Infrequently updated blog of thoughts and feelings whenever I have time to sit down and write. It seems as though I have less and less time to sit down and write these days. That's why this page is static most of the time.

Monday, July 26, 2010

I guess it is pretty obvious I'm not a frequent blogger. Since I'm now exposing my blog to many other people, I thought it was about time I updated it. The following is a portion of yet another APA-50 zine from about a year ago (sans the mailing comments, which no one reading a blog would understand anyway, and the people to whom they are directed have already read them). For those unfamiliar with old fashioned paper APAs, mailing comments are similar to the comment threads on blogs, where members of the apa direct messages to other members, but are read by all.

Bailing Out of Bank of America

I started an old fashioned Depression era run on Bank of America last month, so I guess you can blame me if the rest of the economy continues down the road to chaos. Since I've already taken the first step, I encourage other principled Libertarians to do exactly the same thing. The banking system as it now exists will inevitably collapse without a foundation of trust between the holder of the assets and the owners of them. If one party betrays that trust, it has broken the contract and I am no longer obligated to maintain any kind of business relationship with a person or corporation who has swindled me.

Banks have been failing all over the United States, 60 in the last six months alone. But the biggest banks in the nation, the ones you'd expect wouldn't have this kind of problem, have been bailed out by the taxpayers, including Bank of America. Any institution that failed its customers so spectacularly that it ended up taking by force the money of the American taxpayer does not deserve to include me or anyone I know among its customers. Due to the investment we’ve all had to make—completely without our consent, and against our better judgment—we’ve inadvertently become not a customer, but one of the bank’s owners.

Well, the management of this institution has convinced me that holding any kind of account within their control is a very bad investment, and I want out of it.

The Libertarian Party of California's East Bay Region was formed in 1974, and the first treasurer of the organization opened an account at Bank of America that year to manage the organization's meager assets. When I was elected Treasurer of the East Bay Region in 2002, I became responsible for the account, and BofA never gave me any reason to distrust them. In 2005, due to a change in the bylaws of the LPC, we were required to split our Region into two county organizations, so I opened a second account at the bank for the Contra Costa County LP and maintained the original account for the Libertarian Party of Alameda County.

But when BofA found itself over-leveraged and in danger of failing last year (following the purchase of Countrywide Home Loans) and forced into a shotgun wedding by Hank Paulson to save Merrill-Lynch, it was clear that the bank's assets were seriously mis-managed. BofA changed their policies two months ago on accounts such as ours, which had not been assessed any kind of service fee as long as we maintained a minimum balance of $1,000. This has rarely been a problem in the past, but beginning in June 2009, they raised this threshhold to $2,000, and began charging us a $9.95 monthly fee (the previous fee had only been $8.00).

The Troubled Asset Relief Program (TARP) was passed by Congress last year to save banks like Bank of America that made very bad loans and lost billions of dollars of their customer’s assets. It was also used to bail out AIG Insurance, General Motors and Chrysler. The taxpayers themselves had no input into how their money was being wasted. According to Network World magazine, the email servers at the U.S. Capitol in Washington crashed under the onslaught of messages sent to congress last September by voters urging them NOT to pass the bailout bill, but they did so anyway, having been threatened by Hank Paulson that the entire economy would collapse if they allowed bad businessmen to suffer the consequences of their bad decisions.

Would the sky have fallen if congress had let Bank of America fail? Did the sun forget to rise the day after Lehman Brothers went bankrupt? No, the world did not end and I doubt it would have if the congress had listened to the voters and rejected Paulson’s hysterical ravings. And, of course, the executives of AIG, Merrill Lynch and CitiGroup were all rewarded for their trouble with multimillion dollar bonuses.

So now, the big bad banks have been saved, and the smaller banks that didn’t have enough money to lobby congress were allowed to die. This is not free market capitalism. This is why the officers of both counties that make up the East Bay Libertarian Parties voted to bail out of Bank of America and deposit our funds at any other bank in the area that did not accept TARP money.

As a taxpayer advocate, the LP must take a principled stand against any institution, public or private, that fails to honor a contract. That is why we stipulated that we would only do business with trustworthy banks, those that did NOT beg for a bailout from the taxpayers.

To compile a list of these institutions, I used http://Bailoutwatch.net, http://Bailout.ProPublica.org, and http://subsidyscope.com to identify every bank in the area that had taken any TARP funds at all. Excluding those, we ended up with a list of seven small but fiscally strong banks to evaluate. Most of the banks that have failed over the past two years have been small banks like these, and there would be no guarantee that the bank we selected to manage our funds wouldn't also fail, but there are ways to reduce your level of risk and evaluate how well you can trust your banker. Of course, the East Bay Libertarian Parties are in no danger of losing our money, even if a bank fails, because our meager treasury falls well below the maximum $250,000 deposit insured by the FDIC. But in August 2009, the FDIC revealed that it may also be running out of money, estimating that it will likely need to pay out $70 billion over the next year and a half not to bail out failing banks, but to pay back the money of the deposit holders of those banks. Last March, they only had $13 billion available for this purpose. Several more banks have failed since then.

To make sure we could trust our new bank, I checked the websites of each of the selected banks' services to find out which ones offered us the most value for the lowest fee, preferably charging no fee at all. At the suggestion of Contra Costa County LP Chair Cory Nott, I then checked each institution's “Texas Ratio,” a numerical grade used to assess a bank's level of risk by comparing deposits held in reserve vs. non-performing loans and outstanding debt that is far more likely to predict a bank's failure than the formula used on Wall Street to calculate the risk of leveraged securities. The lower the Texas Ratio of a bank, the healthier they are. Any bank with a Texas Ratio above 100 is in danger of failing. Any bank above 50 is “troubled.” All the banks on our list had Texas Ratios below 15.

But before I'd been able to rate all the banks, one of them, Fremont Bank, immediately dropped off the list, after they submitted an application to borrow $35 million from TARP last July to prop up their mortgage portfolio. The Hayward Daily Review reported that Fremont Bank held only 43 homes in foreclosure status at the time. "We don't really need the capital,” Fremont Bank Vice Chairman Mike Wallace said. “But we don't know what the future holds.” Fremont Bank has a Texas Ratio of 11, so it was in no danger of failing, but took taxpayer money anyway, just because it was there for the taking. This is NOT a bank we could trust.

I ended up with a list of six candidates and presented to the officers the account options offered by these institutions, and ranked them by their Texas Ratio. The officers of both county parties voted to trust Mechanics Bank of Richmond. Founded in Contra Costa County in 1905, Mechanics Bank has already proved it could survive one Great depression, and their policies suggest they know how to weather our current one as well.

Having lost faith in Bank of America's horrendous management of our money (and yours as well), banks that treat their depositors more as partners than as “customers” are the reason why Mechanics Bank never had to apply for bailout money. They can't afford to fuck around with your deposit, since they are not so big that they cannot fail, and just not quite big enough (or desperate enough) to turn to their customers or the American taxpayer for a hand-out.

As many Libertarians have long been aware (and the rest of the population is slowly learning), fractional reserve banking is a system of commerce based not on real wealth, but on imaginary numbers, increasing debt, and blind faith that a paper note issued by the U.S. Treasury Department represents hard assets. This is similar to the fantasy sequence in J.M. Barrie's Peter Pan where the audience is urged to clap their hands to save the life of the beloved fairy Tinker Bell. If enough of us believe in fairies, just wishing she will recover from the poison will make it come true. Timothy Geithner thinks that if enough taxpayers truly believe that Federal Reserve Notes represent real money, then their belief in the fairy tale will likewise make it come true.

But we're grown ups now, and we no longer believe in fairy tales.

Let the Party of Principle demonstrate to the rest of the world that we practice what we preach. If your county party still maintains accounts with banks that cheated the taxpayers, urge them to vote with their feet and relocate their accounts to the banks that stood firm and refused to take TARP funds.

When banks that are too big to fail betray their customers and the taxpayers, it is time to take our money away from them and invest it in a bank that will work for you instead of against you. Free market capitalism thrives on competition, and smaller banks that make better business decisions for their clients should be able to lure business away from the large banks that cheated us. If you maintain any accounts at Chase Bank, Wells Fargo, Bank of America, CitiBank or any other financial institution that took bailout money, you have an obligation to throw a little love out to the banks that didn't rob the taxpayers.