By Pam Martens: November 15, 2012
Throughout the United States there are critical functions that society deems too essential to leave to the vagaries of the profit driven marketplace. Fire and police departments, public schools, parks, libraries, roads, tunnels and bridges – all paid for with taxpayer dollars and overseen by government. So why shouldn’t the U.S. have a parallel system of public banks with a public mandate and accountable to the people – especially at a time of unprecedented corruption in commercial banking under the jackboot of Wall Street.
Until the repeal of the Glass-Steagall Act in 1999, it was illegal for Wall Street firms to own commercial banks. Commercial banks made loans to consumers and businesses and Wall Street investment banks were assigned the job of allocating capital to worthy business enterprises by underwriting their stock and bond offerings. Today, just five Wall Street firms, JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. are not only underwriting securities, they control 48 percent of total banking system assets according to the St. Louis Federal Reserve.
At the end of 2011, these five firms controlled $8.5 trillion in assets, equal to 56 percent of the U.S. economy. The largest of the banks, JPMorgan Chase & Co., had $1.8 trillion of assets, equal to 14 percent of the total of all 7,307 FDIC insured banks.
That level of concentration should be a wakeup call to a country that was brought to the brink of financial collapse because of a systemically corrupt culture on Wall Street and interlocking deals that tied the fate of one firm to the survival of another. (Too big to fail was also too interlocked to fail, thus the government bailout of Citigroup and AIG and the shotgun marriages of Bear Stearns and Washington Mutual to JPMorgan Chase and Merrill Lynch to Bank of America.)
Equally important, those concentrated assets are not flowing into efficient, long-term job creation. In many cases, the assets are engaged in criminal enterprises that boost bonuses on Wall Street while leaving the unemployed and underemployed struggling to feed their families and the Nation teetering toward the next leg of the mislabeled “Great Recession.” This was no recession; this was the inevitable economic collapse resulting from an institutionalized, corrupt, interlocked wealth transfer system.
Before we outline the critical role that public banking could play in today’s dysfunctional brand of casino finance, let’s recap how Wall Street brought the country to its knees and why we can no longer trust it with our savings or to allocate capital to essential, job producing projects:
Wall Street had insider knowledge that subprime loans were going to take down the housing market because Wall Street incentivized their employees to approve loans to people who could not afford the mortgage payment and, in cases like Citifinancial, also loaded up the loans with insurance products;
After Wall Street created the bad mortgage loans, they sold loans they knew to be likely to default to Fannie Mae and Freddie Mac, knowing the firms could fail as a result;
Wall Street hated plain vanilla products like U.S. Treasury securities because they could not hide exorbitant fees. Wall Street created Collateralized Debt Obligations (CDOs) because it could bury its exorbitant fees and bundle up all of its bad loans and sell them off to unwary pension funds and institutional investors. CDOs transformed Wall Street into a mafia-type warehouse and distribution system through securitization – bundling up toxic product and selling it off to others. Mortgages, credit card payments, auto loans, student loans, and dodgy debt from other financial firms were bundled and sold to yield-hungry investors;
The rating agencies entrusted with the critical role of providing honest ratings of these CDOs were corrupted by being paid for the ratings by the Wall Street firms;
Again, Wall Street had insider knowledge that many of these CDOs were ticking time bombs. To profit from this knowledge, Wall Street firms bought Credit Default Swaps on the CDOs, a form of insurance that would pay off when the CDO defaulted or rise in value as the credit worthiness of the CDO declined. AIG sold this insurance through its AIG Financial Products division. When AIG failed, the U.S. government paid 100 cents on the dollar to Wall Street firms for the Credit Default Swaps they had purchased from AIG to insure their very own toxic CDOs, clearly demonstrating to Wall Street that the taxpayer was the easiest mark of all;
Not content with just destroying the U.S. housing market, Wall Street saw other suckers to be fleeced – public school districts, towns, counties, cities and state treasuries. Knowing that it was only a matter of time before its massive issuance of mortgages to people who could not afford them would blow up the housing market and create a long-term downturn, bringing rates to record lows, it sold tens of billions of dollars of interest rate swaps to these public entities. The public entities would receive a variable rate tied to Libor; Wall Street would receive a higher, fixed rate. Wall Street then proceeded to engage in a conspiracy to rig the Libor interest rate to its advantage. Typically, the public entity ended up receiving a fraction of one percent in interest, while contractually bound to pay Wall Street firms as much as 3 to 6 percent in a fixed rate for twenty years or longer. To get out of the deals, public entities have been forced to pay Wall Street tens of billions of dollars in termination fees.
And these are just the mileposts of what we know so far.
On October 23, the Philadelphia City Council held a hearing on the interest rate swaps sold to it by Wall Street firms. Mike Krauss, a director of the Public Banking Institute, an organization formed in January of 2011 to advocate for public banks, was one of the speakers. Krauss testified that budget cuts that resulted from losses on the swaps were having “catastrophic effects on the city’s people and neighborhoods.”
Krauss added: “A handful of banks crashed the economy, virtually the same banks that sold the swaps. They were rescued by taxpayers and the American people – including those of this city – when they crashed their own casino. But the long recession they caused also collapsed municipal tax revenues, putting enormous pressure on municipal and school district budgets. The state cut spending and the cuts grew more severe. Now, these same banks that caused the crash are demanding payment on their one sided interest rate deals, or huge fees to exit the swaps.”
Krauss urged the City Council to look for new banking models to replace failed systems and create a Public Bank of Philadelphia. “A public bank will keep the taxes and other financial assets of the people of this city circulating in the city, by leveraging them to provide the sustainable and affordable credit required in a modern economy to power locally directed economic development and jobs creation,” said Krauss.
Ellen Brown, a public interest writer and attorney, is the Chairman and President of the Public Banking Institute. The organization says its vision is to: “establish a distributed network of state and local publicly-owned banks that create affordable credit, while providing a sustainable alternative to the current high-risk centralized private banking system. This network will act in the public interest, using its counter-cyclical credit-generating capacity to stabilize potential credit crises, maintain the floor against threats of asset devaluations, build infrastructure, and fund expansion of critical industrial productive capacity. Most important, public banking will create jobs, by partnering with local banks to fund local business, advancing credit for public infrastructure, and augmenting government revenues.”
In an article for TruthOut, Brown says North Dakota is the only U.S. state to have a public bank and it was because of this bank that North Dakota was able to escape the 2008 banking crisis, sport a sizeable budget surplus every year since then, the lowest unemployment rate in the country, the lowest default rate on credit card debt and the lowest foreclosure rate.
Contrast that to California, says Brown: “At the end of 2010, it had general obligation and revenue bond debt of $158 billion. Of this, $70 billion, or 44 percent, was owed for interest. If the state had incurred that debt to its own bank — which then returned the profits to the state — California could be $70 billion richer today. Instead of slashing services, selling off public assets, and laying off employees, it could be adding services and repairing its decaying infrastructure.”
There’s one other positive to support the creation of public banks – competition to Wall Street. Reforming Wall Street cannot happen under the current compromised Congress; under the current campaign financing system; under the corrupt revolving door between Washington and Wall Street; under a system that rewarded the supervisory failures of the New York Fed by giving it greater oversight of Wall Street while continuing to allow Wall Street execs and their cronies to sit on its Board of Directors. The entire system is malignant and an insurmountable obstacle to the Nation’s economic recovery. We have watched for four years as Congress failed to reform Wall Street. The one thing that might actually stand a chance of reforming it is honest competition that provides an honest alternative.