U.S. Mayors Fed Up With Paying Wall Street Interest and Fees

Establishment of Public Banks Considered

By John Lawrence

At their meeting on June 19-22, the US Conference of Mayors considered the possibility of establishing public banks as an alternative to Wall Street.

Instead of spending a fortune in Wall Street fees and interest, a public bank would keep the money right in each Mayor’s jurisdiction. Finally, Mayors are wising up.

The Mayors Resolution on Strengthening Municipal Finances addresses the millions of dollars in fees that Wall Street banks charge cities and challenges mayors to negotiate with bankers to reduce these fees or to consider the possibility of a public bank.

Public banking is distinguished from private banking in that its mandate begins with the public’s interest. Privately-owned banks, by contrast, have shareholders who generally seek short-term profits as their highest priority. Public banks are able to reduce taxes within their jurisdictions, because their profits are returned to the general fund of the public entity. The costs of public projects undertaken by governmental bodies are also greatly reduced, because public banks do not need to charge interest to themselves. Eliminating interest has been shown to reduce the cost of such projects, on average, by 50%.

The Bank of North Dakota is the only public, state owned bank in the US. Their successful model has paved the way for other public entities seeking to follow in their footsteps. Instead of sending money to Wall Street, they keep the money in state where they use it to reduce taxes, give student loans on favorable terms and fund state infrastructure projects without paying the exorbitant interest rates that Wall Street charges for access to financing.

How do cities amass such high banking service fees? A major way that cities accrue debt (and related fees and interest) is through bond issues. Cities and counties issue bonds for everything from fixing roads to building new animal shelters. However, bond issues are not a panacea for all local funding needs. Bond issues allow us to have the services, facilities, and infrastructure improvements we need but can’t fit into the budget, but they carry a hefty long-term price tag. Interest and fees are paid to Wall Street whereas with a public bank they would be paid into the local entity’s general fund to defray taxes.

Paying fees to Wall Street has caused many US cities to go bankrupt. When they do, pension funds are raided to pay creditors. That means that retired firemen, policemen, teachers and others may not get their pensions. The city of Detroit went bankrupt after it engaged in a series of interest rate swaps with Wall Street. This amounted to a bet that interest rates would go up, and, when they didn’t, Detroit came out on the short end of the bet. The same thing happened to Jefferson County, Alabama, San Bernardino, Stockton, and Orange County, CA. Interest rate swaps played a major part in all these bankruptcies. Wall Street made money. American cities went bankrupt.

NJ Governor Chris Christie Ships State’s Pension Fund Money to Wall Street

Photo by marcn

The state of New Jersey under Governor Chris Christie’s tutelage has practically bankrupted the state’s pension fund by paying excessive fees to Wall Street. Of course, this is by design because the conservative agenda calls for bankrupting public pension funds and proving that government doesn’t work. If they can enrich their buddies on Wall Street, so much the better. The NJ pension system paid more than $600 million in fees to Wall Street firms in 2014, 50% more than the previous year! This is a higher rate than any other state pays for pension management.

It is significantly and massively higher than was paid for management before Chris Christie came into office. In 2009 before Christie took office, NJ spent $125 million in pension management fees, a lot of money to be sure, but nothing like the $600 million in 2014. Since Chris Christie took office, his administration has spent over $1.5 billion of pensioners’ money on Wall Street fees. No wonder Wall Street Republicans have contributed so much money to Christie’s campaign funds!

For this amount of money spent on management you’d think that the performance of NJ’s pension fund would be phenomenal, but that, unfortunately, is not the case. In fact it has lagged behind other similar pension funds and also the S&P 500. In other words NJ could have put their pension fund on autopilot, paid zero management fees and the fund would have performed better! To make up for shortfalls in the pension fund, Christie has called for reductions in payouts to NJ retirees and also a reduction in their health benefits. He did NOT call for any diminution of payouts to Wall Street in management fees or perhaps a change in management so that fees would be more in line with other states. No wonder Wall Street loves this guy!

So good old boy and everyman surrogate Chris Christie tells NJ cops, firefighters, teachers and other public employees that “there is no alternative” to reducing their benefits because the pension fund is strapped for cash! Fuggedaboudit. The only alternative is to vote Chris Christie and his politically corrupt practices out of office and initiate a public bank in the state of NJ. A public bank would keep the money in the state’s pension fund instead of shipping it to Wall Street.

One glaring example of oppressive city debt is the City of Los Angeles, which pays $204 million per year in Wall Street bank fees; this is 30% more than it spends to fix the streets. (Read a detailed report about LA here.)

And it’s not just simple interest that cities and states pay to Wall Street. Interest rate swaps are fancy derivatives sold by Goldman Sachs and other large Wall Street banks that have resulted in huge amounts of money being owed to Wall Street. A deal involving interest-rate swaps that Goldman struck with Oakland, California, more than a decade ago has ended up costing the city about $4 million a year, but Goldman has refused to allow Oakland out of the contract unless it ponies up a $16 million termination fee—prompting the city council to pass a resolution to boycott Goldman. When confronted at a shareholder meeting about it, Goldman CEO Blankfein explained that it was against shareholder interests to tear up a valid contract.

Small local banks which make far more loans to local businesses than do the large megabanks have been fading away except in North Dakota. This is from Local Banks Have Vanished Since 2008. Why We Should Treat It as a National Crisis:

Local banks are not fading away in every state. They are numerous in North Dakota, where they hold over 70 percent of deposits. The state’s rural geography and robust economy partly explain the difference, but the main reason is the 96-year-old Bank of North Dakota (BND), the only state-owned bank in the nation.

BND bolsters the capacity and competitive position of local banks by partnering with them on loans and providing wholesale banking services. The impact is significant. North Dakota not only has more banks per person than any other state, but the volume of business and farm lending they do is markedly higher (see this analysis), as is the share of mortgages held in state (which ensures that mortgage interest paid by residents benefits the state’s economy, not Wall Street).

Public Bank of North Dakota Is Model for Cities and States

A few states and cities – including Colorado, Santa Fe, and Seattle – are now studying BND as a possible model for their own public banks, while Vermont and Oregon have taken initial steps in that direction. Oklahoma legislators are also studying the possibility of creating a state owned public bank. Eventually cities and states will wise up and stop shipping money to Wall Street.

Arizona is also looking into the public bank scenario. Arizonans for a New Economy (AzfNE) met with the board of directors of the Arizona Bankers Association (ABA) on April 15^thin Tucson at the invitation of the ABA. Pamela Powers Hannley, co-director of AzfNE, presented slides to the board members showing banking trends in Arizona over the last 15 years. What their research showed is that the state has sent more and more money to Wall Street while small local banks and their assets have dried up.

Between 2005 and 2006 some $63B in assets left the balance sheets of banks operating in Arizona. In 2005 Arizona banks reported $80,451 M in assets. Of these $75,135 M were held in nationally chartered (“Wall St.”) banks while state chartered (“community”) banks held $5,316 M. By the end of 2006, the Wall St. banks held $11,782 M while the community banks held $6,180M. The Wall St. banks asset loss was 84% while the community banks had a 16% gain of assets.

Ellen Brown got the ball rolling for public banks with her book The Public Bank Solution. The big Wall Street banks seek to profit from their relationships with cities and states while a locally owned public bank would return all profits to the local economy by depositing them in the general fund.

While infrastructure projects at the national level are not currently being considered, they take place every day at the local level. In order to finance these projects huge amounts of interest are paid to Wall Street banks. In the case of California, its long awaited new Bay Bridge span was recently completed at a cost of $6.4 billion – over 400% over its initial projection. What most Californians don’t realize is that the total cost of the bridge will eclipse $13 billion when interest payments are considered over their life. 50% savings is not an aberration – it is pretty much a standard calculation for what municipalities can save by issuing their own loans for critical infrastructure from their own bank.

Robert Reich details how Santa Cruz County has refused to do business with the big megabanks because it considers them a bunch of crooks.Santa Cruz County’s board of supervisors just voted not to do business for five years with any of the five bank felons including JP Morgan Chase and Citicorp. The county won’t use the banks’ investment services or buy their commercial paper and will pull its money out of the banks to the extent that it can.

“We have a sacred obligation to protect the public’s tax dollars, and these banks can’t be trusted,” said County Supervisor Ryan Coonerty “Santa Cruz County should not be involved with those who rigged the world’s biggest financial markets.” Supervisor Coonerty says he’ll be contacting other local jurisdictions across the country, urging them to do what Santa Cruz County is doing.

San Diego School Districts Drink Wall Street Kool Aid

I wrote previously about how San Diego school districts are being hoodwinked by Capital Appreciation Bonds:

One fantastic advantage of these loans was the “buy now, pay later” aspect. School districts could get their money now and not have to raise taxes on current residents. Easy money. There would not have to be any payments made for 20 years. Current residents would be off the hook. But their children and grandchildren would enter an era of crushing debt when the bill became due.

And Wall Street is patient, very patient.

The ticking time bomb could cause crushing property tax increases for later generations or even bankruptcies by municipal governments. For example, San Diego County’s Poway Unified will have to pay $982 million for a $105 million CAB it issued. Poway has a payback ratio of $9.35 paid for every $1 borrowed. The final payout will be almost $1 billion.

This is payday lending for school districts. They end up with shiny new auditoriums and gymnasiums but then the same old cramped classes and underpaid teachers since CABs only apply to capital improvements, not current expenses.

The San Ysidro school district also swallowed the Kool-Aid. They got a CAB to build the Vista Del Mar elementary school virtually fro free. Only problem is that starting in 2041 the district will pay, on average, almost the full cost of Vista Del Mar each year for a decade. By 2050, the San Ysidro School District will have paid out $228.9 million, almost $15 for every $1 the district borrowed. From 2041 to 2050, the district will pay, on average, $22.9 million each year.

Republican administrations will almost always favor Wall Street banks because they give generously to their campaign funds. But Democrats are not far behind. Goldman Sachs, JP Morgan Chase and Citigroup were among the largest contributor’s to President Obama’s campaign in 2008, but not, however, in 2012. They voted with their dollars overwhelmingly for Mitt Romney in 2012. Goldman Sachs, Bank of America, Morgan Stanley, JP Morgan Chase, Wells Fargo and Credit Suisse were numbers 1 through 6 in terms of top campaign contributors to Romney while giving nada to Obama.

I guess they hedged their bets in 2008 and bet on the wrong horse in 2012. The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Barack Obama on July 21, 2010. Wall Street was not amused. However, they rebounded with their lobbyists and lobbied the bill to death.