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Alarcon's Responsible--and Irresponsible--Banking

MAILANDER MUSINGS - In his "Responsible Banking Act," Councilmember Richard Alarcon would like the City of Los Angeles to show preference to small financial institutions rather than large ones.  This may mean, for instance, shifting the City's payroll account from its longtime home to a smaller bank.
There are two problems with this homespun, well-intended ordinance.  One is that the top banks that are the target of Alarcon's actions--Wells, BofA, Citi, and Chase--were not at all (repeat: not at all) responsible for the financial markets debacle of 2008. Quite conversely, they were all among the stingiest banks around when it came to issuing bad home loans.  

It was the banks they were asked by the government regulators to acquire--CountryWide, IndyMac, Wachovia, and Washington Mutual--who were the real culprits on the banking side of the meltdown (it was AIG on the insurance side, and many investment banks on the mortgage-backed securities side).

I have likened blaming these big banks for what happened to blaming a stingy, responsible aunt who took in a delinquent nephew--a delinquent nephew who ran up gambling debts so high that his debt threatened the whole economic structure of the town.  

Blaming the stingy aunt for being solvent and taking the prodigal nephew in is wrong--and it is also the great error of the Occupy Wall Street movement.  Blame auditors, yes, and blame the actual perpetrators like IndyMac and CountryWide (who both preyed on the kind of low-income, ESL borrowers that populate Alarcon's district and are responsible for his district having the highest foreclosure rate in the city), but don't blame the people who did not offer the flaky loans in the first place.

The second great problem with Alarcon's Responsible Banking action is that it was politicians like Alarcon, right or wrong, who were begging these very same banks--the big banks--to ease lending in the run-up to the financial debacle.  

Yes, politicians on the left, for whom housing and home-ownership was a "civil right"--as Alarcon himself described it to me last summer [link] --were begging the big banks to ease their credit lines the way that the irresponsible bankers at CountryWide and IndyMac were easing them.  

In short, all through the zeroes, Alarcon and company--Garcetti, Villaraigosa, etc,--were on the side of the delinquent nephews, not on the side of the stingy, responsible aunts.  

The whole phenomenon of "liar loans"--which the top banks like Wells and BofA wouldn't go near--was part and parcel of an effort in the late 1990's and early zeroes to get disenfranchised, and often insolvent, workers and even non-workers into homes.  Some bankers at this time even derided these lenders as making "NINJAA loans"--No Income, No Job At All Loans.

Once the people from the City's Treasury Management division weigh in on this Ordinance, I doubt it will go far.  It is hard to imagine a small bank offering the kind of products and services a big City--one with a Mayor doing business in Asia and Latin America--needs to stay solvent and to lure business.  

It's already hard enough to get paid by the City of Los Angeles--it won't be any easier if the City settles on a local bank with a puny track record at wire transfers or bankers' acceptances, and who are baffled when it comes to referrals for bond construction or capital markets investments.  

A big city, alas--certainly one with a $7 billion budget--needs a big, sturdy, responsible bank to do its financial business.

(Joseph Mailander is a writer, an LA observer and a contributor to CityWatch. He is also the author of The Plasma of Terror. Mailander blogs at where this article first appeared.) –cw

Tags: banking, Responsible Banking Act, Richard Alarcon, Occupy Wall Street, IndyMac, CountryWide, Eric Garcetti, Mayor Villaraigosa, Los Angeles, City Council, Wells Fargo, Bank of America, Citi Bank, Chase

Vol 9 Issue 98
Pub: Dec 9, 2011