industrial loan companies were a small part of the financial marketplace until big retailers like Walmart and Home Depot saw an opportunity and applied to open their own banks, in the face of opposition from community banks, consumer groups and labor unions. In the lead-up to the financial crisis, giant commercial lenders GMAC and GE Capital also exploited this law to access cheap deposits to fund some of their risky activities, leading to billions of dollars in taxpayer bailouts.
Unfortunately, instead of eliminating this loophole, the 2010 Wall Street reform law called only for a pause and study on new industrial bank charters. Now Big Tech is looking to come through the door that Congress left open, and regulators in the Trump administration have put out a welcome mat for them. So far, these applications have largely been limited to tech companies like $28 billion payment company Square that already offers financial services. But there should little doubt that companies like Facebook and Amazon won’t be far behind them.
Meanwhile, the 1999 law that repealed the Depression-era Glass-Steagall Act also allowed banks to own and operate commercial businesses. Wall Street banks promised that creating diversified financial holding companies would allow them to offer conveniences such as travel agencies to serve their credit card customers.
It’s one thing for a bank to invest in, or lend money to, a publicly traded company with millions of shareholders. But things get more treacherous when a bank is the owner and operator of a company that gives themspecial insights, market advantages and the ability to influence nonfinancial businesses. That is why banks are supposed to keep the businesses that they own at arms’ length through financial and management firewalls.
Investigations in 2013 and 2014 by two Senate committees revealed that banks were regularly exceeding legal limits on ownership and control. Businesses that rely on aluminum reported that a metals warehouse owned by Goldman Sachs was driving up the cost of aluminum, raising the price of products such as beer and soda. J.P. Morgan used its energy trading business to manipulate energy markets, making consumers pay higher electricity rates. After these scandals, regulators promised reforms, but, five years later, they have still done nothing.
This is where the real threat of Libra presents itself. Because these laws are still on the books, Facebook could eventually open its own bank and offer a full suite of credit and payment services. Under that arrangement, it could offer favorable credit terms and faster transactions to customers that use its banking services at its affiliated retailer. Conversely, Citigroup could own and operate its own online retailer, offering lower prices to its bank customers. Either of these scenarios would spell trouble for small banks and retailers forced to compete on an unlevel playing field against big businesses with outsize market power.
Then there’s the question of privacy. Commingling a digital marketplace with all of a customer’s financial information, including purchases and deposits, is also bad for customers and taxpayers. First, it centralizes sensitive customer information — directly contradicting the supposed purpose of decentralized cryptocurrencies — allowing banks and tech companies the potential to mine their data and determine the maximum price that each customer is willing or able to pay for goods and services. Second, it creates heightened vulnerability to data breaches and abuse. Third, it has the potential to undermine important consumer protections including credit reporting, debt collection and wage garnishment, giving a company powerful leverage over its customers.
Finally, allowing nonfinancial businesses access to the federal safety net that backstops our banking system could lead to taxpayer-funded bailouts for troubled retailers, tech companies and others. There are supposed to be firewalls preventing this from happening, but those contain holes of their own.
Before you dismiss the risks from this sort of excessive concentration as speculative, consider what’s already happening today. The largest Japanese online marketplace has applied for a U.S. industrial loan company charter, prompting the banking industry’s largest trade association to raise concerns about “the free flow of credit, consumer privacy and possible conflicts of interest.” Walmart recently filed a patent application to create its own cryptocurrency, and Amazon is targeting its customers with a subprime credit card that can be used only on its platforms. (Amazon founder and chief executive Jeff Bezos owns The Washington Post.) As the saying goes, “just because you’re paranoid doesn’t mean they aren’t after you.”
Louis Brandeis said of the early 20th century trusts that “both the financial concentration and the combinations which they have served were, in the main, against the public interest.” Big banks and big tech may use fancy algorithms and apps instead of railroads, but his words are as true today as they were when he wrote them.
Regardless of whether Facebook decides to back away from its proposal voluntarily or is forced to do so, public officials need to send a clear message that any other companies contemplating a similar scheme should think again. It wasn’t the first company to have this idea, and it surely won’t be the last.