If you ever needed justification for exerting a semblance of local control over how credit is issued in the economy of your city, county, or state, this may just be it. Any impartial observer of this summer’s most recent bank scandals knows that Wall Street does not have your interests in mind. Apparently, neither does Congress.
Antidote to the Wall Street casino
This issue of PBI’s monthly newsletter is meant to showcase what some of us are working on at the county level. Public banking is not a difficult concept – it’s just regular depository banking, but with the owner being the people, as represented by city, county and state governments. There are numerous implications, however, which primarily involve governance. And, yes, local governance may be messy, but it is far superior to the existing corporate-controlled governance coming out of D.C., which, instead of issuing debt-free money, has handed to banks the monopolistic power over money creation. At least citizens, using a public bank, have the power to make affordable loans for the benefit of their own city, county, or state.
And a few of us, from Berks County in Pennsylvania to Alameda County, California, are doing just that. In Sonoma County, a small team of us are putting into place the relationships needed to create a county-owned bank. In addition to leverage local tax dollars to support the local economy and infrastructure, county banks hold the promise of being a B2B mutual credit exchange, plus being able to issue local currency, much like Citibank's frequent flier miles -- only to aid local businesses in the circulation of goods and services. But there's hard work to do: First, get a champion; second, get the local university to commit resources; third, get business associations and a few banks on board; fourth, expand the coaltion; fifth, go for a vote with the county supervisors. In Sonoma County, we’ll get to a vote sometime late winter or spring.
Meanwhile, PBI has added a county bank section to its website. Be sure to check it regularly or, better yet, make the effort yourself to build consensus around your own county bank. If you are interested in developing your own county bank, be sure to join us every Thursday, from now through November 15th. We'll have a county bank working group conference call at 9am Pacific. You can register for the conference call series here.
The time is now
With the demise of the Glass-Steagall Act, "boring” community banking of the last century was replaced by too-big-to-fail investment banks, armed with nuclear-tipped financial products, sold as fail-safe, that have led directly to a meltdown of our economy and America’s Descent into Poverty. As described by Paul Craig Roberts, former Assistant Secretary of the US Treasury and Associate Editor of the Wall Street Journal, “cities, counties, states, and the federal government (are) without a tax base, resulting in bankruptcies at the state and local level and massive budget deficits at the federal level that threaten the value of the dollar and its role as reserve currency.”
Yet our cities, counties, and states continue to deposit their revenues in this same private well, at virtually no interest, and borrow from the well at much higher interest for bond financing, issuing credit and for our economic livelihood. We are throwing our money away.
Wall Street banks are too big to regulate. Not that it matters -- Congress is their servant. Don't you think it's time to take matters in your own hands and start a county-owned bank?
Public Banking Institute
Featured Article: Thinking Outside the Strongbox -- Can public finance beat Wall Street? Take it to the bank!
THE NEXT TIME you hear someone say the Occupy Wall Street movement was interesting but is losing steam and that all its participants do is protest and demonstrate rather than take positive action, don't believe it.
For the most part, the national media stopped covering Occupy Wall Street when images of protesters became too mundane to make the nightly news—not enough sensationalism.
Critics say the movement is doomed to a slow decline because its proponents have turned their backs on participation in the traditional political process. But looking at the corruption of the big banks and the rigged financial system that brought down the economy, a group of people in sympathy and synchronicity with the Occupy movement decided to push for a new way of doing financial business: use a public-banking model that can eviscerate the power of the few big financial institutions that now control a great deal of state and municipal wealth.
When Ellen Hodgson Brown came to Marin in December 2010, she delivered a presentation that described how California could create a state bank. Brown is the president and chairman of the Public Banking Institute (PBI). "Once you grasp the principle here" it seems like a natural solution to the economic crunch, she said at the meeting organized by Supervisor Susan Adams. "You have to understand that Wall Street is leveraging our money—and not to our benefit—lending it back to us. When you realize that we could do that in-house, keep it all local, leverage our money for our own purposes, when you understand that is the point here—why not do it?"
That's what North Dakota has done—with great success. While other states, like California, are wrestling with crippling budget deficits, North Dakota is on sound financial ground and has low unemployment. It's investing in education, commercial enterprises and state infrastructure in the state rather than sending its wealth to Wall Street.
"It's a big money maker in North Dakota," said Brown. "Since 2008, when other state governments were going bankrupt, the [Bank of North Dakota] returned between 19 percent to 25 percent on equity. It didn't all go back to the state, but it could have. When the state didn't need it, [the bank] plowed it back into capital for the bank to make yet more loans."
North Dakota has realized the rewards of its own state bank since 1919. At the turn of the 20th century, the state's economy was centered on agriculture. Grain markets and market makers outside the state kept a lid on prices. North Dakota farmers were getting squeezed; interest rates on farm loans were increasing along with the price of supplies. The state Legislature established the Bank of North Dakota to foster local agriculture, commerce and industry. The legislation that created the bank envisioned it working with existing banks rather than replacing them, acting as a partner with smaller, local financial institutions. It worked.
PBI has been spreading word of the North Dakota model to other states. Although politicians have expressed interest in the idea, when it comes down to the actual votes, public banking seems to get put on the back burner, despite its benefits as proved in North Dakota. But there's another way, says Marc Armstrong, executive director at PBI.
After Brown's presentation in Marin she took questions from the audience, including: "What about a county bank?" That certainly is possible, she answered. But the focus of her presentation was on the possibilities, practicalities and rewards of setting up a state bank.
Armstrong has been on the road espousing the county bank idea. A Sonoma resident, he has given presentations in his county and he's also presenting the idea in Mendocino. "We educate people about how public banks can come about. It's moving much quicker than we ever expected because of Occupy and because of the headlines in every other newspaper" about bank scandals and financial-system fraud.
The latest and most far-reaching example of bank collusion came recently with the news that big banks rigged the London Interbank Offered Rate, referred to as the LIBOR, which affects how much interest everyone in this country pays on mortgages, credit cards and other financial instruments. The LIBOR is the rate at which big banks can borrow funds from other banks in the London interbank market. They lend to each other. Good credit risks, such as a sound multinational corporation or a major bank, can borrow at the LIBOR plus a few points of interest.
The LIBOR also is the foundation on which banks set rates for less desirable borrowers. Canada, Switzerland, the United Kingdom and the United States rely on the LIBOR to set interest rates. Banks allegedly colluded to fix artificial rates to manipulate the borrowing market in which their customers participated. Some banks inflated or deflated the LIBOR to control the entire market. If, for example, the LIBOR was jacked up when a customer applied for a mortgage, the rate was artificially jacked up as well.
This is just the latest evidence that big banks and the Wall Street financial system have been rigged. Other examples include the municipal bond scandal in which major banks and finance companies on Wall Street managed to rig municipal bond bids to the detriment of towns and cities across the country, forcing them to pay extra out of their beleaguered budgets.
Has the steady drip of banking scandals and financial-system fraud made the job of getting the public's and the politicians' attention any easier? "Yes. Undoubtedly," says Armstrong. "People connect the dots a lot quicker."
Although the foundation for a county public bank has many similarities to that of a state public bank, the more intimate scale of a county public bank can make it especially attractive to those open to the idea. By connecting the attributes of the live-local gestalt and the Transition Town movement and the efforts to move toward sustainability, proponents are trying to show people how investing in their own communities can provide the kind of rewards that sending money to the big banks on Wall Street can never match. And at less risk, says Armstrong.
"Private banks are accountable to shareholders," he says. "The question is how do you do it with the best underwriting standards? We think the best approach is to provide money to capitalize local [community] banks, and they provide the money to fund specific sectors in the [local economy]. The underwriting as well as the loan origination are done by a private banking partnership." As an example, Armstrong says, a community bank could use public county-bank capital to go into the community and say to a customer that the bank has money to offer that can increase a business owner's manufacturing capabilities.
"The loan happens," says Armstrong, " and the manufacturer ramps up his capabilities. The loan is paid off, and the interest that is realized as profit goes back to the pension fund that funded and capitalized the public bank." That's right. The county public-bank proposal posits that a relatively modest portion of a county's pension fund would do better, in financial and social terms, placed in a county public bank than in a Wall Street monolith. The North Dakota record shows that it could be in safer hands than if it were sent to Wall Street. Sonoma County has about $1.8 billion in public pension funds, says Armstrong; $100 million could be used to capitalize a county bank.
While loan origination remains in the hands of responsible community bankers, policy could be set by an oversight board that included a county treasurer and elected officials appointed to the governing body. The public would have ultimate oversight in that structure. The experience in North Dakota shows that a public-banking model can yield better financial results than a private banking model. A county public bank, Armstrong emphasizes, would never be a lender of last resort. It actually would be at least as conservative—if not more so—as a private bank.
"Right now, the credit of Sonoma County is essentially being given away to private banks because we put so much of our money into a very small number of Wall Street banks," says Armstrong. They use the money to create bank credit that they use to buy financial instruments, often in a market that sends the credit overseas. "All of a sudden the credit that we had with our [local] money is being transferred to banks to use for their private gain."
The focus of the public-banking model on the county as well as the state level is taking that credit back and "using it for the good of the people the bank is serving," says Armstrong. The intimate scale of a county bank brings that goal into especially sharp focus. A county bank could, for instance, choose to invest in local renewable energy products and systems, mechanisms that a traditional private bank might eschew.
But that doesn't mean a public county bank would try to displace local community banks. "Our starting point," says Armstrong, is looking at how a county public-banking model can "meet the needs of the community bankers and the credit unions, as well as business associations. It's a partnership approach." Instead of competing with a community bank, a county public bank could provide the community bank with a new chunk of capital to lend in a cooperative endeavor for the good of the community and the safety of public pension funds. Sending those funds to Wall Street, after all, hasn't proved to be an especially safe investment. And the credit crunch that cratered the economy could (and probably will) happen again. Investing in a diversified local portfolio could provide the best benefits, say pubic-banking proponents.
Jerry Allen, chairman of the Investment Committee for the Sonoma County Employee Retirement Fund, authored the article Investment Risk Redefined in the Light of World Chaos and the Need for Local Resilience, in which he wrote, "By using sound investment structures and local loan underwriting processes, with local accountability and transparency, confidence among potential investors is built up that the local investments are sound, well-placed, and have the best possible chance of being repaid. This can happen by utilizing local credit unions and banks that have a commitment to invest locally."
Even if the social benefits of a county public bank don't strike a chord, the pure bottom-line financial implications may do the trick. Because a public bank serves its customers and community rather than its shareholders, a public county bank could offer lower interest costs for bonds to finance local infrastructure projects. A public bank also could offer lower interest rates to consumers and local merchants. And a public county bank could provide those benefits with a transparency unknown with investments in the big banks. That means lowering the risks for the county's public-employee pension fund.
The ideas Ellen Hodgson Brown presented in Marin regarding state banks are just as relevant in connection with county banks. "It's a no-brainer," she said. And Armstrong underscores the sentiment by pointing out that an equivalent to county public banks has proved successful in Germany, where the concept has helped fund the country's exit from nuclear power and entrance into a solar future. It could happen here.
Peter Seidman is a journalist working for the PacificSun in San Rafael, CA.
Fixing the Mortgage Mess: The Game-changing Implications of Bain vs. Mers
By: Ellen Brown
Two landmark developments on Aug. 16 give momentum to the growing interest of cities and counties in addressing the mortgage crisis using eminent domain:
The Washington State Supreme Court held in Bain v. MERS, et al., that an electronic database called Mortgage Electronic Registration Systems (MERS) is not a "beneficiary" entitled to foreclose under a deed of trust; and
San Bernardino County, Calif., passed a resolution to consider plans to use eminent domain to address the glut of underwater borrowers by purchasing and refinancing their loans.
MERS is the electronic smokescreen that allowed banks to build their securitization Ponzi scheme without worrying about details like ownership and chain of title. According to property law attorney Neil Garfield
, properties were sold to multiple investors or conveyed to empty trusts, subprime securities were endorsed as triple A, and banks earned up to 40 times what they could earn on a paying loan, using credit default swaps in which they bet the loan would go into default. As the dust settles from collapse of the scheme, homeowners are left with underwater mortgages with no legitimate owners to negotiate with. The solution now being considered is for municipalities to simply take ownership of the mortgages through eminent domain. This would allow them to clear title and start fresh, along with some other lucrative dividends.
A major snag in these proposals has been that to make them economically feasible, the mortgages would have to be purchased at less than fair market value, in violation of eminent domain laws. But for troubled properties with MERS in the title - -which now seems to be the majority of them -- this may no longer be a problem. If MERS is not a beneficiary entitled to foreclose, as held in Bain, it is not entitled to assign that right or to assign title. Title remains with the original note holder; and in the typical case, the note holder can no longer be located or established, since the property has been used as collateral for multiple investors. In these cases, counties or cities may be able to obtain the mortgages free and clear. The county or city would then be in a position to "do the fair thing," settling with stakeholders in proportion to their legitimate claims, and refinancing or reselling the properties, with proceeds accruing to the city or county.
Bain v. MERS: No Rights Without the Original Note
Although Bain is binding precedent only in Washington State, it is well reasoned and is expected to be followed elsewhere. The question, said the panel, was "whether MERS and its associated business partners and institutions can both replace the existing recording system established by Washington statutes and still take advantage of legal procedures established in those same statutes." The Court held that they could not have it both ways:
Simply put, if MERS does not hold the note, it is not a lawful beneficiary...MERS suggests that, if we find a violation of the act, "MERS should be required to assign its interest in any deed of trust to the holder of the promissory note, and have that assignment recorded in the land title records, before any non-judicial foreclosure could take place." But if MERS is not the beneficiary as contemplated by Washington law, it is unclear what rights, if any, it has to convey. Other courts have rejected similar suggestions. [Citations omitted.]
If MERS has no rights that it can assign, the parties are back to square one: The original holder of the promissory note must be found. The problem is that many of these mortgage companies are no longer in business, and even if they could be located, it is too late in most cases to assign the note to the trusts that are being tossed this hot potato.
Mortgage-backed securities are sold to investors in packages representing interests in trusts called REMICs (Real Estate Mortgage Investment Conduits), which are designed as tax shelters. To qualify for that status, however, they must be "static." Mortgages can't be transferred in and out once the closing date has occurred. The REMIC Pooling and Servicing Agreement typically states that any transfer after the closing date is invalid. Yet few, if any, properties in foreclosure seem to have been assigned to these REMICs before the closing date, in blatant disregard of legal requirements.
The whole business is quite complicated
, but the bottom line is that title has been clouded not only by MERS but because the trusts purporting to foreclose do not own the properties by the terms of their own documents. Legally, the latter defect may be even more fatal than filing in the name of MERS in establishing a break in the chain of title to securitized properties.
What This Means for Eminent Domain Plans: Focus on San Bernardino
Under the plans that the San Bernardino County board of supervisors voted to explore, the county would take underwater mortgages by eminent domain and then help the borrowers into mortgages with significantly lower monthly payments.
voiced at the Aug. 16 hearing included suspicions concerning the role of Mortgage Resolution Partners, the private venture capital firm bringing the proposal (would it make off with the profits and leave the county footing the bills?), and where the county would get the money for the purchases.
A way around these objections might be to eliminate the private middleman and proceed through a county land bank
of the sort set up in other states. If the land bank focused on properties with MERS in the chain of title (underwater, foreclosed or abandoned), it might obtain a significant inventory of properties free and clear.
The county would simply need to give notice in the local newspaper of intent to exercise its right of eminent domain. The burden of proof would then transfer to the claimant to establish title in a court proceeding. If the court followed Bain, title typically could not be proved and would pass free and clear to the county land bank, which could sell or rent the property and work out a fair settlement with the parties.
That would resolve not only the funding question but whether using eminent domain to cure mortgage problems constitutes an unconstitutional taking of private property. In these cases, there would be no one to take from, since no one would be able to prove title. The investors would take their place in line as unsecured creditors with claims in equity for actual damages. In most cases, they would be protected by credit default swaps and could recover from those arrangements.
The investors, banks and servicers all profited from the smokescreen of MERS, which shielded them from liability. As noted in Bain:
Critics of the MERS system point out that after bundling many loans together, it is difficult, if not impossible, to identify the current holder of any particular loan, or to negotiate with that holder... Under the MERS system, questions of authority and accountability arise, and determining who has authority to negotiate loan modifications and who is accountable for misrepresentation and fraud becomes extraordinarily difficult.
Like MERS itself, the investors must deal with the consequences of an anonymity so remote that they removed themselves from the chain of title.
On Aug. 15, the Federal Housing Finance Agency
threatened to take action against municipalities condemning federal property. But to establish its claim, the FHFA, too, would have to establish that the mortgages were federal property; and under the Bain ruling, this could be difficult.
Setting Things Right
While banks and investors were busy counting their profits behind the curtain of MERS, homeowners and counties have been made to bear the losses. The city of San Bernardino is in such dire straits that on Aug. 1, it filed for bankruptcy.
San Bernardino and other counties are drowning in debt from a crisis created when Wall Street's real estate securitization bubble burst. By using eminent domain, they can clean up the destruction of their land title records and 400 years of real property law. And by setting up their own banks
, counties and other municipalities can use their own capital and revenues to generate credit for local purposes.
Homeowners who paid much more for a home than it was worth as a result of the securitization bubble have little chance of challenging the legitimacy of their underwater mortgages on their own. Insisting that their state and local governments follow the lead of Washington State and San Bernardino County may be their best shot at escaping debt peonage to their mortgage lenders.
Ellen Brown is an attorney and president of the Public Banking Institute. She has written eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free (2010).