Enough Is Enough: Fraud-ridden Banks Are Not L.A.’s Only Option

Guest post by Ellen Brown.

“Epic in scale, unprecedented in world history. That is how William K. Black, professor of law and economics and former bank fraud investigator, describes the frauds in which JPMorgan Chase (JPM) has now been implicated. They involve more than a dozen felonies, including bid-rigging on municipal bond debt; colluding to rig interest rates on hundreds of trillions of dollars in mortgages, derivatives and other contracts; exposing investors to excessive risk; failing to disclose known risks, including those in the Bernie Madoff scandal; and engaging in multiple forms of mortgage fraud.

So why, asks Chicago Alderwoman Leslie Hairston, are we still doing business with them? She plans to introduce a city council ordinance deleting JPM from the city’s list of designated municipal depositories. As quoted in the January 14th Chicago Sun-Times:

The bank has violated the city code by making admissions of dishonesty and deceit in the way they dealt with their investors in the mortgage securities and Bernie Madoff Ponzi scandals. . . . We use this code against city contractors and all the small companies, why wouldn’t we use this against one of the largest banks in the world?

A similar move has been recommended for the City of Los Angeles by L.A. City Councilman Gil Cedillo. But in a January 19th editorial titled “There’s No Profit in L A. Bashing JPMorgan Chase,” the L.A. Times editorial board warned against pulling the city’s money out of JPM and other mega-banks – even though the city attorney is suing them for allegedly causing an epidemic of foreclosures in minority neighborhoods.

 “L.A. relies on these banks,” says The Times, “for long-term financing to build bridges and restore lakes, and for short-term financing to pay the bills.” The editorial noted that a similar proposal brought in the fall of 2011 by then-Councilman Richard Alarcon, backed by Occupy L.A., was abandoned because it would have resulted in termination fees and higher interest payments by the city.

It seems we must bow to our oppressors because we have no viable alternative – or do we? What if there is an alternative that would not only save the city money but would be a safer place to deposit its funds than in Wall Street banks?

The Tiny State That Broke Free

There is a place where they don’t bow. Where they don’t park their assets on Wall Street and play the mega-bank game, and haven’t for almost 100 years. Where they escaped the 2008 banking crisis and have no government debt, the lowest foreclosure rate in the country, the lowest default rate on credit card debt, and the lowest unemployment rate. They also have the only publicly-owned bank.

The place is North Dakota, and their state-owned Bank of North Dakota (BND) is a model for Los Angeles and other cities, counties, and states.

Like the BND, a public bank of the City of Los Angeles would not be a commercial bank and would not compete with commercial banks. In fact, it would partner with them – using its tax revenue deposits to create credit for lending programs through the magical everyday banking practice of leveraging capital.

The BND is a major money-maker for North Dakota, returning about $30 million annually in dividends to the treasury – not bad for a state with a population that is less than one-fifth that of the City of Los Angeles. Every year since the 2008 banking crisis, the BND has reported a return on investment of 17-26%.

Like the BND, a Bank of the City of Los Angeles would provide credit for city projects – to build bridges, restore lakes, and pay bills – and this credit would essentially be interest-free, since the city would own the bank and get the interest back. Eliminating interest has been shown to reduce the cost of public projects by 35% or more.

Awesome Possibilities

 Consider what that could mean for Los Angeles. According to the current fiscal budget, the LAX Modernization project is budgeted at $4.11 billion. That’s the sticker price. But what will it cost when you add interest on revenue bonds and other funding sources? The San Francisco-Oakland Bay Bridge earthquake retrofit boondoggle was slated to cost about $6 billion. Interest and bank fees added another $6 billion. Funding through a public bank could have saved taxpayers $6 billion, or 50%.

If Los Angeles owned its own bank, it could also avoid costly “rainy day funds,” which are held by various agencies as surplus taxes. If the city had a low-cost credit line with its own bank, these funds could be released into the general fund, generating massive amounts of new revenue for the city.

The potential for the City and County of Los Angeles can be seen by examining their respective Comprehensive Annual Financial Reports (CAFRs). According to the latest CAFRs (2012), the City of Los Angeles has “cash, pooled and other investments” of $11 billion beyond what is in its pension fund (page 85), and the County of Los Angeles has $22 billion (page 66). To put these sums in perspective, the austerity crisis declared by the State of California in 2012 was the result of a declared state budget deficit of only $16 billion.

The L.A. CAFR funds are currently drawing only minimal interest. With some modest changes in regulations, they could be returned to the general fund for use in the city’s budget, or deposited or invested in the city’s own bank, to be leveraged into credit for local purposes.

Minimizing Risk

 Beyond being a money-maker, a city-owned bank can minimize the risks of interest rate manipulation, excessive fees, and dishonest dealings.

Another risk that must now be added to the list is that of confiscation in the event of a “bail in.” Public funds are secured with collateral, but they take a back seat in bankruptcy to the “super priority” of Wall Street’s own derivative claims. A major derivatives fiasco of the sort seen in 2008 could wipe out even a mega-bank’s available collateral, leaving the city with empty coffers.

The city itself could be propelled into bankruptcy by speculative derivatives dealings with Wall Street banks. The dire results can be seen in Detroit, where the emergency manager, operating on behalf of the city’s creditors, put it into bankruptcy to force payment on its debts. First in line were UBS and Bank of America, claiming speculative winnings on their interest-rate swaps, which the emergency manager paid immediately before filing for bankruptcy. Critics say the swaps were improperly entered into and were what propelled the city into bankruptcy. Their propriety is now being investigated by the bankruptcy judge.

Not Too Big to Abandon

Mega-banks might be too big to fail. According to U.S. Attorney General Eric Holder, they might even be too big to prosecute. But they are not too big to abandon as depositories for government funds.

There may indeed be no profit in bashing JPMorgan Chase, but there would be profit in pulling deposits out and putting them in Los Angeles’ own public bank. Other major cities currently exploring that possibility include San Franciscoand Philadelphia.

If North Dakota can bypass Wall Street with its own bank and declare its financial independence, so can the City of Los Angeles. And so can the County. And so can the State of California.

____________

Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of 12 books including The Public Bank Solution. She is currently running for California state treasurer on the Green Party ticket.

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  • Tonto

    This is a nice bit of logical reasoning from Ellen Brown. Cuckoo! cuckoo! cuckoo! cuckoo!

    “Beyond being a money-maker, a city-owned bank can minimize the risks of interest rate manipulation, excessive fees, and dishonest dealings.”

    Ellen is so blinded by her delusional election ambitions she cannot begin to fathom that the problem with TBTF banks today (here she cites JP Morgan Chase) is that the TBTF’s have had too much cooperation from our corrupt government.

    Ellen, who has never been able to make it in the real-life business world is a now a Green, scatterbrained, government wanna-bee throwing bricks at the crooked edifice of public finance in California. So, her solution is to let the corrupt government run banks, in order to solve the problem of the TBTF banks being in cahoots with the corrupt government. Cuckoo! cuckoo! cuckoo! cuckoo!

    The Bank of North Dakota is only an apparent success on the surface, and Ellen Brown is not stupid enough to think otherwise. First, ND is going through and oil and natural gas boom, and secondly all the chickens have not yet come home to roost concerning the corrupt job the Bank of North Dakota is doing.

    Trust me, if anyone could get a look inside the books of the BND there would be enough felony indictments to make JP Morgan Chase look like one the angels of finance. But Ellen has been slinging propaganda so long, she no longer has has any scruples about the stories she tells in her articles.

    For Ellen, saying JP Morgan Chase is corrupt, and, then saying Bank of North Dakota is run by a gaggle of government goons who are so honest, you just have to trust them, is a bit like claiming she’s still a virgin despite having reared a half dozen bastards of various heights, skin complexions and hair color.

    Hey Ellen! In Maine we’re going to lower the minimum wage so there are more jobs and more people can find employment. There aren’t enough of those jobs Americans won’t do in Maine. So we’re going out of our way to help create them!

    • Carl_Herman

      Again, I appreciate tonto’s vile language and rejection to provide any evidence for his accusations to contrast the available facts documented for public consideration.

      Tonto will spew more hate from my pointing it out. I’m happy to allow the facts and links Ellen provides to also be my argument and final statement.

      • Tonto

        You’re losing your grip, Carl. You’ve always sidestepped the issues, but this time you simply cried, “Foul!” where no foul can exist. This is a blog comment board, Carl. And my point is amply, and succinctly made despite more than one typo.

        Ellen Brown is delusional, viewing her ideological reality through kooky, populist, and dangerous, Elton John styled, rose-tinted glasses. A long black cape with a high, pointed collar seems fitting Ellen Brown’s bizarre blogosphere persona of the estranged economist with all the answers.

        The reality is, public banking is a very bad idea, and no less especially if it is to be run by someone like Ellen Brown, someone who views the world as conforming to a fantasy that cannot be substantiated except by repeatedly chanting extremely strained comparisons like, comparing the U.S or even California’s economy to North Dakota and even Costa Rica.

        Do you know what the population of North Dakota is? Even with the oil and natural gas boom it’s 700,000! Compare that to California, at over 38 million. California has twice as many people collecting unemployment as live in North Dakota. And Costa Rica’s major exports are plantation grown coffee and bananas. Gee, I wonder what the minimum wage is on a Costa Rican coffee plantation.

        Comparing California’s economy to a banana republic like Costa Rica may be a clever joke in some circles, but the comparison really adds nothing to the credibility of the author making the comparison, unless the author is seeking credibility as a humorist, which clearly is not Ellen Browns bag of soup.

        Like the article says, enough is enough. Ellen Brown gets exactly the respect she deserves publishing such crap.

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