Getting to Yes: Making Responsible Banking Work for Los Angeles, California and the Rest of "Main Street" America

Election week is done. It's time to get back to the business of finding real solutions for our nation's economic recovery. As this week ends it is clear that the appetite for federal stimuli is beginning its ebb tide. We see the Federal Reserve playing the risky cards of quantitative easing trying yet again to spark an economic recovery against the odds of a main street economy still mired in the collateral damage of central government's past grand visions.

Don't get me wrong. I actually agree that Fed needs to be doing what it is. We need to find a sustainable balance for our economy and it's a data intensive compass that can only be seen with clarity from the offices occupied by people like Ben Bernanke, Tim Geithner and Sheila Bair. What I do worry about though is that these central solutions too often take from the small and give to the big because the simplifying assumptions used by the economists and statisticians that support the process aren't capable of seeing the one-by-one trench warfare fights being fought by small businesses and individuals. It's an inherent policy formulation weakness of the academic brain trust behind our system that may be costing ordinary people more pain than necessary. But these ordinary Americans are there. We know this because they voted on Tuesday.

Fortunately, the United States is a big country and Washington D.C. isn't the only place exploring ways to find economic recovery formulae. Across the country, cities and states are beginning to chart independent paths to creating their own "islands of recovery". The City of Los Angeles' proposed Responsible Banking Ordinance continues to move through the committee process improving bit-by-bit into what I believe is an important emerging economic policy counterweight to ensure that the "small to big" tendencies of central solutions do not take us astray yet again.

The tale of the tape is something I believe worth sharing with the readers of the Huffington Post.

On October 26th, there was a public hearing by the L.A. City Jobs Committee chaired by Councilman Richard Alarcon on item CF 09-0234, Responsible Banking. The measure was approved with a number of questions to be investigated and reported to a hearing of the L.A. City Budget and Finance Committee to take place on Monday, November 8th. The questions aired by Councilman Bernard Parks focused on two areas. He asked for more information to determine if the cost and design of the process for implementation by the City was indeed workable. He also asked for clarification about how the differences between community banks, large complex banks and the city's debt underwriters would be recognized within the final ordinance.

Mr. Park's questions tell me that the L.A. process is indeed making progress because these are no longer questions about whether this a good thing for the economic interests of the City but rather how well is the plan risk managed. The interests behind the initiative become more positive as banks, large and small, begin to recognize that there is opportunity to be had here. The carrot being offered by the City of L.A is preference to win lucrative contracts that the City will be issuing anyway if evidence can be presented by the bidders that they are placing the interests of the region higher up the business priority list than their competition. It's subtle and far reaching in its potential to encourage money to circulate locally longer.

So now to ponder details,

As I reviewed the current version of the ordinance draft, it was clear the that City of Los Angeles had specified a data collection and reporting request that seeks to get banks to translate the nature of their business activities into measurement language that city governments can understand. The policy question is actually spot on but I'm also pretty sure that asking a bank to deliver the answer on a silver platter to the city first time out is a bit of a stretch. I think there's a better way to make it work for everyone and bring the cost/risk of the process well into good comfort.

The path to success here is to recognize two things. The first is that banks know how to report data to their regulators. They actually track all the information the city wants to know. Once a year they even have to report data to the granularity of branch-by-branch information to the FDIC. The other thing that's clear from the city draft is that municipal governments analyze their quality of service based on census tracts because that's how voters are bucketed. The trick in getting one system to talk to the other is to leverage by translating between the two universes via the zip codes of the U.S. postal service.

Asking the banks to do all the work is a lot of work. But if the City of Los Angeles were to re-design the ordinance implementation process to be a two step process where the banks report data in branches with identification of which zip codes are affected by that branch and there was a post- process by the City to morph the submittals into census tract visibility I think this would actually work reasonably well. City employees and/or other specialty vendors are more knowledgeable about the second step of the transformation than any bank will ever be. And there's a reason for that. Bankers, being lenders, have been discouraged from doing the second step for a long time because the technology that does so equates to gathering the data to do "red lining". So it's actually a better plan for the City of L.A. to deliberately separate these two steps from each other in its ordinance design.

My point here is that by taking a step back and recognizing where natural divisions of skill can be used to complement each other what seems onerous as an all-in-one data request can quickly become very doable.

This gets us to Mr. Park's second inquiry about larger out of area institutions and debt underwriters seeking to do business with the City. To that my observation is that the City of Los Angeles needs to set up a fair playing field for everyone. It's my read that by combining the suggestion above for banks with local branches with the tenets of the current ordinance draft language requesting distilled data into zip codes there's plenty of wiggle room for presentation of evidence of local involvement by these larger institutions, even those that do not have physical branches in the region. Complex transforms of data to support reporting requests are well within the capabilities of the IT departments of these larger businesses. Bearing in mind that these are also the banks that will go after the largest contracts with the City there's plenty of incentive for them to get their systems to produce the reports that will give them an advantage over competing bidders.

And in the long run I'm not just talking about competing just for L.A.'s business. There's a far larger universe of municipal and state government opportunities out there and I'll remind the readers of the Huffington post to look back at the history of my blogs for the one reporting on Bill Lockyer's inquiry earlier this year to the largest municipal bond underwriters.

I mean does anyone really think that the rest of America's League of Cities isn't watching how this plays out? Or that incoming California Governor Jerry Brown, the former Mayor of Oakland, doesn't already know that Los Angeles, San Jose and other cities in California are actively exploring how to affect the future of the State's economy using local strategies? Or that Ben Bernanke, Tim Geithner, Sheila Bair and Barack Obama won't read about this?

Keep going L.A. La-La Land may yet become the next shining star of economic recovery innovation.