How a Public Bank Could Free S.F.’s Money From Wall Street

Gov. Gavin Newsom signed a first-of-its-kind law to help establish public banks — and San Francisco wants to be first in line.

Of all the vivid characters in Hustlers, from Jennifer Lopez’s magnetic Ramona to Cardi B portraying her own lived experience, the 2008 financial crash is the one that will be familiar to most contemporary Americans.

In the movie, the Great Recession spurs a crew of New York strippers into making a living by drugging rich-looking men to spend lavishly at clubs as their own twisted way of surviving in a system that doesn’t protect people like them.

“We got to start thinking like these Wall Street guys. You see what they did to this country? They stole from everybody,” Ramona says to convince Constance Wu’s character of the scheme. “Hard-working people lost everything. And not one of these douchebags went to jail, not one. Is that fair?” 

Though the economy recovered — depending on whom you ask — the reverberations from the financial crisis continue. Anger at a rigged system persists, as seen in today’s society through films like Hustlers and the popularity of politicians like Sen. Bernie Sanders.

Along the way, a potential antidote to this uneven financial system gained a coterie of believers: a public bank.

Gov. Gavin Newsom signed Assembly Bill 857 earlier this month, which, while not establishing a public bank, clears the way legally for California cities to set up public banks if they want to. This makes California the second state in 100 years to allow government-run banks that directly manage taxpayer money rather than leaving it to big banks.  Public banks can invest where preferred without relying on out-of-state bondholders — affordable housing instead of private prisons, green energy instead of oil pipelines, small business loans instead of subprime mortgages, and so on.

Following through would be nothing short of the systemic changes called to end dependence on Wall Street, 11 years after the financial crisis. While several cities in the U.S. are on the same path, San Francisco is primed to take the first leap in California with its $12 billion budget.

The benefit of a public bank is that the priority is the wellbeing of the bank’s consumers, both individuals and local businesses, instead of profits for shareholders of Wall Street banks, advocates say.

“[Wall Street banks] have not proven themselves to be good players in this,” says Supervisor Sandra Lee Fewer, who’s taken activist calls for a public banking venture to City Hall. “They are investing our money into things that don’t represent us. It is time.”

An Old Idea

A public bank — that is, owned by a state, city, or county — is not a new concept, but it is rare. The Bank of North Dakota serves as the main example, established in 1919 out of the need to protect the agricultural industry from the whims of large, out-of-state banks. (America Samoa turned around a banking desert by opening its own bank in 2018.) 

“[The thinking at the time was] ‘We can’t have our own functioning economy because we can’t have credit go where it needs to go,’” says David Flynn, the University of North Dakota’s economics and finance department chair. “The nature of North Dakota history suggests that there was concern about being overlooked and the concern about lack of self-determination in many aspects of life — still, in many ways, something that runs through today.”

The state was, to an extent, insulated from the depressed economy with one of the lowest unemployment rates and a rare budget surplus in 2008, thanks in part to a well-timed oil boom and more responsible banking practices. But even when it turned to an oil bust, the Bank of North Dakota remained profitable.

As the Occupy Movement took off in response to the financial upheaval, public banking received renewed interest but had support in San Francisco government only from then-Supervisor John Avalos. He requested a city report, published in 2011, to determine options while the California Legislature considered studying the establishment of a state bank. Neither Avalos’ efforts nor the legislature’s got anywhere.

Then came Standing Rock.

With the construction of the Dakota Access Pipeline threatening water sources of the Sioux Tribe in the Dakotas, massive protests against the project gained nationwide attention in 2016. It crystalised the need to divest from fossil fuels, both to protect resources and to combat fast-approaching climate change.

Cities like San Francisco looked at ways to separate taxpayer money from fossil fuels but realized there was a limit. In two big ways, North Dakota both shined a light on a problem and offered a solution — one that eventually brought Jackie Fielder, an indigenous Defund DAPL organizer, to help form the San Francisco Public Bank Coalition and take it to the state with similar-minded folks in Los Angeles.

“The narrative shifted,” says Trinity Tran, co-founder of Public Bank LA, of battling Wells Fargo lobbyists while pushing for divestment. “It was pretty apparent that this is literally the people versus Wall Street. This is a permanent form of divestment.”

In 2017, then-Supervisor Malia Cohen was intrigued by the idea and established a public bank task force. Cohen’s status as a San Francisco moderate showed it wasn’t a pie-in-the-sky idea but something for governments to seriously consider.

“I know it’s sort of a culture shift to think about a public bank and what does that mean,” Fewer says. “I never thought San Francisco would be moving toward buying or acquiring PG&E assets. This is very similar to the path toward public banking.”

How It Could Look

A 16-member Municipal Banking Feasibility Task Force spent nearly a year talking about the possibilities of a public bank. They explored models, insurance, whether to allow regular people to hold an account, receiving a banking charter, access to the Federal Reserve, and start-up costs.

Some members and followers like Fielder, however, were frustrated at the slow-moving process and felt the office was dragging its feet as Treasurer Jose Cisneros remained cozy with a partly Wall Street-funded nonprofit he co-founded. His office’s draft report was released in September 2018 but was merely a six-page document that didn’t include critical components of a full-fledged bank.

It offered four models that the task force discussed: a wholesale bank that issues loans for real estate, small businesses, and students; one that expands to small-dollar consumer loans; one that sticks to being a commercial lender without accepting deposits; and a hybrid that transitions from commercial lending to a bank six years later.

At a hearing on the task force that December, Cohen and Fewer criticized the Treasurer’s Office for not going far enough.

“I’m just not buying that we can’t do it because it’s too expensive,” Cohen said at the hearing. “Good things happen to those who are patient but I just want to make sure that we’re not wasting time spinning wheels.”

By the time the final report was released this March, the Treasurer’s Office presented refined options.

One would be to focus on lending and reinvesting without managing the city’s money. With $1 billion in bank capital, the city could boost its annual affordable housing investment from about $400 million to $600 million and triple small business loans compared to about $150 million a year. Model One, as it’s known, would need to have $165 million held in bank capital for financial stability.

Model Two would divest from Bank of America and U.S. Bank, diverting $600,000 in fees paid alone, while managing the $100 million the city has in short-term accounts. The bank would need to be $3.1 billion in size with $460 million in bank capital, taking about 31 years to break even. Start-up costs for staffing, infrastructure, and real estate would take $119 million, the Treasurer’s Office estimated.

The third and final option offered a combination of the two, requiring a size of $10.4 billion and $1.6 billion in capital while taking 56 years to break even. Start-up costs would be the same as the second model.

Sushil Jacobs, a senior economic justice attorney for the Lawyer’s Committee for Civil Rights of the San Francisco Bay Area and task force member, thinks the cost will be much lower. For one, technology costs could be reduced, especially given the hub of financial tech in the area. The bank could also be placed in the old San Francisco Mint, which once turned goods from the California Gold Rush into coins, saving money on real estate.

The Old Mint stands at 5th and Mission, awaiting renovation that could be well-timed for the establishment of a public bank. It’s also where Assemblymember David Chiu, who represents San Francisco, announced a state bill in March to make any of this possible.

Assembly Bill 857 had support from the Board of Supervisors, the Public Bank Coalition, the California Public Banking Alliance, PODER, the California Nurses Association, and San Francisco Berniecrats. Allies in Los Angeles threw themselves into the unfunded, grassroots push at the state level after a measure to open a public bank failed.   

“It’s one of the hardest bills I’ve ever worked on,” Chiu said. “This was a big and new idea for a lot of colleagues so it required a lot of deep education. Every single vote was a slog and guns were blazing throughout.”

In announcing the bill in March, Chiu hinted at a fight with Wall Street lobbyists and wasn’t wrong. The California Bankers Association called it a “misguided” venture that puts taxpayer money at risk. But activists statewide, from Public Bank LA to PODER, kept making the case for a public bank. In the end, the bill passed with just enough votes and an enthusiastic signature from Newsom in October, who called it “progress.”

“It was an uphill battle,” Tran says. “One of the biggest accomplishments was moving this idea from the obscure into the mainstream. With Gavin Newsom’s signature on this bill, it really legitimized this idea.”

Public banking in California got the breakthrough it needed but the work continues.

AB 857 allows for two licenses for such a bank to be issued per year, but it would first need a feasibility study and business plan. San Francisco already spent a year on the feasibility study and is on the cusp of initiating legislation to work on a business plan for about another year while they await an impact report from the Budget and Legislative Analyst.

For Fielder and Jacobs, that means reserving seats for core community stakeholders, including credit unions, affordable housing experts, and immigration and environmental justice groups. They would meet at least monthly to set up the governing structure complete with transparency and plan to obtain FDIC insurance, as required by AB 857. (The Bank of North Dakota and many credit unions don’t require the same insurance.) They hope it can start lending as soon as 2021, followed by deposits a couple of years after that. As a city and county, San Francisco doesn’t have to put the plan to voters.

“We want to get it right,” Fielder says. “We’re looking to find that balance to make sure that the bank sticks to the original vision for this, which is to make sure the city addresses its most pressing issues but also make sure that it stays afloat for decades and generations to come.”

That cautious proceeding is a good sign to Flynn, especially since California is carving a different path than North Dakota’s statewide bank. The latter walks a fine line, functioning more like a state-level federal reserve and staying away from commercial banking while being smaller in scale by serving a population of just 760,000.

“The Bank of North Dakota is a different creature,” Flynn says, adding that California’s economy is much larger. “If you allowed it to be too quick, you could really create some problems really fast. That’s the upside to this slow, deliberate approach. There are a lot of moving parts.”

Washington is due to have a business plan by July while Oakland, Santa Rosa, and others move forward with their own plans. Days after the bill was signed, the Los Angeles City Council already proposed hiring a consultant to develop the plan, placing San Francisco in a healthy competition to be the first to establish a public bank.

“We are setting ourselves up for that,” Fewer says. “We are beginning to realize the power of our dollars. This is not something that’s going to happen overnight.”

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