Green Light for City-owned San Francisco Bank

When the Occupiers took an interest in moving San Francisco’s money into a city-owned bank in 2011, it was chiefly on principle, in sympathy with the nationwide Move Your Money campaign.  But recent scandals have transformed the move from a political statement into a matter of protecting the city’s deposits and reducing its debt burden.  The chief roadblock to forming a municipal bank has been the concern that it was not allowed under state law, but a legal opinion  issued by Deputy City Attorney Thomas J. Owen has now overcome that obstacle.

Establishing a city-owned San Francisco Bank is not a new idea. According to City Supervisor John Avalos, speaking at the Public Banking Institute conference in San Rafael in June, it has been on the table for over a decade. Recent interest was spurred by the Occupy movement, which adopted the proposal after Avalos presented it to an enthusiastic group of over 1000 protesters outside the Bank of America building in late 2011. David Weidner, writing in the Wall Street Journal in December of that year, called it “the boldest institutional stroke yet against banks targeted by the Occupy movement.” But Weidner conceded that:

Creating a municipal bank won’t be easy. California law forbids using taxpayer money to make private loans. That would have to be changed. Critics also argue that San Francisco could be putting taxpayer money at risk.

The law in question was California Government Code Section 23007, which prohibits a county from “giv[ing] or loan[ing] its credit to or in aid of any person or corporation.” 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, in which he states:

1. A court would likely conclude that Section 23007 does not cover San Francisco because the City is a chartered city and county. Similarly, a court would likely conclude that Article XVI, section 6 of the State Constitution, which limits the power of the State Legislature to give or lend the credit of cities or counties, does not apply to the City. . . . [A] court would likely then determine that neither those laws nor the general limitations on expending City funds for a municipal purpose bar the City from establishing a municipal bank.

2. A court would likely conclude that the City may own stock in a municipal bank and spend City money to support the bank’s operation, if the City appropriated funds for that purpose and the operation of the bank served a legitimate municipal purpose.

A number of other California cities that have explored forming their own banks are also affected by this opinion. As of June 2008, 112 of California’s 478 cities are charter cities, including not only San Francisco but Los Angeles, Richmond, Oakland and Berkeley. A charter city is one governed by its own charter document rather than by local, state or national laws.

Which Is Riskier, a Public Bank or a Wall Street Bank?

That leaves the question whether a publicly-owned bank would put taxpayer money at risk. The Bank of North Dakota, the nation’s only state-owned bank, has posed no risk to depositors or the state’s taxpayers in nearly a century of successful operation. Further, in this latest recession it has helped the state achieve a nationwide low in unemployment (3.2%) and the only budget surplus in the country.

Meanwhile, the recent wave of bank scandals has shifted the focus to whether local governments can afford to risk keeping their funds in Wall Street banks.

In making investment decisions, cities are required by state law to prioritize security, liquidity and yield, in that order. 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 consist 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.

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.

The question is, do taxpayers want to have their public monies in a bank that has been proven to be defrauding them?

Compounding the risk is the reason Cyprus “bail in” shocker, in which depositor funds were confiscated to recapitalize two bankrupt Cypriot banks. Dodd-Frank now replaces taxpayer-funded bank bailouts with consumer-funded bail-ins, which can force shareholders, bondholders and depositors to contribute to the cost of bank failure. Europe is negotiating rules imposing bail-ins for failed banks, and the FDIC has a U.S. advisory to that effect. 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.

San Francisco and other local governments have far more than $250,000 on deposit, so they are only marginally protected by the FDIC insurance fund. Their protection is as secured creditors with a claim on bank collateral. The problem is that in a bank bankruptcy, state and local governments will fall in line behind the derivative claimants, which are also secured creditors and now have “super-priority” in bankruptcy. In a major derivatives calamity of the sort requiring a $700 billion bailout in September 2008, there is liable to be little collateral left for either the other secured depositors or the FDIC, which has a meager $25 billion in its insurance fund. Normally, the FDIC would be backstopped by the Treasury – meaning the taxpayers – but Dodd-Frank now bars taxpayer bailouts of bank bankruptcies caused by the majority of speculative derivative losses.

The question today is whether cities and counties can afford not to set up their own municipal banks, both to protect their money from confiscation and to take advantage of the very low interest rates and other perks available exclusively to the banking club. 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.

______________________

Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt and its 2013 sequel, The Public Bank Solution. Her websites are http://WebofDebt.com, http://PublicBankSolution.com, and http://PublicBankingInstitute.org.

36 Responses

  1. Finally America is waking up to the criminally run, Wall st Banks, and are doing something about it. America desperately needs a second option to the Federal reserve cartel, and if, or maybe when the derivatives market crashes, you will need option 2, of publicly owned Banks. May this be the start of many new Banks. Good luck.

  2. Dear Ellen,

    I’ve been pulling my limited retirement funds from these banks you’ve noted on your blog that have fraudulent activities. My main concern now is my mortgage with Chase Home. I refinanced twice for lower interest rates and still have approx 15 years left with a balance below $100,000. Can you or your staff give advice of how to move this out of Chase’s (JPMorgan) clutches without having to incur obscene fees.

    Yours sincerely,

    Gwen Merrick

    Sent from my iPod

    • If you have a mortgage with Chase you should be concerned about having a clouded titled. Go to you recorder’s office and get a copy of your mortgage deed. If it has a MERS number on it, your home actually belongs to another creditor — even if you pay it off or transfer account to another institution. For more info about his MERS scam and what to do about it see http://www.mortgageendgame.com/ They have a class action law suit that you can get involved with to take back possession of you home.

    • you definitely need to be concerned. To learn a TON about this go to www DOT cloudedtitles DOT com – study the links on the website & get his book – then you will understand what I am talking about. It will shock you but it is true. I have uncovered aLOT of the wrong doing that clouded my title. I am moving forward with lawsuit

  3. It’s too bad the people in Detroit didn’t think of this solution. I’m certain a municipal Detroit bank would have obviated the receivership and prevented the fascist takeover by the ALEC funded emergency manager. They have nearly 200 of these emergency managers ready to auction off municipalities throughout the country, so all is not lost if other cities decide to follow San Francisco’s example. It will protect them from the ALEC state putsch’s and from being plundered from the Fed reserve.

  4. […] Ellen Brown Writer, Dandelion Salad webofdebt.com July 30, […]

  5. Reblogged this on thejumbledmind and commented:
    Imagine if banks were no longer privatized and “super-priority” was NOT given to derivative claimants…
    Great article!

  6. Ellen: We have this article posted:

    City-Owned San Francisco Bank Gets Green Light

    Ellen Brown: The question today is whether cities and counties can afford not to set up their own municipal banks, both to protect their money from confiscation and to take advantage of the very low interest rates and other perks available exclusively to the banking club.

    http://www.laprogressive.com/?p=79238

  7. […] Green Light for City-owned San Francisco Bank […]

  8. Hi Ellen,

    You wrote, “Normally, the FDIC would be backstopped by the Treasury – meaning the taxpayers – but Dodd-Frank now bars taxpayer bailouts of bank bankruptcies caused by the majority of speculative derivative losses.”

    It would be bailing out FDIC (were there a shortfall), paying the insured depositors. Whether the banks in question would survive would depend upon other factors. The depositors would not be required to leave their deposits in failed or crippled banks.

    As for the city attorney’s opinion, isn’t it a bit early to decide how that will play out in the state courts?

    It’s too bad the system seems rigged against Public Banking. It would be good were California to amend or abolish laws blocking Public Banking regardless of governmental levels: city, county,…. Even if the law is grey, it should be cleared up leaving no doubt that Public Banking is fine.

    I know you won’t give up even if this one doesn’t pan out as is. There will be Public Banking beyond ND, and your efforts will have been instrumental. It will then spread if it works, and we know it will if it’s designed by people who are in favor of it and model it mostly on ND.

    Stay strong.

    Peace,

    Tom

  9. […] Ellen Brown Web of Debt […]

  10. Great in-depth info and analysis, as usual from Web of Debt. Thanks…a real public service.

  11. […] Green Light for City-owned San Francisco Bank […]

  12. Yeah, well too bad, too, when Willie Brown was mayor in the late 90s during the dotcom boom that he wasted billions.

    In 1996 the Budget of San Francisco was 2.6 Billion. 5 Years later it was 5.2 Billion. Yes, double! BECAUSE they had double the income.

    Yet city services hardly improved. Number of employees went up but didn’t double. Capital projects stayed about the same. Parks & Recreation was still starved for money.

    San Francisco could have completely paid off all their debt. If they had just saved one-third of the increased income, their cumulative deposits in their municipal bank would have been billions! And that doesn’t even count their already sizeable investment portfolio.

    IF San Francisco had created a municipal bank then, they could have lent poor cities like Oakland across the bay the money they needed to replace high-interest debt with low-interest debt. Heck, San Francisco could have been the public bank for the entire Bay Area.

    IF San Francisco had been even slightly frugal they would never have even needed to access outside credit–even at low rates–ever again.

    San Francisco was and still is one of the few rich cities in the U.S. It just depends on who is in charge.

  13. […] This piece first appeared at Web of Debt. […]

  14. […] This piece first appeared at Web of Debt. […]

  15. […] pm on Green Light for City-owned San Francisco Bank […]

  16. […] to borrow from Wall Street, worry about interest rate swaps, or be beholden to the bond vigilantes. It could borrow from its own bank, which would leverage the local government’s capital into credit, back that credit with the […]

  17. […] P.S.  On a positive note, Brown has a blog post that discusses San Francisco’s attempt to launch a city bank. […]

  18. […] borrow from Wall Street, worry about interest rate swaps, or be beholden to the bond vigilantes. It could borrow from its own bank, which would leverage the local government’s capital into credit, back that credit with the […]

  19. […] from Wall Street, worry about interest rate swaps, or be beholden to the bond vigilantes. It could borrow from its own bank, which would leverage the local government’s capital into credit, back that […]

  20. […] borrow from Wall Street, worry about interest rate swaps, or be beholden to the bond vigilantes. It could borrow from its own bank, which would leverage the local government’s capital into credit, back that credit with the […]

  21. […] to borrow from Wall Street, worry about interest rate swaps, or be beholden to the bond vigilantes. It could borrow from its own bank, which would leverage the local government’s capital into credit, back that credit with the […]

  22. […] borrow from Wall Street, worry about interest rate swaps, or be beholden to the bond vigilantes. It could borrow from its own bank, which would leverage the local government’s capital into credit, back that credit with the […]

  23. […] to borrow from Wall Street, worry about interest rate swaps, or be beholden to the bond vigilantes. It could borrow from its own bank, which would leverage the local government’s capital into credit, back that credit with the […]

  24. […] GREEN LIGHT FOR CITY-OWNED SAN FRANCISCO BANK […]

  25. […] 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: […]

  26. […] In light of those Supreme Court cases, it hardly seems necessary for a city to become a chartered city before establishing its own publicly-owned bank; but that is another way to circumvent this debate. The California Constitution gives cities the power to become charter cities; and while General Law Cities are bound by the state constitution, cities organized under a charter have broad autonomy. They can bypass large swaths of state law, including asserting their independence from the state’s supposed restrictions on lending. […]

  27. […] In light of those Supreme Court cases, it hardly seems necessary for a city to become achartered city before establishing its own publicly-owned bank; but that is another way to circumvent this debate. The California Constitution gives cities the power to become charter cities; and while General Law Cities are bound by the state constitution, cities organized under a charter have broad autonomy. They can bypass large swaths of state law, including asserting their independence from the state’s supposedrestrictions on lending. […]

  28. […] In light of those Supreme Court cases, it hardly seems necessary for a city to become achartered city before establishing its own publicly-owned bank; but that is another way to circumvent this debate. The California Constitution gives cities the power to become charter cities; and while General Law Cities are bound by the state constitution, cities organized under a charter have broad autonomy. They can bypass large swaths of state law, including asserting their independence from the state’s supposedrestrictions on lending. […]

  29. […] In light of those Supreme Court cases, it hardly seems necessary for a city to become a chartered city before establishing its own publicly-owned bank; but that is another way to circumvent this debate. The California Constitution gives cities the power to become charter cities; and while General Law Cities are bound by the state constitution, cities organized under a charter have broad autonomy. They can bypass large swaths of state law, including asserting their independence from the state’s supposed restrictions on lending. […]

  30. […] In light of those Supreme Court cases, it hardly seems necessary for a city to become achartered city before establishing its own publicly-owned bank; but that is another way to circumvent this debate. The California Constitution gives cities the power to become charter cities; and while General Law Cities are bound by the state constitution, cities organized under a charter have broad autonomy. They can bypass large swaths of state law, including asserting their independence from the state’s supposed restrictions on lending. […]

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