Gun control questions for underwriters could push Louisiana borrowing costs up
A new solicitation procedure in Louisiana that puts the gun-control policies of bond underwriting firms under the microscope could mean higher borrowing costs for the state as it prepares to sell Garvees for the first time.
The new process was sparked by lending restrictions imposed by Citi and Bank of America Merrill Lynch on some of their clients in the wake of the Feb. 14 gun massacre of 14 students and three adults at Marjory Stoneman Douglas High School in Parkland, Florida.
The banks' policies have angered Second Amendment supporters, including U.S. Sen. John Kennedy, R-La.
Kennedy wrote to state Treasurer John Schroder before the April 26 State Bond Commission meeting, urging Schroder to determine if Citi and BAML have business dealings with the commission or the state.
“There is no reason for these banks to profit from taxpayer-funded contracts while excluding Louisiana businesses from their banking services,” said Kennedy, who was the state treasurer for 17 years before taking the Senate seat in 2017.
Kennedy’s request led the Bond Commission to approve a new solicitation procedure for the upcoming sale of up to $650 million of grant anticipation revenue vehicle bonds to finance four major transportation projects in the cash-strapped state.
Underwriters interested in working on the deals will be asked if they have gun policies that “restrict or would otherwise infringe on the constitutionally protected rights of the citizens of the state to lawfully keep and bear arms.”
They will also be asked if their policies discriminate against citizens, according to a resolution the commission approved April 26.
It’s not unusual for states and municipalities to impose restrictions on banks that have policies with which they disagree, according to Brian Knight, director of the Program on Financial Regulation and a senior research fellow at George Mason University’s Mercatus Center.
Knight said he’d not heard about Louisiana’s policy until contacted by The Bond Buyer, but he wasn’t surprised by it because of “the politicization” of financial services.
Louisiana’s new procedure, he said, could result in a smaller syndicate for the Garvee issue and potentially higher costs for the state if firms refuse to answer the questions about constitutional rights or some don’t respond to the solicitation to avoid the hassle even if they don’t have a position on the matter.
“By limiting the number of potential banks they will work with they will likely have to pay higher interest rates or not sell as many bonds,” he said. “Presumably, the Bond Commission is sophisticated enough to understand that.”
Citi and BAML were the top two senior managing underwriters for Louisiana state and municipal issuers in 2017, according to Thomson Reuters.
Citi was the state’s top senior manager, credited with $1.29 billion of deals, while Bank of America Merrill Lynch was second with $753 million.
Both banks could have been automatically blocked from working on Louisiana’s Garvee deal if a resolution proposed by Schroder had passed. It would also have applied to other underwriting firms with gun-control policies.
Schroder, who chairs the Bond Commission, said he was troubled by the banks' policies and proposed a resolution that he said was prepared in consultation with State Attorney General Jeff Landry.
“This just starts a process and puts everybody on notice because there are some who believe these policies do break the law of Louisiana,” Schroder said.
According to Schroder’s research, there are 1,486 weapons-related businesses in the state that he said could be affected by policies of the two banks.
Rep. Blake Miguez, R-Erath, said Louisiana voters in 2012 overwhelmingly passed a constitutional amendment stating that “the right of each citizen to keep and bear arms is fundamental and shall not be infringed.”
“When did Citigroup and Bank of America decide to get into the policy-making business, instead of the banking business?” Miguez asked Citi and BAML representatives at the meeting.
Landry called the policies “oppressive” and asked the representatives why the policies aren’t “fascism at its best.”
The Citi policy asks new retail sector clients to adhere to a handful of "best practices" policies for firearms sales, including a minimum age of 21 for gun buyers and not selling bump stocks or high-capacity magazines. A BAML executive told Bloomberg News that it plans to stop lending to companies that make assault-style guns for non-military purposes.
The bankers said they’d take questions back to their firms so they could be answered by the appropriate persons. The Bond Commission had not received the answers as of Monday, a spokeswoman said.
Jay Dardenne, commissioner of administration for Democratic Gov. John Bel Edwards, said he appreciated the attention to the banks’ policies but said the Bond Commission had not talked with its financial advisor, Lamont Financial Services Corp., about “how this might impact the ability to effectively market these bonds.”
Citi and BAML are among four or five firms that could sell the Garvee bonds and maximize the financial benefit for the state, said Dardenne, who is a Republican.
“We have to balance our desire to confront those companies about policies that we find objectionable against the economic cost to the state in a very important bond issue for the state,” he said.
Shawn Wilson, secretary of the Department of Transportation and Development, said he wanted to move forward developing the Garvee bond plan of finance so he could send out requests for qualified contractors.
Wilson said he shared concerns about the Second Amendment issues, although he “just wanted to build infrastructure” and join 26 other states that have borrowed against the Federal-aid Highway Program.
“We would not like to be the test case for what’s being proposed,” Wilson said, referring to the solicitation language that would block some underwriters from the state’s Garvee deals.
Some Bond Commission members said they were concerned that an outright ban of firms with gun-related policies could result in litigation.
“I think what we’re discussing is a very important issue not just relating to the Second Amendment but the politics of this state,” said Matthew Block, the governor’s executive counsel and representative on the Bond Commission. “This has not been well thought through as to how this would work mechanically.”
Block offered a substitute motion to remove language from the resolution that would automatically ban firms with restrictive gun policies. Block also said he presumed the commission would ask bond counsel firms about their constitutional beliefs, though that language was not added to the resolution.
The commission voted 8-6 for the amended resolution that allows work on the plan of finance to proceed. It also requires solicitations for underwriting firms to answer questions about whether their policies infringe on the constitutionally protected rights of citizens to bear arms, and if their policies discriminate against citizens of the state.
The commission will select bond counsel for the first Garvee bond sale on June 21, and underwriters will be chosen on July 19. The bonds are expected to be issued in four tranches.
After the vote, Schroder said that as Louisiana’s banker it’s important for him to “make sure we aren’t doing business with companies that violate the laws of the state.”
Gov. Edwards called himself a staunch defender of the Second Amendment, and said “the Bond Commission meeting was an ugly display of political posturing that could have jeopardized a massive infrastructure plan for the state of Louisiana.”
Knight, with the Mercatus Center, said it isn’t unreasonable for Louisiana to adopt a strong policy view supporting the Second Amendment, though there could be enhanced litigation risk to the extent there is disagreement over the interpretation of a bank’s activities, and a bank’s discretion over its public policies.
Other states and municipalities have considered opposite policies relating to guns when dealing with financial institutions.
Last month, Chicago tabled an ordinance that would ban doing bond deals with financial institutions that don’t agree to impose certain gun control policies on their retail business clients. The proposed law was shelved temporarily out of concern that the city’s access to the capital markets could be harmed if banking ties were impaired.
The Securities Industry and Financial Markets Association recently included a section in its newsletter on state actions entitled “STATE & LOCAL RESPONSE TO FIREARM POLICIES.”
SIFMA’s May 4 newsletter contained four entries, including the Chicago ordinance, the Louisiana Bond Commission’s resolution, and an April 12 New York directive urging insurance companies, New York State-chartered banks, and other financial services companies to review relationships with the National Rifle Association and similar organizations.
A fourth entry in the SIFMA newsletter said a Los Angeles councilmember made a motion March 28 to create a list of businesses and organizations that have formal relationships with the NRA, and to develop options to boycott them.
On the flipside, Knight said there are anti-discrimination laws that apply to banks.
In May 2017, Georgia Gov. Nathan Deal signed House Bill 292 into law expanding the state’s anti-discrimination law to firearms.
The Georgia law says that it’s an unlawful discriminatory practice for any person to refuse to provide financial services of any kind to a person or trade association solely because they are engaged in the lawful commerce of firearms or ammunition products.
“The fact is that the policy positions that banks take are going to be consider by their customers, including sometimes when the customer is the government,” Knight said. “I think part of the goal [in Louisiana and other places] is probably to apply pressure to banks to get them to change their position.”