Sunday, April 1, 2012
Public Banking and the Post Wall Street Era
Public banking: A new era in state and municipal finance
By Mike Krauss
Bucks County Courier Times
Like state and municipal financial officers across the nation, Ohio Treasurer Josh Mandel is charged with the stewardship of a lot of other people’s money, including more than $41 billion in pension funds of Ohio workers.
Two weeks ago he announced plans to remove Bank of New York Mellon and State Street Bank as custodians of those funds, and transfer that responsibility, and business, to JP Morgan and CitiBank.
In a written statement, Mr. Mandel cited allegations of fraud against the present custodians as the basis for his decision. But his alternative leaves a lot to be desired.
The new custodians, JP Morgan and Citibank, are at this moment themselves the target of numerous lawsuits and legal actions on the part of state attorneys general, the SEC, investors, other banks, municipalities and pension funds. Allegations include mismanagement, deception, conflict of interest and fraud. The damages sought range from many millions to many billions of dollars.
And JP Morgan is the Wall Street leader ($1.4 billion in 2011 revenue) in the market of the interest rate swaps that have blown up municipal finances across the United States.
As Ellen Brown, author of “Web of Debt” explains, “The swaps were entered into to insure against a rise in interest rates; but instead, interest rates fell to historically low levels. This was not a flood, earthquake, or other insurable risk due to environmental unknowns or ‘acts of God.’ It was a deliberate, manipulated move by the Fed, acting to save the banks from their own folly in precipitating the credit crisis of 2008 ... rewarding them for their misdeeds at the expense of the taxpayers.”
Brown concludes, “This ‘financial engineering’ is sold, not by disinterested third parties, but by the very sharks who stand to profit from their counter-parties’ loss. Fairness is thrown out in favor of gaming the system.”
From New England to California, municipal governments and authorities have lost billions. Reading, Pa., already reeling from collapsing revenue, a vanishing middle class and jobs sent off-shore, lost $21 million — more than a year’s worth of real-estate taxes.
With the switch from NY Mellon and State Street to JP Morgan and Citibank, the Ohio treasurer may have done no more than take Ohio retirees from the proverbial frying pan and into the fire. It is a dilemma faced by state and municipal financial officers across the U.S.
Where does a steward of public funds — charged to do more than simply stuff money in a mattress and stand guard — bank and invest those funds?
The alternative to the Wall Street casinos is now emerging among state legislators and state and municipal financial officers nationwide. It is to place those funds in publicly owned state and municipal banks, where risk-taking is controlled and 100 percent of the substantial income generated is retained by local communities.
One model is the very successful Bank of North Dakota, which is managed by salaried civil servants with banking experience. The managers charged with day-to-day operations and decision making have no incentives for risk taking — no super-sized salaries, no fabulous bonuses, no recurring commissions for a short-term focus on boosting profit for quarterly statements.
Treasury officers across the nation generally have similar criteria to judge where to bank the funds of which they have stewardship. Safety of principal is foremost, but there must be sufficient liquidity to insure all anticipated demands on the funds are met, and a reasonable return.
Wall Street fails on two out of three. The safety of public funds has taken a back seat to private profit, and the return is diminished by commissions and fees to Wall Street managers, who all are paid — it is fair to say — a lot more than any manager in a state treasury or municipal finance department.
In fact, a public bank can return many times more on principal than Wall Street could hope to match, because capital, assets and deposits of the public bank can be leveraged — as with any bank — to create credit directed into the community in partnership with community banks, credit unions, savings and loans and local authorities, to generate economic development, jobs and tax revenue.
This is the real “multiplier effect” that never materialized when Congress and the Federal Reserve funneled first hundreds of billions, and then trillions into rescuing Wall Street from its premeditated recklessness.
With respect to municipal bonds and “hedging” in the complicated world of modern finance and interest-rate fluctuation, a public bank could buy municipal bonds at the market rate (And taxpayers would pay the debt service to themselves); and if it were deemed prudent, hedge the interest rates on their own bonds — cutting out the Wall Street middleman who is now playing everybody, as even Wall Street insiders have now begun to attest.
Seventeen states and a growing number of municipalities are now taking a serious look at public banking: keeping their substantial assets close to home, invested locally and managed prudently.
The first national Public Banking In America Conference takes place in Philadelphia at the end of April. We encourage state and municipal treasury officials to join this discussion and take an active role in shaping the post-Wall Street era in state and municipal finance.
Mike Kraussis a director of the Public Banking Institute and chair of the Pennsylvania Project. www.papublicbankproject.org Email email@example.com