Monday, November 14, 2011

Dennis Santiago: Are Advocates Against Responsible Banking Being Responsible?

(Originally posted to the Huffington Post)

The politics of California are a minefield of self interests. Very few laws get passed here that, when examined in detail, do not lead back to someone hoping to make a mint by creating a monopoly advantage for a product or patent to lock competitors out of the market under the guise of some made up cover story. In my lifetime I've sadly witnessed the greater purpose of government to promote the public good taking a back seat on the bus to these affairs of both special interest capitalism and its often equally diabolical twin, unionism. This cancer to frustrate and neuter government at all levels so that it is pliable to special interests is now accepted as "the way it is" by a body politic told more and more that ordinary people no longer matter.

Here's the thing. It doesn't have to be this way. It was never supposed to be this way.

When someone asks me what my politics are I tell them I'm a Californian. I'm that eclectic open minded person with a broad mix of social values that defy party and cultural boundaries with a reserved fiscal bent that does not mind spending on things we need to better our lives. The kind of person special interests loathe because we're actually smart enough to see through their smoke screens into the darkness of their greed and fear. I run into many other fellow Californians of similar ideals with genuine interest in the betterment of our neighbors, our state and our nation. And it's high time our voices called out to clean up the mess decades of divide and conquer have heaped upon our lives.

Shortly after I wrote the HuffPost blog "Economic Recovery Means Learning to Export Unemployment" pondering ways we might get things started again, I was on a speaker panel on capital availability in Los Angeles where one public official responsible for managing credit enhancement guarantees for small businesses basically said "we are waiting for the problem to go away" or in other words, no one in the public or private sector is taking a risk on ordinary people. This struck me as particularly macabre because in my day job evaluating banks, I see so many of them sitting on piles of deposits that are not being lent. That's how they are supposed to make money by the way. Borrow from depositors at one rate. Lend it with interest and make a living on the spread. For smaller businesses who's "second source of payment" credit enhancement is often based on the owner's real estate equity, it's particularly tough because no one is sure what that back up capital is really worth over the next one or two business cycles. It's tougher still when federal agencies aren't able to provide needed credit enhancement to small business owners to help the banks qualify their backup capital to buffer the systemic shock of these real estate valuation uncertainties, uncertainties themselves created and perpetuated by government policies that are even now incubating swan eggs the color of who's feathers we have no idea. Washington and Sacramento should both take note. If you want to see business investing come back in this country, this is one of the tangible puzzles to solve.

The truth is when no one believes the U.S. economy is going anywhere, there's no demand to borrow. So instead, the money circulates in investments; meaning, our money is propping up the fa├žades of Wall Street, a beast whose appetite for cash to leverage is never ending. Bankers know full well this isn't healthy. They whine about it to me all the time. Evidence of their angst can be found in the extreme competition to win what few lending deals are out there. Ask any commercial lender how many proposals they chase each week and how many bidders they have to outmaneuver to win one. But can you blame business owners for not wanting to take the risk? Would you build a company only to see it outsourced to the world funded by the investment banking money flow of your own community's municipal debentures?

And so I turn to pondering the inconsistencies of the lobbying arrayed against Richard Alarcon's now long hampered quest to bring Responsible Banking to the City of Los Angeles. Born in response to the banking crisis, Alarcon's initiative asks questions important to all communities in this country. Do the financial institutions, services and banks that do business in and with a city benefit the economic interests of that city? Is the wealth and treasure of the people of a region demonstrably reinvested in that region? Are the individual members of the financial apparatus partners or spectators about doing something to better conditions? Given that our tangible economy is at a standstill, we all know the answer is that we could be doing better. I believe the City of Los Angeles is very brave to ask these questions. And make no mistake about it every other municipality in the League of Cities is watching how the politics and lobbying goes here because they are also asking the same questions. These concerns are not just the Imagineering of La La Land.

Opposing Councilman Alarcon's quest are other L.A. City Council members who talk about the onerous costs of implementation. This is something I've always found odd about working with Los Angeles going all the way back to the days I worked with Rebuild L.A. People think they have to do everything in isolation building 100% of the infrastructure that no one else can use. It inflates the perception of the magnitude of the problem to Hollywood proportions, a bit parochial for a thought leader community when you think about it. The fact of the matter is that Los Angeles is now late to the party with its contribution to a comprehensive top to bottom re-make of the U.S. systemic risk management process. While L.A. dawdled, the system moved on. The United States is implementing Dodd-Frank Act and this agenda captures with it are many of the questions Los Angeles was at one time at the forefront of asking the banking and finance system.

Opposing rhetoric I've heard purports that "the Responsible Banking Ordinance has not made much progress because it is a misguided effort. It asks banks seeking to do business with the City to hand over a massive amount of information, which the city would then use to "score" the banks. The bottom line is this would not help Angelenos, but it would burden the City with a new layer of bureaucracy that creates a mountain of paperwork, with little to no real effect."

The talking points that have been circulating for the last year or so go on to amplify the scare about onerous costs by saying that "Banks are already extremely heavily regulated and the information being requested is either already publicly available, or totally proprietary and won't be handed over. The information requested would result in the city getting literally thousands of pages of data. What do we do with that info? The city does not have the personnel or expertise to process and organize a mountain of data. At the same time, the ordinance is vague, unclear and subjective, which undermines the stable, well-understood regulatory environment that is so critical for both the city and the banking industry, when they conduct business with each other."

That's pretty strong stuff so I wondered which of the large over $50B banks and smaller under $50B banks doing business in the State of California one particular group, the Central City Association, actually speaks for. The list turns out to be a rather small one. According to the organization's website the following banks are presently members.

Banks Who are 2011 CCA Members
per CCA's website Operating Bank Assets as of 2Q2011
per FDIC Call Reports
1st Enterprise Bank $525M
American Business Bank $1.1B
Bank of America Corporation $1,684.3B
Bank of the West $59.5B
City National Bank $22.1B
East West Bank $21.8B
JPMorgan Chase & Company $1,932.7B
Union Bank of California
aka Union Bank National Association
a member of Mitsubishi Tokyo Financial Group, Inc. $79.6B
US Bank a member of US Bancorp $316.7B
Wells Fargo & Company $1,153B

This is hardly a comprehensive list of the banks actively engaged in the financial infrastructure of California. Of these two banks, 1st Enterprise and American Business Bank are local players that would have no trouble passing the City's criteria for a favored bank under the evaluation rules of the proposed ordinance. All of the other banks have assets greater than $10B which means they are all going to have to comply with emerging federal regulations mandated by the Dodd-Frank Act to perform scenario stress testing which should includes analysis of potential stresses stemming from asset and liability exposures to regional economic zones, you know like Los Angeles County. The last version of the Fed/OCC/FDIC guidance I read on this indicates they can expect to spend somewhere in the neighborhood of $250K per year per FDIC certificate operating unit if I counted my estimated work hours to comply right. And three of these banks are so large that they are further required to spend millions preparing and maintaining Large Complex Institution (LCI) Resolution Plans under Dodd-Frank. But the big joke is that when all is said and done, from the analytics I have on these banks, they'd all wind up advantaged in winning new City business under L.A.'s proposed rules.

The bottom line is the bank's computers are already going to be running these numbers whether or not Los Angeles or any municipality in this country asks for a subset of these reports to be forwarded to them for local analysis purposes. Being this late to the party is actually working in favor of the Councilman Alarcon's locally focused version of Dodd-Frank transparency. It looks to me that ultimately what the City will discover if it ever gets around to passing the ordinance is that it can find a workable pathway to ask for those reports to be filtered and made consumable as executive summaries knowing the banks are on the hook to get those numbers right for the Feds lest they run afoul of the U.S. Banking Act. Funny thing about computers. Once you program them to do something, all you have to do to get them to do something similar is change the code a little. The cost of transparency is decreasing as time passes, well as long as L.A.'s penchant to try to re-invent everything in the most expensive possible way can be kept in line. And if enough cities in California ask for the same kinds of focused reports, it becomes something that even the more hobbled bureaucracy of Sacramento - with the even greater plethora of special interests and lobbyists - might yet learn to facilitate some of the process for the public good. And that might put the Golden State on a path to glisten.

So again I ask, why the hesitation?

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