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Is a state development bank right for Connecticut?

Insight

Part 1 of 2

 

Back in 1970, Morocco’s King Hassan II was putting on the 18th hole in Marbella, Spain when his friend, Citibank Chairman George Moore, interrupted: “King, what you need to do is establish a Moroccan agro-industrial development bank.”  

The king missed the putt. He looked up. “I need a what?”

George Moore said, “I’ll send you someone.” So it was agreed.

At the time, I was working for Citibank, initially in mergers and acquisitions and then on corporate cash management, in Paris, France. The phone rang.  It was George Moore on the line from New York: “Take your family to Morocco and advise the king — all expenses paid.”

“Yes, sir,” I said, “but about what?”

He said, “About an agro-industrial development bank.” And so it was.

 The problem was, of course, that neither the king nor I knew anything about development banks. So we would have to work from scratch.

First off, the conventional assumption would be that such a bank would have to be either entirely state or entirely private. Never the twain. Could it be both? Could we launch a cooperative development bank with both state and private capital ownership? Why not?  

What could such a development bank do?  How would that help Morocco? We thought: It could finance and promote the launching of agricultural and industrial projects, which, when successful, could be spun off as independent corporate entities and listed on the Casablanca stock exchange. That would create jobs, crops, food processing, production of machinery including rubber and metal products, increase exports, generate income and hard currencies, and would attract more and more private partners and shareholders for the bank and its many offspring.

The bank could be a repository of state and other sources of funds. If desired, it could issue shares, bonds, commercial paper and certificates of deposit. It could help finance farmers’ cooperatives, local businesses, technical training and educational initiatives. It could facilitate the king’s desire to distribute royal lands among private family farms.

Indeed, why not? All it required was cooperation between government and private enterprise — a judicious blend of capitalism and socialism, a quasi public option.

Some three years later and after no less than five failed assassination attempts against the king’s life (one in my immediate presence at the Skirat palace), the king had his development bank.

He told me, “I do not expect to die in my bed — it’s the extreme right that will get me first.” Fortunately, that did not come to pass.  

The bank, I was later told, became immensely successful. Meanwhile, I switched to the World Health Organization. As Yogi Berra used to say, “When you come to a fork in the road, take it.”

Forty years later, back in the USA, we find the world’s most powerful nation in crisis and in desperate need of economic development and jobs. In my day in Citibank, we would have opened the valves of business and personal lending to solve the crisis. That’s what commercial banks are for.

But today, banks aren’t doing that.  The five largest U.S. banks (Bank of America, Citi, Morgan-Chase, Wells Fargo and PNC) having received tens of billions of dollars in bailouts for those “too big to fail,” and holding some 40 percent of all deposits and 48 percent of all bank assets, have cut back on small business lending by a full 53 percent. (Where are the George Moores of banking now?)   

Here’s the question:  Should state-owned banks come to the rescue of Main Street?

We have a single home-grown model to guide on and to build on: the state-owned Bank of North Dakota (BND), established in 1919 to promote agriculture, commerce, industry and infrastructure development in North Dakota. It’s the only state-owned bank in the USA.

The BND takes placements of North Dakota state and state agency funds and acts as an economic development agency and banker’s bank, lending to and covering risks of private banks and businesses. It arranges low-cost loans to farmers, students and local enterprise. BND also makes a market in municipal bonds to promote and finance community development.

The BND is a success: It has almost $4 billion in assets, a $2.67 billion loan portfolio, and more than $50 million in profits for six straight years. Over the last 10 years, the bank has funneled almost $300 million in profits to North Dakota’s state treasury.

During the recent national credit crunch, when private banks ratcheted down their lending, BND’s business lending actually grew by 35 percent, and private sector jobs were increased throughout the state, outpacing the rest of the nation.

 

Sharon resident Anthony Piel is a former director and general legal counsel of the World Health Organization.