Think of the record of management by the city of Los Angeles. They’ve given us buckled sidewalks, a stinky mess of a trash collection system and billions of dollars in pension obligations with no money saved to pay for them. Now, they want to get into the banking business.
You may think I’m making this up. But Charter Amendment B is on the ballot this November. If approved by voters, it would not create a city-owned bank, but it would allow the city to begin the process.
The impetus behind this proposal is well-intentioned. A municipal bank could provide financial services to underserved residents, could help support affordable housing and could provide banking services to cannabis businesses, which now cannot use federally regulated banks because marijuana still is outlawed by the federal government.
Laudable those goals may be, but creating a city-owned bank is definitely the wrong solution. The biggest problem: Political influence. Oh, of course, the city claims a bank, if created, would be operated independently. But isn’t that what they said about the Department of Water and Power? It’s inevitable that all those millions of dollars on deposit will tempt political types to make politically tinged decisions.
The city may not know this, but running a bank is difficult. It’s a business in which a 1 percent profit on assets is considered good. That means a bad decision by a banker – one that costs more than that 1 percent – is not just another oops. It can doom the enterprise. Bankers don’t like to say it, but they must make cold-blooded business decisions – numbers-based calculations scrubbed clean of emotion – if they want to stay a banker.
Will the city-owned bank make such decisions? For the answer, you need only look above, at the part about the impetus behind the proposal. If you reread that, you’ll see that the city virtually announces that it would put social and political considerations in front of cold-blooded business calculations. In other words, the bank essentially would be chartered to make unsound loans. Oh, and the bank would be managed by a commission made up of “Los Angeles residents from each council district.” Maybe it’s silly of me to ask, but shouldn’t the bank be overseen by lending professionals?
Here’s another query: Has the city explored whether the Bank of Los Angeles could even participate in the world of banking? If the city-owned bank really did provide services to cannabis businesses – which would be aiding illegal enterprises in the federal government’s eyes – could the bank get FDIC insurance on its deposits? Could it process its checks through the Federal Reserve system? If not, how would the bank function, exactly?
The city’s exploration of banking shows its contempt for business. It’s essentially saying that the city – with its commission of residents from each council district! – could step in cold and do a better job than experienced bankers. That’s kind of like you saying that since the Dodgers relievers haven’t been performing well, you should walk out of your box seat tonight and take the mound because you could pitch better than Pedro Baez. OK, bad example. You probably could. But you get the point: the city has about as much business running a bank as I do becoming a ballerina.
The city has a bad record of management. The city council imposed its will on the independently operated trash collection system and transformed it into an expensive mess. The city has promised so much in pensions to employees, the unfunded liabilities reportedly amount to $15 billion, a figure that seems like a misprint. And if this bank gets started, you can pretty much assume that it will lead to a failed enterprise that taxpayers must bail out.
Charles Crumpley is editor and publisher of the Business Journal. He can be reached at firstname.lastname@example.org.