Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Enough Is Enough:
Fraud-ridden Banks Are Not
L.A.'s Only Option
By Ellen Brown
Al-Jazeerah, CCUN, February 1, 2014
“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
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 that 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?
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
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.
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.
Beyond being a
money-maker, a city-owned bank can minimize the risks of interest rate
manipulation, excessive fees, and dishonest dealings.
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
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 Francisco
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.