City of San Diego Sending Billions of Dollars to Wall Street Needlessly
By John Lawrence
Public banks are financial institutions owned by government entities, such as cities, states, and nations. Establishment of a Public Bank of San Diego would return millions in profits to the City instead of winding up in Wall Street bankers’ private pockets.
Each year the City of San Diego deposits millions of dollars of city revenues in Wall Street banks. The budget for 2014 General Fund Revenues is $1.2 billion. That includes revenues from property taxes, sales taxes, Transient Occupancy Taxes and Franchise Fees among other things. That money has to be deposited somewhere. The City pays these banks transaction fees and loses whatever interest might be gained if the City of San Diego deposited the money in its own public bank with profits earned deposited in the City’s general fund.
Under the current arrangement, interest earnings for the projected 2014 budget are a pathetic 0.1%. Why? Because the Wall Street banks earn most of the interest on the deposited City revenues and pay out interest to the City bordering on zero. Revenues from interest to the City alone could be millions of dollars, and interest the City pays out could be effectively be reduced to zero if the City of San Diego owned its own bank.
The City of San Francisco is considering the establishment of a public bank in order to recoup the money that now is being paid to Wall Street banks:
The city of San Francisco moves between $10 billion and $12 billion through 133 bank accounts in roughly 5 million transactions every year; and its deposits are held chiefly at three banks, Bank of America, Wells Fargo and Union Bank. The city pays $2.7 million for banking services, nearly two-thirds of which consists of transaction fees that smaller banks and credit unions would not impose. But the city cannot use those smaller banks as depositories because the banks cannot afford the collateral necessary to protect deposits above $250,000, the FDIC insurance limit.
San Francisco and other cities and counties are losing more than just transaction fees to Wall Street. Weidner pointed to the $100 billion that the California pension funds lost as a result of Wall Street malfeasance in 2008; the foreclosures that have wrought havoc on communities and tax revenues; and the liar loans that have negatively impacted not only real estate values but the economy, employment and local and state budgets. Added to that, we now have the LIBOR and municipal debt auction riggings and the Cyprus bail-in threat.
The other consideration is that Wall Street banks have defrauded California jurisdictions and others.
On July 23, 2013, Sacramento County filed a major lawsuit against Bank of America, JP Morgan Chase and other mega-banks for manipulating LIBOR rates, a fraud that has imposed huge losses on local governments in ill-advised interest-rate swaps. Sacramento is the 15th government agency in California to sue on the LIBOR rigging, which Rolling Stone’s Matt Taibbi calls “the biggest price-fixing scandal ever.”
Other counties in the Bay Area that are suing on the LIBOR fraud are Sonoma and San Mateo, and the city of Richmond sued in January. Last year, Bank of America and other major banks were also caught rigging municipal debt service auctions, for which they had to pay $673 million in restitution.
According to 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.
It is to be noted that JPMorgan Chase is among the City of San Diego’s list of approved brokers as well as Bank of America, Wells Fargo and Citigroup.
The question is why would San Francisco, LA or San Diego want to invest in Wall Street banks that are defrauding them and ripping them off? Not only that but if any of these big banks goes bankrupt, cities and counties would likely not get their money back because they would have to fall in line behind derivatives claimants which now have super-priority. And they wouldn’t get a taxpayer bailout either because the Dodd-Frank law now bans taxpayer bailouts.
Bank of America now commingles its $1 trillion in deposits with over $70 trillion in risky derivatives, and has been pegged as one of the next banks likely to fail in a major gambling mishap. So the question is why would San Diego or any other city not form a public bank in order to protect itself and maximize returns to the City Treasury?
According to Green Light for City-Owned San Francisco Bank:
A government that owns its own bank can keep the interest and reinvest it locally, resulting in government savings of an estimated 35% to 40% just in interest. Costs can be reduced, and taxes can be cut or services can be increased. Banking and credit can become public utilities, sustaining the local economy rather than mining it for private gain; and banks can again become safe places to store our money.
The state of Vermont is considering the establishment of a public bank. They think that it will save the state millions in tax revenues and put the state on the road to a sustainable economic future because a public bank invests locally. Money doesn’t take a hike for Wall Street and into the pockets of private bankers, the 1%. The spread between interest charged on a loan and interest paid on deposits is reaped for the political entity whether the state of Vermont or the City of San Diego rather than going to CEO salaries and rich out-of-state shareholders.
During the last fiscal year, the state of Vermont deposited funds totaling more than $313 million in two banks, TD Bank and Peoples Bank. The state could earn a better rate of return on those funds by switching to a state bank, a study written by the Gund Institute for Ecological Economics at the University of Vermont and compiled by the Political Economy Research Institute at the University of Massachusetts said.
If deposits of state cash funds were used for economic development loans, $263.2 million in public lending could result in 2,535 jobs, $192 million in value added (gross state product) and a $342 million increase in state output. “If used to finance state capital expenditures, funding through a public bank could save close to $100 million … due to most interest payments no longer leaving the state,” the study said. The study supports the views of proponents that Vermont could save hundreds of millions of dollars, stimulate business and create jobs by establishing a state bank.
There had been some concern about whether or not establishment of a public bank in the state of California was legal. That has been cleared up for charter cities including San Diego. The law in question was California Government Code Section 23007. The section has been interpreted as barring cities and counties from establishing municipal banks. But Deputy City Attorney Thomas J. Owen has now put that issue to rest in a written memorandum dated June 21, 2013. So for chartered cities establishment of a public bank is OK. A charter city is one governed by its own charter document rather than by local, state or national laws.
So far only the state of North Dakota has a public bank. The North Dakota bank typically returns 70 percent of its earnings to the state. In 2009, during the national banking crisis, the state bank delivered a $30 million dividend to public coffers. Loans go for students, businesses and farmers in North Dakota which builds up the state’s economic well-being instead of being spent on risky derivatives and fraudulent trades on Wall Street.
The Bank of North Dakota (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%, a much bigger gain than could be gotten by gambling on Wall Street. So why do it?
Like the BND, a Bank of the City of San Diego (BSD) would provide credit for city projects – to build bridges, restore infrastructure, 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.
Matt Stannard writes in Why Cities Should Use Public Banks Instead of Big Banks:
Public school districts should not have to refinance their outstanding bonds in order to reduce the interest burdens on their debt. A school district should not be spending $2 million annually to pay interest on their debt. And a big part of the problem is that conventional thinking sees the only route for the financing of public projects as a trip to big, private banks to apply for a loan, the interest of which will go into the hands of private investors and entities with no connection to the community where the project is located.
The case of the San Francisco-Oakland Bay Bridge retrofit illustrates this principle.Six billion dollars of interest and financial fees went to private investors. Had a public bank financed the project, the interest would have been paid to that bank, which would then have returned the vast majority of that money to the state’s treasury.
20 states are considering some form of public banking legislation including Hawaii, Illinois, Massachusetts, Michigan, Missouri, New Mexico, Vermont, Virginia, Pennsylvania and Washington. In addition, current candidates for political office in eight states – California, Florida, Idaho, Illinois, Missouri, Oregon, Vermont, and Washington State – are pushing a state-run bank as part of their platform. Also a Pennsylvania county is considering a public bank.
Finally, city owned public banks can protect city workers’ pensions and stop the rash of municipal bankruptcies caused by speculation by City Treasurers on Wall Street. This is what caused the bankruptcy of Orange County a few years ago. Orange County was at the time the largest American county to have gone bankrupt, when in 1994 longtime treasurer Robert Citron’s investment strategies left the county with inadequate capital to allow for any rise in interest rates for its trading positions. When the residents of Orange County voted down a proposal to raise taxes in order to balance the budget, bankruptcy followed soon after. Citron later pleaded guilty to six felonies regarding the matter.
Wouldn’t it be better to eliminate the threat of casino gambling on Wall Street by City Treasurers as well as the threat of municipal bankruptcies by establishing a Public Bank of San Diego?