As Gov. Jerry Brown’s administration turns toward tidying up California’s complex and still-unsettled marijuana laws, the massive market for money made from the plant’s products has begun to attract attention from financial services companies that want to take advantage without taking on too much risk. 

“Though federally prohibited, marijuana is now legal in some form in 28 states and Washington, D.C. But most banks remain loath to accept pot business accounts out of fear of federal money laundering laws that can consider such deposits as illegal transactions,” the Sacramento Bee reported. “Efforts in 2014 by the United States Treasury Department to ease rules for financial institutions wanting to service state-licensed marijuana businesses largely failed to diminish the uncertainty.”

From meetings to markets

“Now California officials, led by state Treasurer John Chiang, are hosting an ongoing series of ‘Cannabis Banking Working Group’ meetings that look to identify policies under which ‘the cannabis industry may fully avail itself of banking services … that every other business in California enjoys,’ Chiang said,” according to the paper. “California’s marijuana industry, valued at more than $6 billion, is expected to produce as much as $1 billion in state taxes after 2018, when recreational pot dispensaries open to the general public. But a lack of accessible financial services – including the ability to deposit funds or handle credit card transactions – continue to be the norm for marijuana businesses.”

Businesses and bankers have been leery of the gap between state and federal marijuana law. “Federal crimes often conjure images of ‘interstate’ activity, but with regard to marijuana, the Supreme Court has clearly spoken that even purely intrastate marijuana is subject to federal criminal regulation,” as California Lawyer recalled. “In Gonzales v. Raich, the Supreme Court held that because of its ‘aggregate’ effect on the interstate market, even purely intrastate activity is subject to regulation under the commerce clause of the Constitution.” At the same time, the White House and Attorney General’s office have continued to suggest that enforcement of federal marijuana law could be strengthened from where the Obama administration left it. 

Reconciling rules

The proposed changes would streamline environmental policies, standardize the more liberal of the state’s licensing regimes, formalize background check and disclosure requirements for cannabis-based business owners, and eliminate a provision that would have required continuous California residency for those affected by the rules since the first day of 2015.

Accrediting workers

At the same time, the cannabis industry has seen its workers brought into the state’s regulatory mainstream. So-called budtenders at the River City Phoenix dispensary in North Sacramento have become among the state’s first state-certified cannabis pharmacy technicians, a certificate program “spearheaded by the United Food and Commercial Workers union, which represents 1.3 million members and began reaching out to dispensary workers about four years ago,” according to the Los Angeles Times. “The apprenticeship program is yet another measure of how cannabis is professionalizing at a breakneck pace. Another sign: the unionization of the cannabis workforce. The UFCW, which represents workers at River City Phoenix, has organized thousands of them in eight states.”

The panel was moderated by FCD Chair Chris Cox, a former chairman of the Security and Exchange Commission and former longtime U.S. congressman from Orange County. Cox said the Nov. 4 election “will have an impact on everything, from health care to financial regulation.”

He pointed to the 2010 Dodd-Frank financial reform, which passed without a single Republican vote in the Senate or House. Although the bill was supposed to make another financial crash less likely, instead it imposed 2,379 new pages of regulations on banks and other businesses – yet just yesterday spurred the relaxation of housing lending.

The spotlight passed to Daniel Gallagher, one of two members of the U.S. Securities and Exchange Commission who yesterday objected to the new relaxation. “Three U.S. agencies signed off on relaxed mortgage-lending rules Wednesday, helping complete a long-stalled provision of the 2010 Dodd-Frank financial law,” the Wall Street Journal reported this morning. “Two Republican SEC commissioners, Daniel Gallagher and Michael Piwowar, objected to the rules.” The three approving agencies were the Federal Reserve Board, the Securities and Exchange Commission and the Department of Housing and Urban Development.

The paper quoted Gallagher, “Today’s rule-making takes the untenable housing policy that injected irrational exuberance into mortgage lending and, as a result, caused a catastrophic financial crisis and chisels that failed policy into the stone tablets of the code of federal regulations.”

At the event in Costa Mesa, Gallagher said that, when reforms were proposed in 2011, a 20 percent down payment was going to be required for loans. But yesterday’s action dropped that to zero percent. “Here was a chance to make right what was wrong in the sub-prime bubble” of a decade ago, he said, when a similar easy-money policy first hit the housing market, then cascaded through the capital markets.

Gallagher also said the Dodd-Frank bill made the mistake of regulating the capital markets, which raise investment money, the same as banks. Which means bank regulators will be in charge of investments. The problem, Gallagher said, is that “bankers don’t understand other types of regulation.”

Fatal Conceit

Dodd-Frank’s deficiencies also were highlighted by Paul Atkins, CEO of Patomak Global Partners and a former SEC member. He referred to “The Fatal Conceit: The Errors of Socialism,” the final book of Nobel economics laureate Friedrich Hayek.

For Hayek, the “conceit” was that a group of really smart people could run millions of people’s lives better than they can themselves. Dodd-Frank’s fatal conceit, Atkins said, was to “get all the best people in Washington together and make the capital markets stable. But they’re inherently unstable. That’s the underlying falsity of the Financial Stability Oversight Council,” one of the new bureaucracies Dodd-Frank created.

Atkins was seconded by Brian Cartwright, a senior advisor at Potomak and former general counsel at the SEC. “The powers of the FSOC are broadly and vaguely enumerated,” he said. He pointed back to 50 years ago, when banks were the primary investment vehicle in America. By contrast, today “80 percent of financing comes from capital markets, not banks. There is a tension between traditional banking and capital markets, and it’s not just the U.S., it’s global.”

He said banking regulation was “fairly good,” and has to be because banks “leverage” deposits – meaning leading out money – at 10 times deposits. So stiffer regulation is needed to make sure the deposits are lent out responsibly.

By contrast, capital market leveraging is much smaller. “The notion you would impose bank regulation on this is pretty wild stuff,” he cautioned. “I’m hoping this won’t happen.”

Rep. Ed Royce

“This is worse than the Fatal Conceit,” charged Rep. Ed Royce, R-Calif., the senior member of the House Committee on Financial Services and the chairman of the Committee on Foreign Affairs. “It’s not just a bank-centric model of regulation, it’s more like a utility.”

By that, he meant government was allowing banks to gain a certain profit for a highly regulated service, such as electricity or water. But that means, “You’re not allowing bankers to be bankers. And you’re putting such additional costs on local community banks, you’re allowing them to be gobbled up” by the big banks that more easily can absorb regulatory costs.

Royce said now is the time for reforming the Dodd-Frank reform because “my Democratic colleagues are getting skittish about waiting for the economic recovery.” His analysis of the economic situation was confirmed a couple hours later at the latest Cal State Fullerton Center for Economic Analysis forecast. “Mediocre growth seems to be the new norm,” said director Anil Puri, as reported in the Orange County Register.

Royce continued that the over-regulation of Dodd-Frank was “seeping out into the rest of the capitalist system,” retarding growth.

Royce said some action could come in the lame-duck session of Congress after the Nov. 4 election. But if Republicans take over the Senate, the real action would come next year. President Obama could veto any potential straightening out of the Dodd-Frank regulations. But if some Democrats join with the potential Republican majority to comprise 2/3 of both houses, “presidents tend to take a second look at such legislation.”