[CRNMC] FW: Preparing To Asset-strip Local Government? The Fed¹s Bizarre New Rules

[Shannon Biggs]

Shared by Ben, his thoughts and the link are below.

Blessings to all, looking forward to the point person call tomorrow.

Best, Shannon 
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Folks,

A common concern expressed by municipal officials and their hired attorneys
when they ask about the possible consequences of enacting community bills of
rights banning state-permitted corporate activities is this:   standing up
for the rights of community residents against corporate interests could
result in the bankruptcy of the municipality due to legal fees and damages
won for "violating" corporate civil rights. It's reason #1 for their
rejection of local bans on corporate harm-for-profit projects. Those
officials are probably not noticing that the bankruptcy they fear is already
being planned for them and their tax-paying constituents even without the
corporate lawsuits for doing what government is supposed to do: secure
unalienable rights.

So, here's a current economics lesson for them and for us (see article
below). Here is more evidence of the new enclosures. The privatization of
the "commons"  -- which are our social assets held in-common -- can be seen
everywhere, from the defunding and planned failure of school systems, public
pensions, state and national parks, municipal utilities, to the take-over of
municipalities like Detroit, MI; Harrisburg, PA and the stripping of local
government by centralization of governing authority....the new enclosures
look a lot like stealth fascism.

Ben

Why would regulators dangerously jeopardize state and local government
budgets in this way? Skeptical observers speculate that the intent is to
Detroit-ize municipal governments, so that assets can be stripped as is
being done in that imperiled city. The international bankers got away with
asset-stripping Greece. Why not make the US itself a wholly-owned subsidiary
of private banking interests?

http://ellenbrown.com/2014/09/08/preparing-to-asset-strip-local-government-t
he-feds-bizarre-new-rules/

Preparing To Asset-strip Local Government?  The Fed¹s Bizarre New Rules
<http://ellenbrown.com/2014/09/08/preparing-to-asset-strip-local-government-
the-feds-bizarre-new-rules/>
Posted on September 8, 2014 by Ellen Brown
In an inscrutable move that has alarmed state treasurers, the Federal
Reserve, along with the Federal Deposit Insurance Corporation and the Office
of the Comptroller of the Currency, just changed the liquidity requirements
for the nation¹s largest banks. Municipal bonds, long considered safe liquid
investments, have been eliminated from the list of high-quality liquid
collateral. assets (HQLA). That means banks that are the largest holders of
munis are liable to start dumping them in favor of the Treasuries and
corporate bonds that do satisfy the requirement.
Muni bonds fund the nation¹s critical infrastructure, and they are subject
to the whims of the market: as demand goes down, interest rates must be
raised to attract buyers. State and local governments could find themselves
in the position of cash-strapped Eurozone states, subject to crippling
interest rates. The starkest example is Greece, where rates went as high as
30% when investors feared the government¹s insolvency. Sky-high interest
rates, in turn, are the fast track to insolvency. Greece wound up stripped
of its assets, which were privatized at fire sale prices in a futile attempt
to keep up with the bills.
The first major hit to US municipal bonds occurred with the downgrade of two
major monoline insurers in January 2008. The fault was with the insurers,
but the taxpayers footed the bill.  The downgrade signaled a simultaneous
downgrade of bonds 
<http://www.globalresearch.ca/credit-default-swaps-evolving-financial-meltdo
wn-and-derivative-disaster-du-jour/8634>  from over 100,000 municipalities
and institutions, totaling more than $500 billion. The Fed¹s latest rule
change could be the final nail in the municipal bond coffin, another
misguided move by regulators that not only does not hit its mark but results
in serious collateral damage to local governments ­ maybe serious enough to
finally propel them into bankruptcy.
Why this unprecedented move by US regulators? It is not because municipal
bonds are too risky, since corporate bonds with lower credit ratings are
accepted under the new rules. Nor is it that the stricter standard is
required by the Basel Committee on Banking Supervision (BCBS), the BIS-based
global regulator agreed to by the G20 leaders in 2009. The Basel III Accords
set by the BCBS are actually more lenient than the US rules and do not
include these HQLA requirements. So what¹s going on?
>From the Inscrutable, Unaccountable Fed
The rule change was detailed by Pam Martens and Russ Martens in a September
4th article titled ³The Fed Just Imposed Financial Austerity on the States
<http://wallstreetonparade.com/2014/09/the-fed-just-imposed-financial-auster
ity-on-the-states/> .² They write that on September 3rd:
> The Federal regulators adopted a new rule that requires the country¹s largest
> banks ­ those with $250 billion or more in total assets ­ to hold an increased
> level of newly defined ³high quality liquid assets² (HQLA) in order to meet a
> potential run on the bank during a credit crisis. In addition to U.S. Treasury
> securities and other instruments backed by the full faith and credit of the
> U.S. government (agency debt), the regulators have included some dubious
> instruments while shunning others with a higher safety profile.
> Bizarrely, the Fed and its regulatory siblings included investment grade
> corporate bonds, the majority of which do not trade on an exchange, and more
> stunningly, stocks in the Russell 1000, as meeting the definition of high
> quality liquid assets, while excluding all municipal bonds ­ even general
> obligation municipal bonds from states with a far higher credit standing and
> safety profile than BBB-rated corporate bonds.
> This, rightfully, has state treasurers in an uproar. The five largest Wall
> Street banks control the majority of deposits in the country. By disqualifying
> municipal bonds from the category of liquid assets, the biggest banks are
> likely to trim back their holdings in munis which could raise the cost or
> limit the ability for states, counties, cities and school districts to issue
> muni bonds to build schools, roads, bridges and other infrastructure needs.
> This is a particularly strange position for a Fed that is worried about subpar
> economic growth.
Not Sufficiently Liquid?
In a September 3rd press release
<http://www.federalreserve.gov/newsevents/press/bcreg/tarullo-statement-2014
0903.htm> , Federal Reserve Governor Daniel K. Tarullo stated that while
³most state and municipal bonds are not sufficiently liquid to serve the
purposes of HQLA in stressed periods . . . the liquidity of some state and
municipal bonds is comparable to that of the very liquid corporate bonds
that can qualify as HQLA.² [Cite] Criteria were being developed, he said,
for considering these assets. But ³it is important to get this final rule
adopted now, so that the largest banks can begin to prepare for its
implementation on January 1.² In the meantime, muni bonds are in limbo, and
it appears that most will still not be accepted as HQLA.
The regulators consider stocks to be more liquid than muni bonds because
they are readily traded on the stock market. But as the Martens¹ note, stock
markets can be quite inaccessible in a crisis. Quoting from the Fed¹s own
archives on the crash of 1987:
> Market makers in the over-the-counter market were not obligated to maintain an
> orderly market and many withdrew from trading. Delays in processing trades
> resulted in investors receiving prices very different from what they expected.
> Many brokers did not answer their phones, leaving investors unable to reach
> them. Erratic price movements and quotes resulted in frequent lock-ups in the
> electronic trading system used in the over-the-counter market.
In any case, switching the banks¹ holdings from muni bonds to corporate
bonds or Treasuries is liable to have little effect in a crash. The stricter
rules are supposed to be a defense against bank runs; but in a major
derivatives bust and bail-in, the available collateral will go first to the
derivatives claimants, through a massive concession to financial
institutions in the Bankruptcy Reform Act of 2005. (See my earlier article
here 
<http://ellenbrown.com/2013/04/09/winner-takes-all-the-super-priority-status
-of-derivatives/> .) The FDIC and the depositors are both liable to be out
of luck, no matter what form the collateral takes.
The Martens¹ conclude:
> That the Fed and its regulatory cohorts have to resort to this implausible
> plan ­ which crimps the ability of states and localities to raise essential
> funds to operate ­ in a strained effort to pretend that they¹ve found a means
> of avoiding another massive bailout of Wall Street in a crisis, is just
> further proof that the only way to seriously deal with too-big-to-fail banks
> is to restore the Glass-Steagall Act and break up these complex creatures
> before they strike again.
Gordon Gekko Goes Muni?
The rule change may not have much effect in a crash, but where it will have
a major effect is on the cost of credit, which will increase for municipal
governments and decrease for corporate and financial institutions. The
result will be to further shift power and financial resources from the
public sector to the private sector.
Why would regulators dangerously jeopardize state and local government
budgets in this way? Skeptical observers speculate that the intent is to
Detroit-ize municipal governments, so that assets can be stripped as is
being done in that imperiled city. The international bankers got away with
asset-stripping Greece. Why not make the US itself a wholly-owned subsidiary
of private banking interests?
If that seems far-fetched, consider what is happening with Argentina
<http://ellenbrown.com/2014/08/25/colonization-by-bankruptcy-the-high-stakes
-chess-match-for-argentina/> , which has been forced into bankruptcy by a US
court to satisfy the exaggerated claims of certain hold-out vulture funds.
IMF regulators have discussed establishing an international bankruptcy court
that could strip a country such as Argentina of its assets, including prime
sections of real estate, to pay off the nation¹s creditors.
In the US, there is already a trend to force state and municipal governments
into austerity measures, if not outright bankruptcy, in order to eliminate
labor unions, pension obligations and social services. Bankruptcies can be
involuntary, forced by the creditors who caused them. Detroit is the US
model <http://www.wsws.org/en/articles/2013/06/10/bank-j10.html> .
Michigan¹s Constitution protects pensions, so the emergency manager
appointed by the governor could not unilaterally cut those funds. But in a
municipal bankruptcy, a judge would decide the fate of city workers¹
pensions, making it an attractive option for banking interests. The
oligarchs have long had their eyes on the massive sums represented by the
pension funds. 
Public Banks to the Rescue?
Whatever the explanation for the Fed¹s game-changing move, the vulnerability
of state and local governments to unpredictable and unaccountable federal
regulators is another strong argument in favor of forming publicly-owned
banks. Why be under the thumb of an erratic privately-owned central bank
manipulated by Wall Street megabanks now caught in multiple frauds?
Like Eurozone countries, US states cannot print their own currencies. But
unlike Eurozone countries, they can borrow from their own public banks,
which can create money as credit on their books just as private banks do.
At least, they could if they had their own banks. Only one state ­ North
Dakota ­ has currently taken advantage of that option. North Dakota is also
the only state to have escaped the 2008 credit crisis, sporting a budget
surplus every year since then. It has the lowest unemployment rate in the
country, the lowest default rate on credit card debt, and one of the lowest
foreclosure rates.
True, North Dakota also has oil. But the 2008 crisis happened before oil and
gas had made a significant impact
<http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPND2&f=M>  on
state revenues; and the state was posting a budget surplus all during that
period. Other oil and gas states are not doing so well.
Globally, 40% of banks are publicly owned; and they are largely in the BRIC
countries ­ Brazil, Russia, India and China. These countries also escaped
the credit crisis largely unscathed.
If state and municipal governments want to protect themselves from the fate
of Greece and Detroit, they would do well to follow North Dakota¹s lead and
form their own publicly-owned banks. And time is of the essence, if they
hope to beat the rush before the first US Cyprus-style bail-in consumes the
collateral 
<http://ellenbrown.com/2013/04/09/winner-takes-all-the-super-priority-status
-of-derivatives/>  that local governments are counting on to protect their
multi-billions in deposits.
_________
Ellen Brown is an attorney, founder of the Public Banking Institute
<http://publicbankinginstitute.org/> , and author of twelve books, including
the best-selling Web of Debt <http://webofdebt.com/> . In The Public Bank
Solution <http://publicbanksolution.com/> , her latest book, she explores
successful public banking models historically and globally. Her 200+ blog
articles are at EllenBrown.com <http://ellenbrown.com/> .



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