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La-La Land Gets Feisty

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L.A. City Councilman Richard Alarcon is hopping mad about the way his City and his people are being treated by the banking and finance industry and he's building a template for how the City of Los Angeles will respond to it. He wants banks doing business with the City to prove they are involved in "investing local" and he is not of a mind to shy away from divesting Los Angeles' treasure from banks who do not.

And how much treasure is that? Start with around $28.9 billion dollars in city operating and related pension funds the City can influence directly. Then there's the wealth of ordinary people and businesses local leaders can influence by example. When I testified to the Jobs and Business Development Committee on February 23rd I included in my testimony a 17 page table detailing the amounts of deposits in small and large bank branches in every zip code in Los Angeles County. It contains a powerful message that the actions of the City of Los Angeles messages a resident and commuter economic base of nearly $300 billion dollars in bank deposits presently split equally between large and small banking institutions. If such an effort activate an "invest local" movement succeeds, that is a potential public-private economic powerhouse.

The hearing aired several public frustrations centering on issues including foreclosure prevention, access to banking by "Unbanked and Under Banked" persons and a most interesting side trip into the world of swaps.

Alarcon reported that his 7th District faces the highest rate of pending single family home foreclosures in the City. With the 2010 wave of Option-ARM mortgage resets still to come, he has even more future social stress to weigh on his mind. A packed room filled with the yellow t-shirts from the Alliance for Californians for Community Empowerment (ACCE) and purple t-shirted members of the Service Employees International Union (SEIU) made their feelings known with the thunder of a crowd watching a Laker game. What was their message? The real net effect of the nation's foreclosure prevention programs has done diddly. They do have a point. People are not only losing their homes they are suffering extraordinary emotional stresses dealing with a seemingly heartless loan modification process. A group from the California Reinvestment Coalition (CRC) even flew all the way down from San Jose to direct their anger specifically at the practices of the Bank of America who they allege as being singularly uncaring compared to every other bank dealing with these issues in the San Jose area. They reported they even went to Bank of America's headquarters to express their concerns but alas Charlotte does not know the way to San Jose.

The truth is that there's no easy answer to the foreclosure problem for anyone involved with the process, bank or otherwise. Alarcon took a long view about loan modifications in his remarks. He opined that loan modifications are just kicking the can down the road and worried out loud that we'd wind up back at square one five years from now unless the programs ultimately morph into substantive principal reduction programs. The fly in that ointment though is that one can't really offer mortgage principal relief to the troubled borrowers without creating an even greater political demand for equal or better principal relief for the far larger number of current mortgage obligors as well as a new series of tax credits for lien free real estate owners. Never mind the considerable effect it would have on bank balance sheets as mark-to-market rules trigger a mass devaluation of book assets, policy makers need to worry just as much about the implied hit to their property tax base. Like I said, there are no easy answers to this one. My gut still says we are looking at some sort of transformational outcome that will turn renters back into renters en masse. The real question is will be the landlords be a new wave of private barons, deputized banks turned unwilling REIT, federal GSE's morphed into national rental property management companies, or does Los Angeles have in mind another one of those public-private coops that have been tried in the past be the City? The words from a song echo in my head. "life is so strange ... destination unknown".

Here's the thing, there isn't actually anything in the draft ordinance that guides an implementable operational outcome to the issue at this time. Nebulous laws aren't the way to San Jose either. If "responsible banking" in Los Angeles is to deal substantively with the issue of foreclosure, the control language outlining specific, actionable and realizable expectations of bankers and the specification of the public apparatus to that will be created to manage the process needs to be added to the text of the final ordinance.

Councilman Alarcon also noted that fellow committee member Councilman Bernard Park's 8th District contains the highest concentration of unbanked and under banked persons in the City of Los Angeles. It's not a small problem. The FDIC's 2009 Survey of Unbanked and Underbanked Households estimates that 7.7 percent of U.S. households are unbanked - meaning they have neither checking or savings accounts - and 17.9 percent of U.S. households are underbanked - meaning they make extensive use of far costlier non-bank alternatives to their financing needs. That's a whopping 30 million households. The FDIC's findings indicate the problem disproportionately impacts African-Americans, Hispanics and American Indians five to seven times greater than Whites and Asians. And so we get to one of the expanded objectives of City of Los Angeles Motion 09-0234 also known as the "Responsible Banking Practices" motion to compel banks doing business with the City to help address this concern. It's a big ask and one that is a bit more complex than both government and banking probably realize.

I've seen these we've got a good idea initiatives in a multitude of business and civic contexts now and I have to tell you that displacing establish incumbent businesses is not as easy as one thinks. It costs money for any business to establish a physical point of presence in a community and Los Angeles is a tough town to do that in. Bank accounts cost overhead to support and you typically have to maintain a minimum balance of some sort to gain service fees relief from a bank. Unbanked people tend not to like costs showing up as recurring fees on their already meager account balances. The check cashing shop down the street may cost more but the charge only hits when you actually have a check and the payday loan guy gives you money you need now. My message here is not that I'm supportive of higher cost alternatives to banking. Quite the contrary! I cut my teeth on civic involvement with Rebuild LA almost twenty years ago. I've witnessed my share of cycle of poverty perpetuating infrastructures and understand that it's important to find and implement sustainable game change solutions.

What I am saying is that a municipality contemplating mandating that banking and financial services vendors must somehow compete with entrenched "irregular immediacy" financial services models as a predicate to being eligible to deliver conventional services is a lot to ask from a portion of the banking industry that has little demonstrated business acumen addressing this kind of market demand profitably.

Both of the above issues are certainly intriguing social responsibility challenges to ponder. Personally, I'd suggest making them agenda items for a banking practices task force to investigate separately rather than try to incorporate it into the original tenets of 09-0234. It'll bog it down and in my opinion Los Angeles does not have the time to let that happen. Better to leave appropriate hooks in 09-0234 to bring the outcome of the task force's recommendations back into the process to add to a bureaucratic vehicle created by an ordinance. The immediate need remains to perfect the primary motion into an draft ordinance that will actually be "operable" and pass it into law.

Where to improve?

The Los Angeles motion is presently moving along a track that could result in an ordinance that is strong on policy and weak on efficacy. The February 23rd hearing further amplified policy but left it up to the staff apparatus of the city to continue to pursue efficacy.

The draft from the Los Angeles Chief Legislative Analyst's (CLA) office is based on a copy of an old Philadelphia ordinance. The inspection criteria matrix is a direct extract from the 1978 CRA law. I have to tell you straight up. A photocopier is not a proper tool for designing a micromanagement version of the Community Reinvestment Act (CRA) able to inspect, analyze and verify compliance with "invest local" policies by any municipality, county or state. Something more specific and actionable is needed. Something that, as committee member Bernard Parks alluded to several times during the hearing, will stand up to legal scrutiny. I see the stakes in that poker hand and raise you to stringent legal AND political scrutiny.

The most glaring flaw in the draft is reliance on federal CRA scores. CRA ratings are federal ratings that are updated infrequently, once every three years nominally. The scores are also computed looking at the bank as a whole AND focusing on community involvement in its' primary markets of presence. Thus a bank like say the Bank of New York - Mellon or Capital One who do business with the Los Angeles area can argue well within the limits of statutory reason that they owe Los Angeles or any other community outside their local areas nothing under CRA guidelines. No boys and girls, I did not make that observation up. Forescee Hogan-Rowles from the L.A. public-private Community Financial Resource Center (CFRC) did and I figure the on the record observations of someone who is also a Commissioner of the Los Angeles Department of Water and Power deserves the stature of ordinance designing guidance in this process. There's a lot more brain trust out there that can help the City of Los Angeles get this template right. The CLA and CAO need to be taking advantage of it.

Naturally you utter stuff like this within earshot of people and the next question becomes, "Ok if not CRA then what Dennis?" Time for me to put my mouth where my foot is so here's this week's lesson in financial analysis and requlatory reporting regime design. In this case, all you city councils, county boards of supervisors and state legislatures please pay close attention.

The City of Los Angeles desires to annually assess using objective data on the specific "local economy impact" of banks wishing to do business with the City. These data will be used as part of the City's criteria to qualify the eligibility of banks to conduct such business. The City further specifies that these objective tests be based on "evidentiary grade" public document data submittals and that the City wishes to create an effective solution to capturing this data that can be scaled for use by other government entities similarly interested in "local" efficacy measurement.

1. All banks are required to submit quarterly Call Reports to the FDIC as all credit unions are similarly required to do so with the NCUA within 30 days of the end of each operating quarter. The City is aware that these Call Reports are entity wide reports that are not locality specific however it does imply that the reporting infrastructure to file these reports exists.

2. All banks are also required to file a branch level of detail Summary of Deposits report commensurate with the FDIC timed to coincide with the June 30th (2nd Quarter) Call filing each year.

3. Evaluation categories,

a. Local institutions: These will be defined as financial institutions with depository and lending operations contained within Los Angeles, Orange, Santa Barbara and Riverside counties. The economic impact of these institutions will be considered to fall within a City of Los Angeles greater economic zone benefitting the resident and commuter populations of the City. The primary test for qualifying as a local institution will be their listing of branch locations as reported in the most recent FDIC Summary of Deposits reference file.

b. Broad-Based institutions: Broad-based institutions are depository and lending operations with greater than 10% business activity in locations outside of zip codes contained within the economic inclusion zone. In the case of multiple unit bank holding companies (BHC's), the broadness test for an institution will be considered taking into account all of the banking units of the BHC.

4. Annual reporting data,

a. For local institutions, the June 30th FDIC Call Report or NCUA 5300 filing shall serve as the basis of analysis.

b. For broad-based institutions, a special June 30th Call Report styled equivalent filing encompassing just those branches identified within the zip codes of the Los Angeles economy zone detailing lending information of interest to the City shall serve as the basis for analysis and comparison against local institutions. (final requirements TBD to be identified by the yet to be commissioned L.A. Banking Practices Committee)

c. All institutions are to additionally file an annual statement detailing their past year performance on loan modifications and access by "unbanked and underbanked" persons specifically within the Los Angeles area as well as a statement on their goals for the coming year. These goals to be part of each succeeding year's performance evaluation. (Again, the specifics of what the statement needs to have in it should be delegated to a commission of specialists to ensure the best possible capture of objectivity.)

I've rambled almost enough. I'll end this section with one additional message to the FDIC and NCUA. You can make this process a lot easier on America by adding the most critical pieces of information on lending to the data collection set and output fields of the SOD file. That would enable scaling the process to apply across the nation as a level playing field. I'm more than happy to help draft a Notice of Proposed Rule Making to facilitate.

Hey so what ya'll wanna bet all them prarie dogs in banking are looking up right about now wondering what that cracking sound that just went overhead was?

And now a side trip into swaps.

This is actually more my partner Chris Whalen's commenting territory and I'll leave it to him to do any definitive banter on the topic elsewhere but it seems that Los Angeles got talked into one of those "hey sovereign government you know you can lessen the cost of your municipal bond issuance by also purchasing a swap deal with it" things. This one was a good deal for the City the first four years as interest rates chugged along normally but when Ben Bernanke decided the Fed was going to artificially drive interest rates to zero percent to save Manhattan Island from itself it put the City of L.A. in the awkward position of shelling out $10 million a year in windfall profit money to the Bank of New York - Mellon on a deal that last until 2028 OR the City can buy out of it for $29 million which by the way is equal to three years of payments aka one business cycle of look ahead modeling aka about where Ben Bernanke might have changed interest rates in God knows what direction by then territory. Read the world's newspaper about sovereign debt boys and girls. They aren't the only ones that got nailed with that one. My mechanic likes to point out whenever I try to play with my car too much that "it costs money to go to the school of hard knocks". But a Federal Reserve artificial windfall and there was no pre-packed out in the deal structure protecting both parties against severe non-normal departures from the projected interest rate curve model at deal instantiation? Hmm? I think I'll leave this one here for the moment.

It's time to close the kimono for the weekend. This one had a lot of babble not normally exposed to ordinary people. Hope you're being entertained.

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