Where can banks invest/ give loans?

I sent an email to the Office of Thrift Supervision:

Can you tell me what kinds of regulations there are regarding where my commercial bank can offer loans/ investments?

Are there regulations preventing currency speculation, for instance?

Im trying to understand rules surrounding where the bank money can go.

If you dont know, can you direct me to a department that does?

A Moment of Synthesis

As mentioned earlier, I would like to visually diagram this research and info.

What are the categories:

Regulations/ Rules/ supervisory bodies
(Fed, BIS, Office of Thrift, cra, fdic...)

Bank assets and liabilities...
(stats about bank profits...what is done with bank assets-complicity,
experiences of those affected by banks...good and bad)

Notable Facts

Recommendations at the various levels...regulatory and within bank and support for alternatives

It seems there is room for....

A website in the US about banks --why banks need to be reformed...calling for a specific set of policies, an advocacy/ educational/ even art project. That could be fun --an NGO about banking, finance, actually intervening and advocating and offering excellent explanation and alternatives.

An interesting model of such a website: bankwatch.org --feels grounded and thoughtful, credible. They are connected to brettonwoodsproject.org

How big the financial industry is....

from UFE:

How Did Finance Capital Gain Ascendancy Over Industrial Capital?

1. This summarizes an excellent article by Walden Bello, "Architectural blueprints, development models, and political strategies," Focus on Trade Number 34, April 1999

This pre-eminence of the financial sector is related to the crisis of dwindling growth or deflation which as increasingly overtaken the real sectors of the global economy. This crisis has its roots in overcapacity or under-consumption, which today marks global industries from automobile to energy to capital goods. Diminishing, if not vanishing, returns in industry has led to capital being shifted from the real economy to squeezing "value" out of already created value in the financial sector.


The result is essentially a game of "global arbitrage," where capital moves from one capital market to another, seeking to turn profits from the exploitation of the imperfections of globalised markets by taking advantage of interest-rate differentials, targeting gaps between nominal currency values and "real" currency values, and short-selling in stocks, that is, borrowing shares to artificially inflate share values then selling. Not surprisingly, volatility, being central to global finance, has become as well the driving force of the global capitalist system as a whole.


... since differences in exchange rates, interest rates, and stock prices are much less among the more integrated Northern markets, movements of capital have been much more volatile between the capital markets of the North [and] the so-called "Big Emerging Markets" of the South and Asia. Thus... the crises of the last few years have been concentrated in the emerging markets. Since late 1994, we have had Mexican financial crisis, the "Tequila Effect" of this crisis in Latin America, the Asian crash, the Russian collapse, the unravelling of the Brazilian real, and the spinoff of the Brazilian crisis on the rest of Latin America.


... finance capital operates... "in a realm close to anarchy." That deregulation at the national level has not been replaced by reregulation at the international level is because finance capital has accumulated tremendous political power over the last two decades.

2. Here is a more historical answer from economist Susan Mesner:

By the 1960s, the US was no longer a leader in world trade but still unquestionably the leader in financial markets. It was to our advantage to arrange the rules of the game so as to keep the position. The response of financial and corporate leaders to postwar restrictions was to seek ways to expand activities while avoiding constraints, so there was a real push to liberalize and deregulate financial institutions beginning in the 1970s. The Eurodollar market was created in the late 1950s because of 1) growth in world trade, 2) desire to elude financial regulations, 3) political considerations, i.e., Soviets' need to hold dollars offshore during Cold War. The system mushroomed in the 1960s as a result of new US restrictions on capital outflows and banking regs. When the gold window was closed in the early 70s, the price of currency became market determined, which marked the collapse of the Bretton Woods era. It's worth noting that in 1973 there was an international effort to give the IMF the power to force states to cooperate in controlling financial movements--it was an ambitious proposal backed by twenty major countries, and ultimately blocked by the US. Financial and corporate leaders saw where the advantages were early on.


Also see Robert Brenner, "The Economics of Global Turbulence," New Left Review 229.


3. And here are some FACTS ON THE GROWTH AND ASCENDANCY OF FINANCIAL CAPITAL:

CHIPS, the Clearing House Interbank Payment System, owned by 11 big NY banks, ties together 142 banks and does 150,000 transactions a day, $2 billion a minute, about $1 trillion a day, half the electronic transfers in the world. Financial assets have been growing at 2.5 times the rate of GDP since 1980. $35 trillion in financial assets were traded globally in 1992 (twice the GDP of the 23 richest industrial countries). The biggest financial market is exchange of currency: 60 times world trade in manufactured goods, $1.3 trillion a day. So volatile that 66% [of the transactions?] hold money less than seven days, only 1% as long as a year. International capital disciplines states. It's not just buying politicians, it's withdrawing money from countries when they adopt unfriendly policies. 1994: investors decided Mexico was unstable and withdrew billions, destroyed the peso, in less than three days. A few 1000 transnational money managers make the decisions. More typically, bondholders can dump holdings, drive up interest rates, and slow economic growth. ("Globalization and the technological transformation of capital," Jerry Harris, Race and Class 40:2/3, pp 21-35)


Question: Why did finance capital gain power over manufacturing capital, which had more power 1945-1970 than it has now? Because the state stepped back from the role of coordinating the economy, and financial markets took over? Because the early 70s saw a crisis in profits/ the rate of profit? Because expansion halted, OPEC extracted a huge amount of capital, and recycled it to banks to invest? Because when states abandoned Keynesianism, mass demand started to erode, huge pools of wealth started to concentrate, and those became available to banks & other financial institutions to invest? Cause or effect?

More about the financial industry that profits from the poor

There is a book called Merchants of Misery: How Corporate America Profits from Poverty, published by Common Courage Press

As reviewed by Anitra Freeman:

"Check cashing outlets. Pawn shops. Used car lots advertising "No credit? No problem!" Familiar sights in Seattle, or in any city of any size. Often a welcome sight: when you have a disability check but no checking account, or the check's run out and you need to turn some of your belongings in storage, that you can't use, into money that you can use.

Reading Merchants of Misery gives a different perspective on these services. This book is a collection of articles by national-level journalists for such publications as U.S. News & World Report, the Wall Street Journal, the New York Times, Barron's, and other major newspapers and magazines...

The articles collected cover the uses and abuses of the "fringe economy" through banking, check cashing outlets, pawn shops, home repair rip-offs, car loans, insurance, low-income rental housing, rent-to-own plans, trade school scams, and - woven through it all - politics.

Businesses that target the "fringe economy" make $200 to $300 billion a year off of the marginalized - the poor, the working-class, and often the minorities - who can't get loans from traditional institutions. And yet, many of the traditional institutions that deny service to the poor - by not placing banks in working-class neighborhoods, by refusing mortgages in minority neighborhoods , etc. - these same institutions own a majority of the businesses that profit from the poor, through the nontraditional market."

Later, this review shares a story from the book about how racism works its way into financial services:

"Joseph Boyce, a black editor at the Wall Street Journal, wrote in 1992 about trying to sell his house in Atlanta. When white appraisers came in, Boyce's family was present. The appraisers set the value of the house at just over $70,000. Before a second set of appraisers came in, Boyce removed all his family photos and had his secretary and her son, who are white, be there instead of his own family. The second time around, the house appraised $12,500 higher."

Citigroup, JP Morgan Chase and Bank of America. These are the biggest banking players. I should research the claims that they are dangerous and harmful entities.

Citigroup

From a group called citiaction: Citigroup is "comprised of Citibank, investment house Salomon Smith Barney and Traveler’s Insurance...with operations and customers in 134 countries around the world.

From a partnership with Maxxam Corporation to destroy the California Redwoods, to helping the World Bank and Exxon-Mobil build an oil pipeline through the rainforests of Africa, Citigroup profits from environmental devastation...From mining the Amazon rainforest to the displacement of millions for China’s massive Three Gorges Dam, Citigroup is underwriting the deal...

Sounds like they gave loans to Enron, too.

JP Morgan

Bank of America

Oh my --Wal Mart has an application at the FDIC to create a WalMart Bank.

Smithy mentions somewhere --perhaps in episode 2-- a couple of facts I want to review related to the money lending power of big corporations; she specifically mentions GM. As I recall, almost a half of GM's profits come from their loan department!

(It's in Episode 9, the one about Jack Welch, who is/was a long time CEO of GE -not GM: "GE Capital [is] the largest non-bank financial institution in the world and almost half of the modern GE...")This goes on the list I will make of REMARKABLE FACTS from this research.

Another point Smithy makes is that only a 1/5 of investments come from banks these days. The rest come from individuals and hedge funds? Here it is, from episode 3:

"As income and wealth gaps have widened few people have more money, and the majority of the people are getting less. Many of those that have accumulated lots of the money go looking for lots of places to invest it, or gamble with it, so that it will make more. This has lead to an explosion in non-bank financial institutions and the use of corporate bonds in lending. Neither mechanism "creates money out of thin air" because the players don’t have a banking license. But because the players have accumulated so much of the existing money they can become financiers themselves by lending out the piles of dough they’ve accumulated. Thus, according to Martin Mayer in the book "The Fed", only one fifth of commercial and industrial financing now comes from the banks. The rest comes from people and non-bank institutions that have accumulated lots of the existing money."

She adds: "This has several implications. First the Fed’s powers over the market is more limited because there are so many non-bank financiers, so the Fed has to do whatever it can to please these non-bank markets and keep their confidence in the whole financial system alive. By necessity this means always pleasing the people that already have lots of money. Second, banks go looking all over the place for new people and entities to lend to since the domestic non-bank corporations abandoned them. This search has been a big part of banks overseas lending adventures and the phenomenal growth in lending to the sub-prime domestic markets over the past decade. The sub-prime market is people with bad credit histories, which often correlates with low income. This loan market has grown 300% from about 75 billion in 1993 to over 300 billion by 2000, according to the Wall Street Journal. Previously the banks wouldn’t touch this market with a ten-foot pole, but in their never-ending search for new borrowers, especially at high yields, this has become a huge growth area."

There is so much info in Smithy --I get new info each time I listen or read her material!

But back to the WalMart Bank idea. Im going to google this.

Very interesting! According to CNN (in early January 2006): In July 2005, the world's largest retailer filed an application with the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation to operate an industrial bank. The company said the bank would be narrowly focused on processing the company's credit, debit and electronic check payments which could save the company millions of dollars in fees that Wal-Mart (Research) currently pays out to other banking institutions."

1,700 people have sent the FDIC letters of opposition...Opponents say: "They may be able to bring prices down until they monopolize an area," he said. "But once they have such a concentration and there is no other business to counterbalance Wal-Mart, they will be able to price however they want."

Another site said Walmart wanted to be able to cash checks for people and sell money orders --my sense is that these are things that poor people tend to use more. You have to pay money to cash a check, at least $3. What are the experiences of poor people with banks --do they tend to not open accounts? It bugs me greatly that Walmart wants to get in on the business of screwing poor people even more --charging them for cashing their checks.

from Jan 26, 2006 WSJ: "Bentonville, Ark.-based Wal-Mart Stores Inc. is trying to obtain a state banking charter in Utah that would be a back-office processing center, handling debit-card, credit-card, and electronic check-transfer payments by customers, the company said. Wal-Mart is looking to establish the bank through the same exemption in banking laws that Greenspan has publicly opposed.

Noting that corporations escape the regulatory scrutiny of bank holding companies, which are managed by the Fed. Greenspan urged Congress to close the loophole because it provides the corporate bank owners with a competitive advantage over other financial institutions.

The Federal Deposit Insurance Corp. must rule on the superstore's application for the proposed bank. It has received more than 1,500 comments in the past six months on the issue. The FDIC has said it will wait for a full board, including a new chairman, before voting."

I also learned: "other companies, from Nordstrom (JWN ) to General Motors (GM ), have bank and thrift charters or hybrid Federal Deposit Insurance Corp.-insured industrial loan companies (ILCS) in tow..." So some companies are also sort-of banks...scary.

Finally, news from a Business Week article from Jan 2005:

"Clearly, Wal-Mart is on the move. Over the past three years, the giant has steadily built alliances with financial-service providers, such as MoneyGram International (MGI ) and SunTrust Banks (STI ), enabling it to offer services such as bargain-priced money orders and wire transfers. It has bank branches operated by partners in nearly 1,000 of its massive supercenters. And it has stepped up the pace. SunTrust is experimenting with nearly 45 in-store bank branches co-branded as "Wal-Mart Money Center by SunTrust," with plans to expand to about 100 of them by early 2006.

Already, Wal-Mart customers are reaping the benefit. They can cash payroll checks for just $3, transfer money to Mexico for $9.46, and buy a money order for 46 cents. Some competitors charge twice as much. These are mostly high-margin, highly fragmented businesses in which the poor and immigrants are sometimes at the mercy of unscrupulous operators. "Traditionally, nonbank vendors of financial services have charged an arm and a leg," says David Robertson, publisher of The Nilson Report, a newsletter about credit and debit cards. Adds Gary Stibel of New England Consulting Group in Westport, Conn.: "Wal-Mart is giving people in lower-income brackets opportunities in financial services they never had before."

Financial services could open a rich new vein of profits for Wal-Mart as it seeks to remain a growth company. By one rival's estimate, the market for services that Wal-Mart already offers is worth about $5 billion a year in fees, leaving plenty of room for it to slash prices while making a profit. As it has with other goods, Wal-Mart will slowly "collapse the price umbrella," squeezing check cashers and wire-transfer leader Western Union Financial Services (FDC ), predicts Robert G. Markey Jr., consultant Bain & Co.'s director for financial services.

For the time being, though, the basic services it offers represent little more than a rounding error for the $287 billion goliath. Wal-Mart doesn't break out results for the unit, lumping them into the company's "other income," which totaled $2.1 billion in the first three quarters of the last fiscal year. That was up 31% but amounted to just 1% of total revenues. Still, there's huge potential for growth. Says banking consultant Bert Ely of Ely & Co. in Alexandria, Va.: "They're developing, in customers' minds, a link between Wal-Mart and going to the bank. That has powerful long-term implications."

PERFECT FIT FOR UNDERDOGS
Not all financial-service suppliers are willing to ride this tiger. Jane J. Thompson, president of Wal-Mart Financial Services, concedes that "some of the leaders in the industry don't want to hurt their margins and don't want to work with us." But MoneyGram, with a market share of around 1% in global money transfers, is a distant No. 2 to Western Union, which has 12%. For such players, Wal-Mart promises huge volumes of business through its 3,100 U.S. stores and more than 100 million customer visits a week. As the underdog, MoneyGram was already cost-conscious and focused on growth, not on protecting margins -- a perfect partner for Wal-Mart, says MoneyGram Vice-President Daniel J. O'Malley. And it can't hurt to learn how Wal-Mart does business, notes SunTrust Executive Vice-President Christopher T. Holmes, especially if Wal-Mart achieves full-fledged banking status.

Could Wal-Mart really become a bank? First it would have to take on current prohibitions on combining banking and commerce. The laws were designed to prevent a big player such as Wal-Mart from denying credit to competitors or shifting losses from its retail business to an insured bank. But many expect Wal-Mart to overcome those rules. Ronald K. Ence, vice-president of Independent Community Bankers of America, says Wal-Mart lobbied last year to expand the banklike powers of the ILCs. A bill that passed the House, but not the Senate, in 2004 would have allowed unlimited interstate banking, but only for those with at least 85% of their business in financial services.

Wal-Mart denies any such lobbying. It tried to buy a savings bank in Oklahoma in 1999, only to be blocked by the Gramm-Leach-Bliley Act, which overhauled federal banking law. And the California legislature halted Wal-Mart's plan in 2002 to buy a small ILC.

Yet if Wal-Mart were to gain full banking status, it would be able to offer everything from checking and savings accounts to mortgages, car loans, and even small-business loans at prices that rivals could be hard put to match, let alone beat. "There's no question, they want to have a nationwide financial-services network. If they do, there's no doubt in my mind they'll be able to do to community banks the same thing they've done to the local grocery store and the local hardware store and the local clothing store," says the community banker group's Ence.

Wal-Mart insists its financial plans don't depend on owning a bank or a thrift. "Our strategy is what you see," says Wal-Mart's Thompson, who was once executive vice-president of Sears, Roebuck & Co.'s (S ) credit business. The services Wal-Mart offers are aimed squarely at its core, lower-income customers and employees. Many are among the estimated 56 million American adults who don't have a bank account. "Helping the underserved customer gets right at what we like to be known for," says Thompson, who joined Wal-Mart in May, 2002. More important than the unit's profits, she says, is that these services bring customers into stores more often.

She seems to have learned from Sears's ill-fated effort in the 1980s to create a financial supermarket with its Allstate (ALL ) insurance, Dean Witter brokerage, and Coldwell Banker Real Estate units. Sears lost focus on its core business and found that many customers didn't want to buy mutual funds or insurance from the same place that sold them appliances. "My whole thing is about starting with the customer," says Thompson, who joined Sears in 1988 and took over its credit operation in 1993.

BEING SMART BY BEING WARY
Even though Wal-Mart may be following a gradual approach to avoid Sears' mistakes, it occasionally hints at bigger ambitions. On its Web site, Wal-Mart describes itself as "a trusted name in financial services." In stores, it's slapping its powerful brand on the money centers operating in them.

So far big rivals say Wal-Mart isn't hurting them. 7-Eleven (SE ), which offers check-cashing, money orders, and the like through 1,000 electronic store kiosks, says it's focused on convenience, not offering the lowest price. Likewise, Eric C. Norrington, a spokesman for Ace Cash Express Inc. (AACE ), the nation's biggest check-cashing chain, says Wal-Mart hasn't affected his company's pricing or growth. "Wal-Mart has validated the importance of this market segment. That's attention we welcome," he says.

But as toy retailers, grocers, and even jewelers have painfully discovered, complacency in the face of Wal-Mart can be suicidal. Given the giant's long interest in the financial arena, technological savvy, cheap capital, and instant national reach, small and midsize banks, in particular, are right to be paranoid. Even big ones should be wary. "The mistake would be to stick your head in the sand and try to convince yourself that Wal-Mart is not a factor," says Bain's Markey. For no matter what the obstacles, Wal-Mart seems determined to be a force in finance."

Wizards 7: Water Cycle versus the Money Cycle

How can I get this book?

Organizing Access to Capital: Advocacy and the Democratization of Financial Institutions edited by Gregory D. Squires

I especially want to read this chapter to get more info on the community reinvestment act: "Community Reinvestment in a Globalizing World: To Hold Banks Accountable, from the Bronx to Buenos Aires, Beijing, and Basel" – Matthew Lee

Between 1993 and 2000 the share of single-family home purchase mortgage loans going to low- and moderate-income borrowers increased from 19 percent to 29 percent. According to the National Community Reinvestment Coalition, the share of loans going to black households increased from 3.8 percent to 6.6 percent, while the Hispanic share increased from 4.0 percent to 6.9 percent.

Homeownership rates are at all-time high levels. In the first quarter of 2001 the national homeownership rate rose to 67.4 percent. The Joint Center for Housing Studies found that African American homeownership climbed to 47.6 percent and the Hispanic homeownership rate reached 46.3 percent. In central cities the homeownership rate reached a record high of 51.2 percent in 2000, according to the U.S. Department of Housing and Urban Development. All of these figures were the highest in the nation’s history. Though much remains to be done, clearly there has been progress in recent years.


I learned there is a proposed Community Reinvestment Modernization Act of 2001 (HR 865) introduced by Rep. Tom Barrett (D-WI) and Luis Gutierrez (D-IL) that broadens application of CRA beyond federally chartered depository institutions, increases data disclosure requirements and strengthens oversight responsibilities of appropriate authorities.

"The proposed legislation was inspired by two trends. First, the continuing disparities in wealth, homeownership and access to financial services between economically distressed, predominantly nonwhite central cities and more prosperous, disproportionately white, outlying urban and suburban communities. Second, the continuing consolidation within and among financial services industries that was reinforced by the Financial Services Modernization Act permitting banks, insurers and securities firms to enter into each others’ businesses in ways that had previously been prohibited by federal law.

To address these trends, the bill would enhance access to financial services for citizens of all economic circumstances and in all geographic areas; enhance the ability of financial institutions to meet the credit needs of all communities; and ensure that community reinvestment keeps pace with affiliations that are occurring in the financial services marketplace."

Safety and Soundness: The Office of Thrift Supervision

The man who is starting Common Good Bank mentioned that US banks are regulated by the Office of Thrift Supervision (OTS),which I learned "is the primary regulator of all federally chartered and many state-chartered thrift institutions, which include savings banks and savings and loan associations. OTS was established as a bureau of the U.S. Department of the Treasury on August 9, 1989, and has four regional offices located in Jersey City, Atlanta, Dallas, and San Francisco. OTS is funded by assessments and fees levied on the institutions it regulates."

I will try to print the Examination Handbook, "a comprehensive handbook that combines safety and soundness and compliance guidance." I'm hoping that will clearly explain things like where a bank can invest (i.e. can it do currency speculation), what constitutes a "safe and sound" bank, what a bank has to do to satisfy the Community Reinvestment Act, how much it needs to invest locally...

I am also downloading the 24 page text of the CRA, available at this link.

Common Good Bank: Wow.

There is so much to report from my interview.

I'll write in answers to the questions from the interview.

The idea of starting the bank: He describes this in an article he wrote for a local newsletter, writing, "How did I get into this? Twenty-five years ago I grew weary of ineffectual political campaigns and lackluster leaders. It struck me that our government is so persistently bad, we might have to simply start an alternative government dedicated to the common good, and start ruling. "Hey, kids, let's start our own country!" It was a daydream, a whim, a passing fancy." Twenty years later, he worked with people in his town to create an informal alternative economic system, but found in time that is was a lot of paperwork, a bit confusing, and disconnected from the real world. So they decided to start a real savings banks.


The organizational structure: everyone who is a member can vote (there is a proxy voting system, where a member can let another member vote for them and there is also instant run-off voting); the members elect 7 board of directors --volunteers who are kind of like elders, making sure the bank follows its charter/ mission to create social good. This Board hires (and can fire) the paid 7 Board of Supervisors, who in turn hire the CEO (general manager) and assistant manager and other personell. This gives the bank the best of "both worlds" --commercial banking, which has a paid board, and credit unions, which have a voluntary board.

What kinds of questions can members vote on as a group --they can bring up questions, or vote on questions posed by the elders or supervisors; they can, if I understand correctly, vote on the kinds of investment policies the bank should have. Members will, though, be kept out of the nitty gritty --on the assumption that too many cooks in the kitchen ruins the stew.

Common Good will be FDIC --all Massachusetts banks are required.

The starting a bank description in "Banking Basics" is correct; William is currently filing the paperwork to get the bank liscense, and he is negotiating to see if the amount needed to start the bank can be 2 million rather than 8 million.

William explained to me that banks don't separate loans and investments --they are all called assets. He also said they sell bundles of mortgages. There is nothing productive about this, we agreed. It's good to remember that a socially responsible bank or economy would be productive. How do we define productive--actually producing something of value that is tangible, aside from money, or a service that produces well being in another. Interesting to see how it's complicated to define productive.

I have to re-listen to the audio recording I made, but I think that members can choose to be investors, and also there can be investors who are not members. I think there are only a small number that can be non local.

What inspired him: Mondragon, Ithaca Hours, alternative currencies, Gandhi, some of his friends.

The salary of a commerical bank CEO is at least 100,000-120,000; the CEO of a credit union is paid more like 50,000.

There are regulations for banks about what they invest in. I'm going to find this on the web.

Here is how he describes the benefits of the bank in his essay: "Based on initial survey results, our annual financial benefit to the community is projected to be as much as $120,000 by the end of the first year. This could be extra funding for education, social services, the arts, economic development, or food pantries.
Benefits to individuals will include better rates on deposits, better rates on loans, lower fees, affordable stock options with a planned return of prime minus 1.5% (currently about 5.5%), rebates from local merchants (typically 5 or 10 percent), and a local debit/credit card for purchases and cash withdrawals in every nearby town.Benefits to local businesses will include a focus on small business lending, incentives to buy local, funding for economic development, negotiable credit lines, 24/7 advertising, and local debit/credit cards with no fees and immediate deposit to the merchant's account, processed by touch-tone phone."

I'll listen to the audio and see if there is anything I can add.

I'd like to be able to diagram how this bank is different from a creditunion/ commercial bank, just as he diagrams that.

On Tuesday, I will meet with the founder of a very cool sounding bank-to-be called Common Good.

I should try to tape record this.

Questions specifically about Common Good:

I'm curious to hear how he came up with the idea of starting a bank. What made him choose a bank as a way of creating a better world? I think democracy means a lot to him.

I'd like to understand the organizational structure more, including what kinds of decisions the members will be making. (He has outlined a direct democracy voting system I'll describe more on Tuesday.)

What does/ will Common Good offer that a credit union doesnt? (What are his thoughts about what's good/ limited about credit unions?)

Will there be a board?

Will it be FDIC? What's entailed in that?

Ive read one thing about the process of starting a bank --Iis this close to your process--and where are you in the process?

What are various bank liscences --is there a community bank liscence? What kind will CG go for?

What kind of investment opportunities will the bank have?

Will there be shareholders? stock?

What is meant by merchant tithing? A local credit card?

Are there some banks that have inspired him? Mondragon credit union?


And some more general questions about banks:

Does he know the salary of most commercial bank and credit union CEOs? Does the Board of a commercial bank get paid? How do they get selected?

I'd like to show him my emerging diagram of banks, what comes in, what goes out, how a bank is affected to the whole world of global financial transactions, to the Fed, currency rates...and see if he includes anything else.)

Are there regulations about what banks can invest in? Does he understand how currency stuff works --do banks engage in currency speculation, how does currency speculation work.

What about his thoughts on something like Wainwright? What does he think of the term socially responsible?

I'm really excited to spend a lot of time with Smithy's first "Wizards of Money" episode, called "How Money is Created."

Some highlights of this episode:

Thoughts after interviewing Miette and Ivy

I'd like to present this material for different ages. First, I'll write up the narrative I'm researching here with an all-ages audience, primarily adults, in mind. I think the guiding narrative will be: where shall I desposit my money?

Then, I'll simplify it even more. I just read Langston Hughes' book Black Misery --short sentences next to pictures, describing intimate details about a black child's experience. I'd like something with one or two sentences per page with pictures. That will be fun to distill.

There could also be one that is more of a chapter book, along the lines of Miette's request --a mystery about money (something about a robbery or about an alternative currency, the disappearance of money...) that young characters solve.

There is also the idea of a kid's book, with photos, solely about Common Good, or something based on that, a promising alternative that highlights the problems in the current banking system. Or a kid's book about something in Argentina related to barter and alternative currencies.

However I go with it, I need the research I am doing now.

Making some calls…

Today’s task is to call various banks (Banknorth, Wainwright, Franklin First, Santa Cruz Community Credit Union.) I’m asking them:

“I want to open an account, and I’m researching various banks/ credit unions. Can you tell me where the bank deposits are invested? What percent of the bank assets are given out as loans, and what percent are invested? Who decides where to invest the money?”

First, Wainwright: 1-888-428-BANK

The automated voice speaks Spanish and then English during the opening message. Plus, some salsa-ish music while you wait.

I was transferred to George’s office –George is in charge of investment relations.

George’s assistant answered my question about who decides where the bank should invest: the decisions are made by the president, chairman, chief financial officer, and George who does investment relations.

The assistant on the phone didn’t know where the money was invested or what percent of the total investments/ loans was to cool non-profits (they list a ton on their website…) but she suggested that I suggested I look at annual report, and the 10Q, both on their website. She is sending me a bunch of info, too.

Second, Franklin First Credit Union: 413-774-6700

The person who answered the phone said, “Martha, the CEO can answer that. She’s at a meeting.” I was able to leave a message on the CEO’s voicemail. I mentioned in my message that I recently met with one of the Board members. I also said I’d try her back if I didn’t hear from her.

The CEO Martha called me back a few hours after I left my message! I love that. She said that Franklin First invests in other credit unions and banks. They aren’t allowed to invest in mutual funds. She said they don’t have time to research where the other credit unions or banks invest their money…She invited me to call her back.

Me: Of the amount that is invested by the credit union, what % in credit unions, what % in banks?

Martha: A small percent is invested in other credit unions; the majority in banks. (She added something about credit unions not having rates listed…I should ask her about this again.)

Me: I assume in banks it goes into CD…

Martha: In both credit unions and in banks it goes into CD’s.

Me: You have to keep same fractional reserve as banks?

Martha: She wasn’t certain if it was the same…but they do have a fractional reserve requirement.

Me: Why do credit unions have tax-exempt status?

Martha: Credit unions formed at a time when [lower-income] people got money from loan sharks. To avoid the usury rates of the loan sharks, the people formed coops. The government felt it was the right thing to make these coops tax exempt since the credit unions were people helping themselves…

She recommended I look at the Massachusetts League of Credit Unions website.

Third, Banknorth, the Northampton branch.

The woman who answered said something about the Banknorth investment group making the bank’s investing decisions. And then she said he is based in her branch. And I said, “The investment group is a man? He is based there?” She said, “Actually he’s the western region rep; he comes to this office every once in a while.” She was a little unclear. Turns out he’s based in Pittsfield. His name is S. Morantz. 413 748 8278

I feel a little nervous calling him –funny, how easily I feel intimidated by a big bank. I noticed I worried he’d be angry with me, try to demean me for asking these questions. I didn’t have this feeling calling the other places.

Steve called me back a few hours later, too. Amazing. He was just as gruff and demeaning as I expected. And, as I suspected the woman who gave me his number misunderstood my question. Steve is trained as a broker and helps people invest their own money. He doesn’t help the bank invest its assets. Clearly, not many people call to ask where the bank invests its assets.

He didn’t know the answers to my questions but managed to avoid ever actually saying he didn’t know.

I asked where the Banknorth assets were invested. He said, “Restrictions are heavy. It’s not like Banknorth invests in Google.”

He said the bank tries to lend money to people. There are federal rules about needing to lend to low income people and to small businesses, and Steve thought Banknorth was chartered as a community bank. He said the bank sells its mortgages to other banks or mortgage companies. He kept saying there are rules. The bank most of all wants your money in checking so that it doesn’t have to pay interest. (Oy, that’s where my money is now at Banknorth. They do invest the checking account money. A while back, I had convinced myself that if I kept it in checking where I get no interest, they weren’t actually investing it and thus I was less complicit in a system I didn’t understand.) I asked if he had a guess about what percentage of the bank assets go towards lending, what percent towards investment. He said they try to lend, but I don’t think he knew.

I asked, “Who makes the investment decisions for the bank?” He said, “There is an investment committee. There’s not a lot of latitude given the investment regulations which are there so banks don’t speculate.”

Drawing on my Smithy research, I said, “I thought there weren’t that many regulations. I was actually wondering if banks did speculate on international currencies…”

Steve: “Well, speculating means lots of things. It’s different from hedging. Hedging is not speculation.” [So banks hedge?]

That’s the gist of what I learned from him.

He had asked why I wanted to know this. I said I was looking to open an account and wanted to be in the most ethical bank I could find. He said something sarcastic like good luck, it’s not an ethical system. But he also sincerely added that credit unions or small community banks would keep money local, though they would have fewer services.

Fourth, Santa Cruz Community Development Bank 831-425-7708

I love this place. They are a CDCU –I asked the man who answered the phone how being a CDCU is different from being a regular CU. He said the CDCI focuses on community development. Though other credit unions give business loans (and not all do, actually –Franklin First doesn’t) the Santa Cruz Community Credit Union has special loans and does outreach to low income and other underserved people. They are a nonprofit committed to social and economic justice.

This man put me on hold and asked the Director of Finance my questions. He came back on the line and said they try to make as many loans as possible for their members. Any excess is invested in other credit unions or in Federal Home Loan Bank. The Board of Directors, all members, decide precisely where to invest the excess.
What does it mean for credit unions to invest in each other? I’d like to understand that better.

I’m on the Coop Development website (www.cdf.coop) –they have links to credit union-related things. I’m trying to understand the different credit union associations.

1. Credit Union National Association (CUNA) “is the premier national trade association serving credit unions. Ninety percent of America's credit unions are affiliated with CUNA.”

2. CUNA MUTUAL GROUP “is the leading provider of financial services to credit unions and their members worldwide, offering lending, protection, financial, employee and member solutions through strategic partnerships, technological innovations and multiple service channels. The mutual insurers of the CUNA Mutual Group are owned by their policyholders and operate to serve their best interests.”

3. The National Association of Federal Credit Unions (NAFCU): “The National Association of Federal Credit Unions is a respected and influential trade association that exclusively represents the interests of federal credit unions before the federal government and the public. Membership in NAFCU is direct; there are no state or local leagues, chapters or affiliations standing between NAFCU members and the NAFCU headquarters in Arlington, VA…NAFCU provides its members with representation, information, education, and assistance to meet the challenges that cooperative financial institutions face in today's economic environment. The association stands as a national forum for the federal credit union community where new ideas, issues, concerns and trends can be identified, discussed, resolved.”

It seems NAFCU is focused on federal, as opposed to state, credit unions and on various kinds of legislation to protect federal credit unions. In the 1970’s they won the creation of federal share insurance for federal credit unions (the National Credit Union Share Insurance Fund). Since then, these have been their accomplishments:

a separate federal regulator (the National Credit Union Administration);

a central bank for liquidity purposes (the Central Liquidity Facility);

expanded powers for credit unions (including mortgage lending, share drafts, and variable-rate accounts);

expanded fields of membership, so more consumers could be served by credit unions;

a lessened regulatory burden on credit unions;

preservation of federal credit unions.

**

I learned some things from the CUNA website about the struggle over whether credit unions should be tax exempt (which they currently are, at least on the federal level):

“The House Ways & Means Committee, chaired by Congressman Bill Thomas (CA-22) held an oversight hearing on the credit union tax-exempt status on November 3, 2005. Regulatory agencies & academic witnesses, as well as industry representatives testified. This included not only CUNA and another credit union trade association, but also witnesses from the American Bankers Association, America’s Community Banks, and the Independent Community Bankers Association. Chairman Bill Thomas closed the hearing by stating that he would not try to subject credit unions to federal taxation. On November 17, 2005, CUNA submitted a follow up letter that addressed some of the banker attacks in the hearing that required a more detailed response.

Chairman Thomas did put credit unions on notice that he expected greater “transparency, accountability and verifiability,” particularly in regard to such issues as the filing of Form 990s (and the compensation disclosures therein) for all credit unions and in measuring credit union service to people of modest means. On this latter point he was critical of the NCUA and the movement for not having a more precise definition of modest means. He made it clear that while in the 1930s that term may have applied to a broad middle class that lacked access to affordable financial services, today he believes modest means encompasses service to those with low-income, women and minorities. He is in favor of a data collection and reporting mechanism, whether CRA or otherwise, to measure credit union service to these groups, and he believes the movement should support this as a means of verifying that our tax-exempt status continues to be deserved. Structural arguments for the tax exemption are secondary in the Chairman’s estimation.

Chairman Thomas was critical of the NCUA for what he called its unwillingness to recognize the benefit of data collection that provides the transparency and accountability that he says a tax- preferred movement like credit unions ought to have. Near the hearing’s conclusion he said of the NCUA: “I am concerned that an agency that is supposed to be a regulator is an enabler.”

No legislation has been introduced in the 109th Congress on the federal tax-exempt status of credit unions. However, CUNA continues to be on guard against any Congressional legislation that would seek to tax credit unions as a means of offsetting the cost of tax relief, deficit reduction, or hurricane cleanup. Such taxation would end up in a net loss of revenue to the federal treasury as well as hurt hurricane victims.”

Im wondering: On what grounds did credit unions get tax-exempt status? What is the history of that?

What comes to mind when you hear the word bank?

Ivy (age 5): Ummmm. A bank is kind of like a river hang... or where you get money from.

Miette (age 8): Money and bars [in front of the teller.]

Ivy: A bank is kind of like a salt air; there's a hot dog sale and sometimes people hang out by the bank there. A hot dog sale is kind of like a playground. Grass and seaweed in the boat in water and the whale and the lantern and the sailship and pirate and crocodile and whale. HEEEELLLLPP!

When were you last in a bank?

Miette: Last month.

Have you ever robbed a bank?

Miette: No

Ivy: What is robbed bank mean?

Is there anything you'd like to learn about banks?

Miette: How much money does it collect in a week? How many people go to the bank in a day?

Ivy: A bank is sort of like a zoo, with a swamp nearby. I've been to a zoo bank.

Miette: This is boring. That's why Ivy is attacking me.

How could banks not be boring?

Miette: If it were fiction, and there were kids solving a mystery and in the process learning about banks.
It could be called The Bank Robbers.

Great idea! What would they learn about banks in the story?

Miette: How many people come to the bank. How many men come to the bank -- how many men with brown hair, how many women with yellow hair. How much money does the bank collect? They'd know everyone in town and the robbery would be committed by someone in town.

[I told them the story of the recent huge Brazilian bank robbery, in which some people opened a flower/landscape store across the street from a big bank. Everyday the people in the flower store drive off with a truck full of soil. One Monday, the bankers returned to the bank after a weekend and discovered they had been robbed. None of the door or window alarms had gone off. The robbers had dug a tunnel from the flower shop to the bank vault. Turns out the flower shopkeepers were the robbers! They had been carting off the soil from the tunnel! After the robbery, the flower shop closed down --the shopkeepers werent seen again.

Miette was captivated. We agreed that the story could be loosely based on that real robbery.]

Would you read this story about banks?

Ivy: I want to play Candyland.

**

Addendum

Here’s the actual BBC news account of what happened in the Brazilian bank robbery:

8/8/05
'Record' bank robbery in Brazil

Thieves in Brazil have stolen up to $65m (£36m) after tunnelling into a bank in what police say could be the country's biggest bank heist. The thieves dug a 200m (656ft) tunnel into the bank from a nearby house in the northern city of Fortaleza. Neighbours said between six and 10 men worked at the house, rented in the name of a company making artificial turf. The theft happened over the weekend, but was not discovered until Monday morning because the bank was closed. Neighbours reported seeing vanloads of material being removed each day.

"It's something you see in the movies... They dug a tunnel that goes underneath two [city] blocks. They've been digging for three months," investigator Francisco Queiroga told the Reuters news agency.
The Banco Central said the robbers opened five containers with 50 real ($22) bills.
The value of the stolen bank notes has not been determined. However, police sources said the heist may have yielded as much as 150m reals, which would make it the biggest bank robbery in Brazil's history.