Big Banking Scandal Wall Street Is Hiding From You

Above Photo: Occupy Wall Street protesters in Phoenix, Arizona. Photograph: KeystoneUSA/Rex Features

Your community’s tax dollars are getting quietly pilfered by Wall Street banks, and the banks are doing an excellent job of keeping the how away from you.

The amount of public money spent on just bank fees and interest every year numbers anywhere from the hundreds of billions to the tens of trillions. The exact amount is available through Comprehensive Annual Financial Reports (CAFR), though even obtaining the forms can prove to be a challenging task for the average taxpayer curious about how much of their tax dollars and pension funds are getting vacuumed up every year by the bank their city does business with.

Budgets don’t matter, CAFRs do

Scott Baker, a senior advisor for the Public Banking Institute, said the CAFR forms reveal far more than a city, county or state’s annual budget, and that accessing them is key to understanding how much wealth is inside a community along with how much is being sucked up through banking fees.

“Think of the budget as your wallet and household spending money. Think of the CAFRs as that plus your house, car and every other asset you own, plus an accounting of everything incoming and outgoing for years before and after,” Baker said. “Big difference!”

Each year, public institutions ranging from local fire departments to state pension funds, are required to fill out a CAFR, which details the total amount of all assets for all time, prepared under accounting and reporting standards outlined by the Government Accounting Standards Board. A CAFR contains figures outlining not only governmental funds, but also propriety funds, fiduciary funds, and component units. However, only governmental funds are accounted for in a public entity’s budget, leaving most people in the dark on the total value of assets held by that particular public entity.

Merely obtaining a municipality or state’s CAFR can be challenging for the average citizen. The website CAFRman.com, which is built to help taxpayers navigate the confusing bureaucracy of obtaining their city or state’s comprehensive annual financial report, explains how to obtain a CAFR in a multi-step process. But the arcane nature of the forms even has some bureaucrats scratching their heads. Lt. Col. Gerald Klatt (Ret.), a former federal accountant and auditor with the Air Force Audit Agency, said even some elected officials have never seen their city or state’s CAFR.

“It is not a secret document, but definitely is not a well known document,” Klatt wrote. “If you want to know the financial condition of your government(s), do not look in the budget. Get the CAFR.”

Everything we know about supposed “shortfalls” is a lie

In the 2010 CAFR report for the Bank of North Dakota (BND), which is the nation’s first and only public bank as of this writing, the state’s bank provided 95 financial institutions throughout the state with a combined line of credit exceeding $318 million. The BND’s Flex PACE program, which provides communities with funding for jobs retention, technological development, along with small business and retail loans, was also greatly utilized that year, according to Ellen Brown:

The need for Flex PACE funding was substantial, growing by 62 percent to help finance essential community services as energy development spiked in western North Dakota. Commercial bank participation loans grew to 64 percent of the entire $1.022 billion portfolio.

According to CAFR records obtained by Baker, the state of New York alone has a fiduciary net position amounting to $181 billion as of March 2014. New York City’s fiduciary net position was $192 billion as of June 2014. If just 10 percent of those funds $37.3 billion were reallocated toward chartering a public bank, both of those entities would suddenly have a flood of new revenue which could be used for similar public investment in infrastructure, education, healthcare, pensions, and small business loans. And because New York City and New York State’s economies are much larger than North Dakota, the financial support that could be made available to communities would likely be much greater.

To fully understand Wall Street’s role in the bankrupting of cities and states, it’s important to also understand how Wall Street calculates a state or municipality’s financial liabilities. For example, CNBC reported earlier this year that New York State’s pension fund had $19.8 billion in unfunded liabilities. However, according to Baker, multi-decade investment returns for pension funds are based on underperforming assets, like bond returns at a nearly zero percent interest rate, resulting in gradually higher unfunded liabilities every year.

More importantly, return on investment (ROI) is typically determined by private fund managers, rather than elected city and state comptrollers and treasurers. Baker called the monopolization of fund management by private hedge fund managers a “big scam.”

“[M]ost fund managers underperform the S&P or other benchmarket indexes. Fortunately, a few pension managers are getting wise to this. A couple of years ago California decided to stop investing its $400 billion in retirement funds with hedge funds because they were too hard to understand,” Baker told US Uncut. “Also, hedge funds charge 2 percent of assets plus 20 percent of profits, so they are darned expensive, too.”

Employer/employee contributions are also not listed as fund income when deciding whether or not a pension fund has a shortfall. As a result, Wall Street is able to capitalize on states duped into thinking their pension funds are in a deeper hole than they really are, and public assets are then put up for privatization. As Occupy.com reported in 2014, Detroit’s emergency manager used inflated pension shortfall numbers as justification for selling off the city’s water infrastructure.

Using “trade secrets” as an excuse to not tell us where our money goes

While President Obama ran on promising the most transparent administration in history, many public records requests by watchdog groups have been stonewalled, particularly in gleaning how much public money is being siphoned away by the big banks.

The blog WallStreetOnParade, which is run by Wall Street veteran and CounterPunch contributor Pam Martens, documented how Freedom of Information Act lawsuits have skyrocketed by 56 percent in the ten-year period between 2006 and 2016. In a Government Accountability Office (GAO) study of FOIA lawsuits between 2009 and 2014, the GAO discovered thatonly 112 of 1672 of FOIA lawsuits over those five years — roughly 6.69 percent — ended with the plaintiff substantially prevailing.

And even in cases where a public records request is returned to someone seeking information on how much public money is being taken through banking fees, financial institutions are still managing to stymie virtually all inquiries. According to a 2013 article by financial consultant Susan Webber (Yves Smith), founder of financial analysis blog Naked Capitalism, private equity (PE) funds have managed to successfully convince pension fund managers that disclosing the exact amount of the excessive fees charged in the funds’ contracts, referred to in the industry as limited partnership agreements (LPAs), would be the equivalent of sharing a “trade secret,” allowing fund managers to continue fleecing retirees.

“[N]obody who invests in PE looks closely at whether PE firms are complying with the fee and expense provisions of their agreements. Part of the reason is that the PE firm lawyers draft the terms in these LPAs to be almost incomprehensible,” Smith wrote. “Public pension fund investors have almost universally acceded to the demands of PE firms to exempt the LPAs and cash flow reports from state FOIA laws, which keeps the eyes of the press and the public off the documents.”

A public option for banking

The cost of storing public dollars in private banks, as every city and almost every state currently does, comes at a tremendously high cost. Currently, the lone exception is North Dakota, which has held its state and local tax dollars in a public bank for over a century.

Coincidentally, North Dakota was the only state to remain in the black at the time of the 2008 financial collapse. While the New York Times cites the state’s oil boom as a major factor, author and attorney Ellen Brown notes that other oil-rich states like Alaska, Montana, South Dakota, and Wyoming, which produce more oil and gas than North Dakota, still saw their economies decline as a result of the 2008 crisis.

Brown maintains that North Dakota’s economic success was due to its public bank, rather than its oil industry exclusively. She cites a 2011 paper written by law professor Tim Canova (who ran against former DNC chair Debbie Wasserman Schultz in Florida’s 23rd Congressional District), arguing that North Dakota’s public bank allowed it to prosper despite the ongoing recession:

The state deposits its tax revenues in the Bank, which in turn ensures that a high portion of state funds are invested in the state economy. In addition, the Bank is able to remit a portion of its earnings back to the state treasury… Thanks in part to these institutional arrangements, North Dakota is the only state that has been in continuous budget surplus since before the financial crisis and it has the lowest unemployment rate in the country.

The answer is simple: If states want to preserve their pension funds, provide funding for critical public infrastructure, and have a publicly available paper trail for how their public money is managed, public banking is the best way forward.