These are strange times for Wall Street as bankers watch one of their most reliable business lines -- lending to U.S. states and cities -- turn into a political weapon.
GOP lawmakers in Arizona, Kentucky, Missouri, Ohio, South Dakota and West Virginia have introduced legislation conceived by an influential gun group, the National Shooting Sports Foundation, that aims to punish Wall Street for what it deems to be restrictive gun policies.
The measures, the latest of which was put forward last week, target banks’ work with states and cities. They follow the lead of a GOP-backed law in Texas that has successfully cut off banks like Bank of America Corp., Goldman Sachs Group Inc. and JPMorgan Chase & Co. from a key public-finance market. Several banking groups are lobbying against the legislation, but they may face an uphill battle given five of the six states are Republican-controlled.
The municipal market has always been intertwined with politics, as bankers lean on relationships with local officials to win business. But at a time when the nation is increasingly divided on issues from vaccines to education, financial institutions that restrict their dealings with gunmakers -- and in some states, oil and coal companies as well -- now face blowback even in the normally staid world of public finance.
The pending gun legislation could shake up the $4 trillion municipal market, something that’s already happened in Texas. The bills also threaten to block municipalities from working with some of the nation’s biggest lenders, just as the Federal Reserve is expected to start lifting interest rates.
For Megan Kilgore, who handles debt sales as auditor for Columbus, Ohio, the outcome of the proposal there is clear: It risks increasing borrowing costs by limiting the banks that municipalities can do business with.
“I feel like this legislature as well as other legislatures across the nation are prioritizing bump stocks over basis points,” said Kilgore, a Democrat who won election after working as a financial adviser to municipalities.
Issuers in Arizona, Kentucky and Ohio -- where the proposals would affect a broad swath of municipalities -- sold about $21 billion of bonds combined in 2021, or around 5% of issuance nationwide, data compiled by Bloomberg show.
Texas saw its public-finance market upended after the gun law took effect Sept. 1. Citigroup Inc., which paused its muni business there for several months, has maintained that it can comply with the new law and has underwritten three small Texas deals since November.
It’s a crucial market, with around $50 billion of annual debt sales, second only to California.
“It’s a hidden cost to the taxpayer,” said Kit Taylor, who was executive director of the Municipal Securities Rulemaking Board, the market’s regulator, until 2007, and is now retired. “You put a restraint on a market, there’s going to be a cost.”
Spokespeople for Citigroup, JPMorgan, Goldman Sachs and Bank of America declined to comment.
Legislative Defense
GOP officials say they’re defending against what they see as corporate America’s attacks on their way of life. In public finance, the pressure extends beyond guns. West Virginia lawmakers are considering a bill, which the state Senate passed last month, that would allow the state treasurer to refuse to bank with firms that boycott energy companies. The firearms bill introduced there in February is designed similarly.
“As a state we’re going to try to make sure that our use of banking services is with companies that reflect our values,” said Republican state Senator Robert Karnes, the sponsor of the firearms bill. “The same companies that hate coal hate the Second Amendment.”
The National Shooting Sports Foundation, which was founded in 1961 and is based in Newtown, Connecticut, has been working with state lawmakers to introduce legislation similar to what was enacted in Texas. The organization contends that banks and payment processors will refuse to work with firearms companies, lifting their costs.
“Banks can solve the problem,” said Lawrence Keane, its senior vice president for government affairs. “They can simply stop discriminating.”
The foundation has the ear of Republican state leaders. Six GOP governors attended a forum at a trade show it held in Las Vegas in January, including South Dakota’s Kristi Noem. Keane pressed the governors on their role in pushing back against “woke banking.”
Of course, the measures now pending in these states may yet fizzle. A bill in Indiana has already died after being introduced in January.
Bank ‘Headache’
Bills that have been introduced in Arizona, Kentucky and Ohio are similar to Texas’s.
Arizona’s bill, for example, would require all public contracts valued at $100,000 or more to have a written certification from the company that it does not and will not “discriminate” against a firearms entity.
“This is bad for the market,” said Paul Hickman, president of the Arizona Bankers Association. “If you want to prevent banks from moving into this marketplace and give an incentive for banks to leave, this is a good thing to do -- banks don’t want to come in and have this headache.”