What if you had a solid, reliable business partner who, you discovered, had been investing in cluster bombs, or coal and nuclear power plants, or destruction of tropical ecosystems, or loan-sharking or strip-mining?
You just might be in such a relationship if you're one of those 4 out of 5 Americans who have a bank account. Each time you deposit your paycheck, you build a relationship with a corporation that, going by the odds, is likely to be involved in all sorts of unsavory pursuits.
Short of stowing cash in your socks drawer, is there a way to keep your hard-earned money out of trouble? Maybe, but to do that while still taking advantage of the interest, federal deposit insurance, and many conveniences afforded by checking and savings accounts is not a simple matter. By closing an account or two, you can get away from Big Banking and its high-profile abuses, but finding a place to open a new, clean-and-green account is not that easy.
You don't have to be a Wall Street tycoon to play a hand in global ruin and local plunder. A modest checking or savings account at a major bank can get you in on some pretty ugly activities. Before trying to find a new, innocent home for your paycheck or tax refund, we'll take a look at what your current business partner may have been up to.
Big banks behaving badly
America's largest banks take in colossal sums of money every day, and they have before them a world of profitable opportunities in which to invest that wealth. Commercial banks and savings institutions have taken full advantage, chalking up a sixth straight year of record profits in 2006. But follow those profits to some of their sources, and the view is not so pleasant:
-- According to a 2007 report by the Belgian nonprofit Netwerk Vlaanderen, international banking groups led by Citigroup, JPMorgan Chase, Wachovia and Bank of America (America's four biggest banks) supplied lines of credit totaling more than $8 billion between 2004 and 2006 to companies involved in production of cluster bombs -- probably the most vicious form of non-nuclear weaponry. The banks' customers included GenCorp, Raytheon, Lockheed-Martin, Textron, Thales and EADS.
-- In February, Texas electric utility TXU became the target of history's largest-ever leveraged buyout, which had crucial backing by banking powerhouses JPMorgan Chase, Citgroup and Morgan Stanley. Intense pressure from environmental groups convinced the banks and buyers to announce that they would reduce the number of new coal-fired plants planned by TXU from eleven to three. Their eco-consciousness, however, was short-lived; they announced in mid-March that if the deal goes through, TXU will contract with Mitsubishi to build two nuclear plants near Dallas and build three additional nukes by 2020!
-- Wells Fargo & Co., with more than 3,200 bank branches in 23 states, has provided hundreds of millions in loans to Alpha Natural Resources. Alpha strip-mines coal in the Appalachians, favoring the extreme technique known as "mountaintop removal". Wells Fargo is heavily invested in oil and gas in the western United States, it has funded Burlington Resources' oil exploration on indigenous lands in the Amazon of Peru and Ecuador, and it funded a report supporting logging in Alaska's Tongass National Forest. Oh, and Wells Fargo was also named one of the country's "100 Best Corporate Citizens for 2007" by Business Ethics magazine.
-- A predatory feature of life in low-income America, the "payday loan" industry has ballooned by more than tenfold since 1993. The Tennessean in Nashville fingered four of the nation's top ten banks -- Bank of America, JPMorgan Chase, Wachovia and Wells Fargo -- as having played a crucial role in the rise of payday-loan shops, which saddle their customers (who average $25,000 in income) with interest rates reaching 200 percent, 300 percent, or even 500 percent on an annualized basis. Amazingly, such rates are legally recognized. The state of California, for example, limits interest on payday loans to 459 percent annually!
Who's in your wallet?
If you'd rather not endorse such shenanigans each time you endorse a check, it's not too difficult to stay away from predatory megabanks. In most cities and towns, there are plenty other places to take your money. But even if a financial institution's not on the list of America's largest banks, it still may not be the kind of business associate you'd like to have. Listed more or less in order of increasing "virtue," here are some ways that have been suggested to find a better home for your money:
Local commercial banks, even though they are perfectly capable of helping developers pave over good farmland or putting people out of their homes, have less power than the big ones to do harm. Corporate insider Catherine Austin Fitts of solari.com recommends a strategy for keeping your money in a local bank and out of what she calls "The U.S. Banking Tapeworm 20." Here's only a very brief summary of what Fitts sees as necessary in choosing a local bank with a heart: investigating the bank's coverage area, ownership and governance; reading their financial statements and Security and Exchange Commission filings, if any; contacting bank-rating agencies; doing web searches on owners' and board members' names; talking to branch managers and loan officers; determining the backgrounds and attitudes of board members; and checking out customer diversity, profitability, loan-to-deposit ratio and soundness of investments.
Few people are going to have the interest and knowledge to do what Fitts suggests; indeed, if you are able and willing to follow that whole procedure, it probably means you are a banker. Fitts estimates that investigating one's local banks will take 4 to 15 hours. Good luck with that.
Dr. Ritchie Lowry, professor of sociology at Boston College, runs the website goodmoney.com. He told me that the Community Reinvestment Act of 1977, which requires financial institutions to target an appropriate portion of their investments to low-income communities in their area, provides a convenient window on what a local bank is up to: "Each bank has to file a report under the act. So you can go to the manager and say, 'I'd like to see your report.' That way, you'll find out if they are supporting things like low-income housing and the right kinds of small business."
Credit unions have a lot of appeal as places to keep your money. They're owned by their depositors. They're nonprofit and tax-exempt, so they can afford to pay slightly higher interest rates and loan money at lower rates. These days, they can provide a broad range of services that include increasing availability of ATM services. And your money is less likely to end up in the global arms trade or tropical sweatshops.
A credit union must have a well-defined "field of membership" -- for example a group of employees or a geographical community. The Credit Union Membership Access Act of 1998 has allowed them to greatly expand their fields of membership. This, naturally, has drawn fire from the owners and managers of commercial banks, who don't like competing against tax-exempt institutions that are permitted to offer most of the same services they do.
Now any industry that's a thorn in the side of Big Banking can't be all bad, but credit unions aren't without faults of their own. Complaints by the major banks' friends in Congress prompted the General Accounting Office (GAO) to look at the lending practices of credit unions, which are exempt from the Community Reinvestment Act. Released late last year, the GAO report (pdf) found that "despite the shift toward community charters and the increase in the number of credit unions participating in NCUA's [the National Credit Union Association's] low-income and underserved programs, our analysis ... indicated that credit unions had a lower proportion of customers who were of low and moderate income than did banks."
NCUA's own figures show that only 30 percent of credit union members earn less than $34,000 a year, compared with 39 percent of bank customers, while credit unions serve a much higher percentage of people in the $90,000 to $130,000 bracket than do banks.
Although credit unions aren't under pressure to make a profit, there's nothing to stop them from investing in shady ventures on behalf of their members. A recent instance: The 73-year-old New Horizons Credit Union of Denver, which lost $20 million in 2006, was taken over by the state of Colorado last April and is now up for sale. Its fiscal ill-health appears to be related to loans made through car dealers who exploit credit-challenged customers.
Community development financial institutions (CDFIs) are designed primarily to serve low-income areas. The National Federation of Community Development Credit Unions lists 220 members. Among the most prominent is Self-Help Credit Union of Durham, N.C., which since 1980 has loaned $4.5 billion to over 50,000 small businesses, homeowners and development organizations. Self-Help has regional offices in nine other cities. Anyone can become a member and open money market and savings accounts, complete with ATM services.
The Community Development Bankers Association has 22 member banks across the country. The most celebrated is ShoreBank of Chicago, Detroit and Cleveland, which pioneered the community-development model. Having gotten its start in 1973 as South Shore Bank in Chicago, ShoreBank has made more than $300 million in development and conservation loans, including the financing of 47,000 affordable residences. It offers the usual banking services, including online banking, to customers anywhere in the country. Shorebank has been widely credited with helping revive Chicago's South Side.
Although you can join or bank at almost any CDFI, even if you don't live near one, you may have to give up a lot of the conveniences provided by local banking -- like having ATMs nearby or writing checks accepted readily by your own local businesses. Ritchie Lowry points out, however, that if you have a couple of thousand dollars to set aside, you can buy a certificate of deposit (CD) at any community development credit union or bank you choose, whether you live on the South Side of Chicago or the North Slope of Alaska. As Lowry points out, "It doesn't really make much difference whether or not a CD is from a local bank."
"Do the right thing with the rest of your life."
Wherever you put your own money, don't expect highly profitable but less-than-pure industries to go begging for investors. (In fact, for the truly hard-nosed, bottom-line investor, there's the Vice Fund, which claims high and "recession-proof" returns on your investment in military armaments, tobacco, alcohol and gambling.) Nevertheless, there is little doubt that by depositing in a community development bank or screened mutual fund instead of the Vice Fund or Wells Fargo, you can sleep somewhat better at night.
To get a broader picture of personal banking, I asked Doug Henwood, publisher ofLeft Business Observer and author, most recently, of the 2003 book "After the New Economy," about alternatives for people on the left who don't have the means to become big philanthropists but who want the equivalent of a checking and savings account with adequate convenience and security in which to put their modest earnings.
Henwood was blunt, telling me, "Basically it's very hard to do what you're talking about." Just because a bank is local, he noted, it's not necessarily innocent: "A lot of small banks have far more money than they can invest locally, so they either lend the surplus to bigger banks via the federal funds market or buy U.S. Treasury bonds, which means they're directly funding the purchase of cluster bombs."
Citing the GAO report on credit unions, Henwood characterized them as "notorious for underserving lower-income people and communities." Even with a community development credit union, he said, "you have to read the fine print on what they do."
The effort to bank ethically is a variation on the theme of "socially responsible investing," which rose to prominence in the 1980s with the campaign that pushed companies to divest from apartheid-era South Africa. As a veteran advocate of responsible investing, Ritchie Lowry sees the choice of a bank as an exercise of power: "Whether you have a bank account or a credit card or a mortgage, you're a customer, and customers always have a degree of power over businesses. We can use that. People say, 'Well, corporations are starting to use green practices just because they're hot right now and it's good PR.' I say fine; I don't care what's going through the souls of CEOs as long as they do what's needed."
In a recent article, Aaron Chatterji of Duke University and Siona Listokin of the University of California at Berkeley acknowledged that, "by the numbers" responsible investing has become an important feature of the nation's financial landscape, with one dollar of every nine invested now being put through some kind of social and/or environmental screening process.
But how effective are such screens? The number of issues concerning people is now so large, write Chatterji and Listokin, that companies can shop around for issues and voluntary codes of conduct that will be pleasing to customers and investors but won't hurt the company's bottom line -- and probably won't accomplish very much. They conclude:
At the root of the problem is an inconvenient but implacable fact: Corporations care about profits. Corporations will not -- and their shareholders do not expect them to -- engage in behaviors that do not maximize profit. Indeed, shareholders would punish them if they did. In concept and in practice, therefore, [corporate social responsibility] is at best a partial solution to solving social injustices.Citigroup, to take one example, has initiatives to oppose illegal logging and buy renewable energy. Yet it is also the country's No. 1 banker to the oil, gas and power-utility industries, having advised on $9 billion worth of such deals in a single day this month.
And for an ordinary citizen trying to be ethical, the choice of a bank is much more complicated than choosing at lunchtime between McDonald's and Gino's Sandwich Shop. Financial institutions are one or more steps removed from the impact of what they're funding, whether it's military hardware or wind farms or both. Their investments are highly diverse and constantly changing, and they're always obliged to maximize return on investment.
Putting pressure on corporations through their banks can be tricky, as TXU's abovementioned switch from an all-coal to a coal-plus-nuclear energy strategy illustrates. Environmental Defense, the Natural Resources Defense Council and Rainforest Action Network all helped lead the fight to force TXU's buyers, through their financing banks, to drop plans for eight coal plants. The organizations are rightly proud of their vistory, but if they have views on TXU's new plan to compensate by building nuclear plants, those views haven't shown up on any of the groups' websites.
After looking at more than 100 academic studies, Chatterji and Listokin dismissed the claim that it's more profitable to invest in responsible corporations than in evil ones. That's because it's hard to know whether responsibility breeds good performance or if it's just that companies with more money can afford to spend more on activities perceived as "doing good." A bank, for example, can be pushed into voluntary actions that promise to be profitable. But it will almost never bow to demands that would give an edge to the competition. On the other hand, legal restrictions and regulations, universally applied, don't face that problem.
To keep your money out of the hands of the most notorious polluters and exploiters is one thing; to expect to improve the world simply through the passive act of drawing interest or dividends is quite another. "My usual line on all this," says Doug Henwood, "is that you should hold your nose and invest more or less conventionally (because it's nearly impossible to do the right thing if you're looking to earn interest) and do the right thing with the rest of your life."