by Zach Carter
June 13, 2009
Local banks can change the world, one neighborly investment at a time.
William Spademan is a radical banker. In an era when Wall Street executives frequent talk shows to defend lavish bonuses “earned” through reckless speculation, Spademan has been working to create a new kind of bank that would empower communities instead of enriching a powerful few.
“If you give any community the ability to create and control money, [it] can decide for itself what to invest in—[and] what needs to be done,” Spademan says.
After spending decades in the nonprofit world, Spademan found himself reluctantly turning to the realm of banking in an effort to mitigate economic inequality and assuage poverty.
“I was kind of repulsed by the whole idea of economics and money,” Spademan says. His new banking model is informed by years of community activism. Spademan founded the Center for Peace and Justice in Brunswick, Maine, in the late 1980s and continues to operate a group that provides financial support to nonprofit organizations.
For six years, he has been working to develop a new type of financial institution he calls a Common Good Bank. Spademan’s bank combines two common financial structures—a credit union and a public bank corporation—directing the community focus of the former and the profit potential of the latter toward the good of society. It’s an ambitious idea that would give communities democratic control over the creation of money and its distribution—restoring public accountability in the financial system, and funding important public projects that have been ignored by Wall Street financiers.
Large banks today tend to be public companies with stockholders spread all over the globe, especially on Wall Street. The short-term interests of these shareholders are rarely attuned to the well-being of the communities where banks operate.
West Coast financial behemoth Wells Fargo, for instance, has long been considered one of the strongest banks in the world for investors. But its stock price benefited significantly from the billions of dollars the bank raked in from the subprime mortgage boom. Wells Fargo’s executives sold these toxic loans off to investors immediately after they had been extended to borrowers, so the bank’s books have stayed clean, even though many of the communities it serves have been devastated. In April 2007, the banking giant paid $6.8 million to settle a class-action lawsuit filed against the company for predatory subprime mortgage lending in California.
It became common for corporate banks to pursue high-risk ventures to turn high profits, despite the fact that it is astonishingly easy to make money in the banking business. Before risky lending was the norm, banking“used to be called the three-six-three business model,” according to Lawrence J. White, a senior bank regulatory official during the late 1980s. “You borrow money at 3 percent, you lend it out at 6 percent, and you”re on the golf course by 3 p.m.,“ says White.
Shareholders on Wall Street do not need a bank to make long-term profits; they only need it to garner high returns in the short term. When the stock starts to fall, these speculators can simply sell and move on to other stocks. The pressure on bankers to engage in risky behavior is high, and many banks link executive compensation to the company’s stock price, rewarding short-term gains and sacrificing long-term stability.
“We saw what was going on in the industry in the last few years,” says Curtis Hage, CEO of Home Federal Bank, a community bank based in Sioux Falls, South Dakota, that specializes in mortgage lending. “It was just intolerable to us.”
Hage is no radical. In my half-hour conversation with him, he used the word “conservative” approvingly a total of 22 times. He wasn’t referring to theories of international relations; he was talking about straightforward aversion to risk. He never raises his voice. He wears plaid ties. He has never approved a subprime mortgage or a blockbuster merger, and all of his bank’s loans are made either in the Sioux Falls area or to people with whom the bank has previously worked. Hage believes the best way to make money is to be responsive to community needs. “If we make a loan to a borrower who can’t afford it, we’ve done no service to them, and we’ve created no value” Hage says.
Yet Hage still faces pressure from shareholders to make risky loans, expand his operations, or accept a buyout from a bigger bank with no particular commitment or accountability to the Sioux Falls community. Wells Fargo, in fact, owns a stake in Home Federal, and Wells Fargo is far less threatening than some Wall Street hedge funds.
Speculators Keep Out
Spademan thinks he has found the solution to Hage’s dilemma. He hopes to lock speculators out of the Common Good Bank business by writing founding documents that require new shareholders to be depositors, and by adopting by-laws that allow each shareholder one vote on how to organize the company’s operations. Most corporations grant one vote to each share of stock, a strategy that gives wealthy shareholders more power and allows speculators to rewrite the company’s business practices if they purchase a large-enough stake.
Here Spademan borrows from a business model that has thrived in the United States since the Great Depression: the credit union, a democratically governed financial co-op that is owned by its customers.
Michael Sills is the CEO of Evansville Federal Credit Union in Evansville, Indiana, a small collective with about 7,500 members, all with an interest in improving life in Evansville.
“One of our employees here was at church, and she talked to Ruth, who is a social worker here in town, about establishing a house for women who have been through alcohol or drug rehab, a kind of transitional house,” Sills said. “So we enlisted our customers and our members to help donate money and do bake sales and car washes—those kinds of things—to generate the money. I think there was a bowl-a-thon, too.” Evansville’s substance-abuse-recovery home is the kind of project that might not get funding from ordinary financial institutions.
Some credit unions also offer unique, socially responsible loans, like Santa Barbara County Federal Credit Union in California, which specializes in lending for solar energy panels. Interest rates on credit union loans are typically lower than those on bank loans, while credit unions usually pay their depositors more than banks. Credit unions almost entirely missed the subprime explosion.
But there are significant costs to the credit union charter. Credit unions are barred from turning a profit (aside from a small amount to cushion against losses), so Evansville FCU funds its charity work with bake sales rather than earnings. Credit unions cannot sell stock. If they want to grow, they have to rely on the modest earnings cushion they’ve retained over time to fund any expansion, which makes for a very slow process.
Spademan’s Common Good Banks could get around this problem. They would be stock-based corporations, but with strict rules that require them to be governed like a credit union. What’s more, Common Good Banks could turn a profit, but they would have to spend it on charitable contributions. Owners of the bank would vote on how to distribute profits to various charities, nominated by the owners themselves.
“Each of the depositors is given 100 virtual pennies, and they have to distribute them among the various organizations,” Spademan says. “If you like one organization a lot you could give 60 virtual pennies to that one, and only five to another. When all the voting is done, you add up all the pennies that all the organizations have been given, and those are the proportions in which the profits will be given out.”
This strategy could dramatically expand a community bank’s local role and influence. It would also give communities control of how money is created and invested, even allowing the bank to fund projects that have no hope of generating a financial return.
“Our money system is so broken that we don’t even see that it’s silly that there are people who are desperate for work while there are jobs that need to be done” Spademan says. “Things aren’t happening just because we don’t have an accounting system that can deal with it. That’s crazy”
Spademan faces some significant challenges getting his program off the ground. The recent wave of bank failures has put the federal deposit insurance fund under pressure, and the FDIC has been approving fewer new bank applications. Since Common Good Bank investors will have no hope of earning a significant financial return, Spademan will have a smaller pool of potential start-up capital than ordinary banks and will need committed organizers to assemble depositors.
Fortunately, Spademan appears to be well on his way. Between early March and mid-April, Spademan hired 23 division organizers, each in a different community, to gather the bank’s financing. If he can marshal the capital, Spademan could very well do something radical with the financial system.
Despite all the pressure on Home Federal’s Hage, the survival of his bank proves that a stock-based company can maintain fair lending practices and turn a profit, while the existence of more than 7,800 credit unions in the U.S. proves that democratic finance can work.
Zach Carter wrote this article as part of The New Economy, the Summer 2009 issue of YES! Magazine. Zach writes a weekly blog on the economy for The Media Consortium. His work has appeared in Mother Jones, The American Prospect, and The Colorado Independent and on AlterNet.
Fuente: Yes! Magazine
Wells Fargo: Too Big to Jail?
by Laura Flanders
The F Word
June 9, 2009
Break the banks, for the good of the people
Bailing out the big US banks has done nothing to improve them, writes Joseph Stiglitz.
WITH all the talk of “green shoots” of economic recovery, America’s banks are resisting efforts to regulate them. While politicians talk about their commitment to regulatory reform to prevent a recurrence of the crisis, this is one area where the devil really is in the details — and the banks will muster what muscle they have left to ensure that they have ample room to continue as they have in the past.
The old system worked well for the banks so why should they embrace change? Indeed, the efforts to rescue them devoted such little thought to the kind of post-crisis financial system we want, that we will end up with a banking system that is less competitive, with the large banks that were “too big to fail” even larger.
It has long been recognised that the US banks that are too big to fail are also too big to be managed. That is one reason the performance of several has been so dismal. When they fail, the Government engineers a financial restructuring and provides deposit insurance, gaining a stake in their future. Officials know that if they wait too long, zombie or near-zombie banks — which have little or no net worth, but are treated as if they were viable institutions — are likely to “gamble on resurrection”. If they take big bets and win, they walk away with the proceeds, if they fail, the Government picks up the tab.
This is not just theory; it is a lesson learned, at great expense, during the savings and loan crisis of the 1980s. In a financial restructuring, shareholders typically get wiped out, and bondholders become the new shareholders. Sometimes, the government must provide additional funds, or a new investor must be willing to take over the failed bank.
The Obama Administration has, however, introduced a new concept: “too big to be financially restructured”. The Administration argues that all hell would break loose if we tried to play by the usual rules. Markets would panic. So, not only can’t we touch the bondholders, we can’t even touch the shareholders — even if most of the shares’ existing value merely reflects a bet on a government bail-out.
This judgement is wrong. The Obama Administration has succumbed to political pressure and scare-mongering by the big banks and, as a result, has confused bailing out the bankers and their shareholders with bailing out the banks.
The Obama strategy’s current and future costs are very high — and so far, it has not achieved its limited objective of restarting lending. The taxpayer has had to pony up billions, and has provided billions more in guarantees — bills that are likely to come due in the future.
Rewriting the rules of the market economy — in a way that has benefited those that have caused so much pain to the entire global economy — is worse than financially costly. Most Americans view it as grossly unjust, especially after they saw the banks divert the billions intended to enable them to revive lending, to payments of outsized bonuses and dividends.
This ersatz capitalism, where losses are socialised and profits privatised, is doomed to failure. Incentives are distorted. There is no market discipline. The too-big-to-be-restructured banks know that they can gamble with impunity — and, with the Federal Reserve making funds available at near-zero interest rates, there is ample money to do so.
Some have called this “socialism with American characteristics”. But socialism is concerned about ordinary individuals. By contrast, the US has provided little help for the millions of its people who are losing their homes. Workers who lose their jobs receive only 39 weeks of limited unemployment benefits, and are then left on their own. And, when they lose their jobs, most also lose their health insurance.
America has expanded its corporate safety net in unprecedented ways, from commercial banks to investment banks, then to insurance, and now to cars, with no end in sight. In truth, this is not socialism, but an extension of long-standing corporate welfarism. The rich and powerful turn to the Government to help them whenever they can, while needy individuals get little social protection.
We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed.
This raises another problem with America’s too-big-to-fail, too-big-to-be-restructured banks: they are too politically powerful. Their lobbying efforts worked well, first to deregulate, and then to have taxpayers pay for the clean-up. Their hope is that it will work again to keep them free to do as they please, regardless of the risks for taxpayers and the economy. We cannot afford to let that happen.
Joseph Stiglitz, professor of economics at Columbia University, chairs a Commission of Experts, appointed by the UN, on international monetary and financial system reforms.
Fuente: The Age