Let’s chat about the Kansas Legislature’s threat to defund bank regulation. It was dangerous.

I want to talk for a few minutes with the people of Kansas about banking — not with the comparatively few who understand the mechanics of banking and this thing called TEFFI but with the overwhelming majority of us whose interaction with banks is the making of deposits, the begging for loans and sometimes the praying to Dear God that the check for the water bill won’t bounce because we forgot we also bought groceries yesterday.

What’s that, you say? Well, a check is a dated and signed paper instrument that allows the bearer to … never mind. The point is that overdraft fees are bad. Except for the bank, where they are a profit center.

No, what I want to talk to you about is what has been done in the last few weeks, why it was done and what the next steps are going to be for regulating TEFFIs in Kansas.

Last month, Kansas lawmakers authorized the state bank commission to expend $0 in regulating financial institutions in the next fiscal year, a job that was expected to require about $13 million. This legislative displeasure with the Office of the State Bank Commissioner, which is funded not with tax dollars but with fees from institutions, was apparently related to its regulation of the single TEFFI in Kansas, which had asked for a modification of its legal nature to a trust company.

A TEFFI — stick with me here, this is important — is a cute-sounding handle for something called a Technology-Enabled Fiduciary Financial Institution. This is a one-of-a-kind “novel” institution, located right here in Kansas. It’s called Beneficient — cute-sounding too, and don’t you just trust them already? — and it was created by a near-unanimous vote of the Kansas Legislature back in 2021 at the urging of a Texas gazillionaire who charmed the pants right off just about everybody he met by promising wonderful things for rural Kansas with no local risk. The Republican-controlled Legislature loved the idea, as did Gov. Laura Kelly, a Democrat. Seems the sure way to get bipartisan support is to promise something for nothing.

This gazillionaire, Brad Heppner, who grew up in the tiny community of Hesston in east-central Kansas, pitched a TEFFI to Kansas lawmakers by describing it as a kind of “pawn shop” for the rich where they could hock alternative assets like hedge funds, private equity, or collectibles like fine art or vintage cars. In exchange for being granted a charter to operate this novel institution in Kansas, Heppner offered 2.5% of transaction fees to be set aside for rural development. The first rural economic zone designated for these benefits was Hesston, where Heppner said he wanted to build a grocery store so his mother and others in his hometown wouldn’t have to drive to a bigger town to buy food.

By about this time last year, the Beneficial office in Hesston, with headquarters in Dallas, was open for business under an experimental charter, despite the concerns of Kansas bank commissioner David Herndon about the lack of oversight his office had over the new institution. Also, Heppner was bringing baggage with him from Texas: A class action federal lawsuit alleged he defrauded investors of millions to secure cash for Beneficient. There was also an SEC investigation amid deals with another firm, eventually helmed by Heppner, that was built on the lovely idea of purchasing life insurance policies from seniors needing money and cashing in when the former policy holders died.

For more on how Beneficient came to Hesston, read Sherman Smith’s in-depth reporting. More recently, Tim Carpenter wrote about a federal bankruptcy case where creditors accused Heppner of orchestrating a “classic Ponzi scheme” to defraud investors. Heppner was dismissive of the claims.

The Kansas bank commission was never comfortable with the idea of the TEFFI, because the act that established it offered little regulatory insight. Here’s where the analogy of the pawn shop breaks down, because pawn shops are subject to all sorts of federal, state and local regulations. They are required, with only some small variations in local ordinances, to open their books for inspection of every transaction they make: every guitar, every watch, every diamond ring that broke somebody’s heart. There are even stricter regulations on pawn shop gun sales. But TEFFI transactions? Details of Beneficient’s individual transactions are closed to state bank examiners, shielding both the company and its clients from scrutiny.

After nearly a year of operation, Beneficient reported more than $250 million in Kansas investments and $18 million in funds for economic growth, according to an oversight report to a joint legislative committee. That report also noted the state banking office was monitoring the SEC investigation and the bankruptcy of the life insurance bond company for any adverse effect on Beneficient, which has plans to go public in a deal with Avalon Acquisitions. There was still no grocery store in Hesston as of last December — the date of the report — but plans were said to be progressing.

Which brings us about up to date on the Legislature’s authorization of zero funds for the banking office. While funding was restored in the final budget, what is most disturbing is that at about the same time we were seeing the two largest bank failures in the nation’s history — Silicon Valley Bank and Signature Bank, with a combined $300 billion in assets — Kansas lawmakers were playing chicken with the state bank commission over what appears to have been a request from a single financial institution to modify the terms of its legal status. In the past few days, another bank, First Republic, another large regional bank, has fallen.

Despite understandable jitters, banking commissioner David Herndon told me recently that investors should have no fears about the health of Kansas banks. He called the threat from lawmakers to defund his office “immaterial” to the current health of the state’s financial institutions.

“Our banks are doing quite well,” Herndon said.

Lawmakers never clearly explained to him their reasons for proposing a zero budget: “Nobody ever told me what they were looking for,” Herndon said. But he suspected it had to do with “a disagreement over (Beneficient Financial Fiduciary) over what they were.” On April 5, they reached an agreement the company is a trust company, as authorized by the TEFFI Act.

A memorandum of understanding, however, prohibits the company from using the term “bank” or “trust company” in its name. It is also forbidden from using the term “trust company” in marketing without reference to TEFFI and must narrowly define its status in regulatory filings.

To understand why Beneficient had sought the “trust company” designation, I reached out via email to its media specialists. I received no response. Whatever goals the company had with this status change remain as inscrutable as its business model.

The threat to defund the office should cause alarm. In these uncertain times, when we’re witnessing bank failures that are even bigger than those experienced in 2008, we should demand our lawmakers provide stability for financial institutions that safeguard our checking and savings accounts, our mortgages, and our futures.

What we’ve been given instead is a Legislature that places the interests of the wealthy few over the needs of average Kansans. The threat to defund the bank commission was the worst kind of political stunt. It’s just what you’d expect from a Legislature that can be seduced into adopting sports betting by what the New York Times called “Cigars, Booze, Money.”

But there are some things even more important than money.

Let me end where I began, with borrowing from Franklin D. Roosevelt’s first fireside chat, in 1933, on the banking crisis: “There is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people.”

There is no lack of confidence in the banking system here in Kansas. We’ve grown up being able to trust our financial institutions, to rely upon them as a necessary part of everyday life, to enjoy the stability necessary for growth and happiness. But the recent bank failures in other states should remind us that confidence is a fragile thing, that we live in turbulent economic times and that regulation is not the enemy of progress.

Max McCoy is an award-winning author and journalist. Through its opinion section, the Kansas Reflector works to amplify the voices of people who are affected by public policies or excluded from public debate. Find information, including how to submit your own commentary, here.