this is our top stories now syria in the cycle of violence twin blasts hit a government building in damascus while new footage of alleged rebel brutality surface. leaders grow desperate to undo the ruinous effect on the union member nations grow wary of german proposals of a political federation of europe. the country's involvement in the u.s. led war claims pakistani lives on an almost daily basis. to pick up today for the moment i'll be back with the news team in half an hour from now the summary but in the next ninety minutes we cross over to washington d.c.

starting with financial analysis in the capital account. good afternoon and welcome to capital account i'm laurin the star here in washington d.c. these are your headlines for wednesday june twenty seventh two thousand and twelve barclays will reportedly pay four hundred fifty million dollars to settle with u.s. and u.k. authorities over accusations the bank attempted to manipulate key interest rates to benefit the banks to rivet is ratings positions now this is the first settlement but there is still a global investigation going on involving many of the world's biggest banks so are you sick of this do you want to put your money in a bank that simply uses your deposits to make loans to finance the economy not to

finance speculation or gambling or allow manipulation well talk to c.e.o. of ego bank ron paul about community banks as an alternative but on that note is the traditional business model of small banks being destroyed by service and looking at what's going on in central bank land what would be the impact of nerve i'm talking about a negative interest rate policy the e.c.b. is reportedly contemplating and mario draghi is thinking of reducing the bank deposit rate to zero or even lower we'll talk about it plus u.s. cities and states are strapped for cash they are three trillion dollars in debt according to the federal reserve and stockton a city in california has become the latest to crumble under the way it is reportedly the nation's largest city to seek bankruptcy protection which which it is slated to do so is there an alternative model of doing business for cities to

avoid these tragedies well we're going to tell you about that thousand. as saying as city hall let's get to today the capital account. all right you heard me at the top of the show barclays has been ordered to pay hundreds of millions of dollars to settle charges of attempting to manipulate two global benchmark interest rates ok barclays according to reuters has admitted to trying to make lie bore look artificially low to avoid signaling the bank's distress to markets during the financial crisis this went on from two thousand and five to two thousand and nine according to the c f t c one of the regulators barclays traders and employees also attempted to manipulate the interest rates and

make false reports concerning them to benefit the bank's derivatives trading positions to maximize profits and minimize losses this conduct occurred regularly and was perv a sieve and they included barclays traders asking the other banks to assist in the manipulation or helping other banks and their attempts to manipulate these interest rates now just so you know if you don't live where underpins trillions of dollars in derivative contracts and is a crucial peg for corporate and personal borrowing so it affects everyone or a lot of people presumably so if this is another example where you're sitting there feelings screwed over by these big banks and what they can do what can you do well whether you're scared about the safety of your money or you're sick of being used to allow big banks to take on more leverage and enable their risky speculation well

let's talk about some alternatives ron paul is here to talk about iran will do paul chairman and c.e.o. of eagle bank which is a community bank and he has been in the business a long time twenty five years he's here to spell out the benefits and also a lot of the challenges facing small banks so first thanks for being on the show so i'm sure over absolutely so as i told you before i'm very excited to get your perspective running a small bank first is community banking an alternative for people who are there scared of having their money in these too big to fail institutions that spec. late with it or who are opposed to it they don't want to deposit their money in a bank and allow that bank to take on more leverage to speculate is our community banks an alternative absolutely community bank especially eagle bank is your basic blocking and tackling type of banking you make deposits and you get loans we're very active in the community so you'll know everything about the bank as a community bank a good community bank is and that's exactly one of the alternatives rather than banking with the big banks that you hear about derivatives most people don't

understand what a derivative is but then you find out that some of these banks have invested in this with your money and that's just the contradiction in terms of what community bank is all about ok so community banking just vanilla banking they take deposits they make loans it's simple is that none of these crazy speculative derivatives positions but look at how the industry has changed i want to bring this up for our viewers to see that community bank and market share has really changed since you've been in the business mr paul i mean look at this since one thousand nine hundred five so the giant banks had just seven percent of the share of u.s. deposits and ninety five look at two thousand and ten they have forty four percent almost half and during that time the share that community banks had went from twenty eight percent to i mean about half of that so what factors do you attribute this to macro economically looking at the picture is it monetary policy issues is it regulatory issues what would you can point it's all the above ninety one percent

of the banks in this country are a billion dollars in smaller. and that ninety one percent accounts for only ten percent of the total assets of this country as you referring to before so you see the total imbalance between the size of the banks versus the number of banks in this country as an example sixty percent of all the loans made of a million dollars or less are being made by these billion dollar and less banks so the disconnect that we have here is as you point out in the graph is that the number of banks have reduced from fourteen thousand down to seventy two hundred twenty years so the statistics are just extraordinary to see how big banks are getting bigger and the number of smaller banks are getting smaller despite the fact that our economy desperately needs these small banks to continue to make the loans well let's talk about the impact that a monetary policy is just one example have had on these smaller banks let's talk about there the fact keeping interest rates at zero percent how is that impacted

the traditional the nella banking model of bar a short lending long making money on this but how how is it hurt that how does it hurt your bank well as you remember years ago when the small in the s. and l. crisis that was exactly what happened the s. and l. crisis they were borrowing short and they were lending long interest rates changed and the entire industry imploded that's the concern that people have within all banks so eagle bank is an example what we do is we have a very very balanced portfolio and that's the key you don't want to be borrowing short and lending long so it's very hard for people coming in especially the washer metropolitan area which is such a real estate town is you need long term financing for that office building or apartment building and you're going to a community bank because they're the only local decision makers that can make that loan how do you combine the two and the only way of really doing it is trying to balance a portfolio the portfolio you're going through c.d.'s you're taking portfolio and going to the federal home loan bank to stabilize your portfolio for

a longer period of time so you do your best in matching funds but it's a very very difficult process. have you seen that profit margin then as you've had zero percent interest rates since two thousand and eight i have to imagine it had well acted small banks what we have to remember is the federal reserve reducing their interest rates from twenty five percent to zero if that's what is done is only your overnight funds so from a banking perspective the cost of our funds really is more than just overnight banking it really we don't really use fed funds at all which is the zero side what we're doing is we're going out and taking money through money market accounts of c.d.'s and transaction accounts so it's a balance of all these instruments going out to the fed fund market is really not what you want to do it's really as they say it's the source of last resort ok but has this become more difficult this balancing act and is there enter a strain absolutely extremely difficult now stream we difficult and what about from a liquidity perspective are you finding that fewer depositors want to keep their

money in savings account that they're not making any money on their savings account and maybe they just want to checking account and they want to speculate with their money or keep under their mattress well i will tell you that's the big the big thing is keeping your mattress because people don't want to keep it in the stock market because of the volatility of the stock market they really don't want to keep it in banks because they were concerned about banks and they're not really getting anything for the risk that they haven't banks fortunately in two thousand and eight the ted program came out the transaction guarantee program came out which gave people a lot more comfort in being able to keep money in the banks because there was unlimited insurance however as of december right now that's plan to disappear so we worry that's going to affect you or your your bank well i think all community banks are worried about that because especially those banks that are very active in the lending market because right now you have significant amount of liquidity that's being kept in transaction accounts checking accounts that likely will be uninsured anything above two hundred fifty thousand dollars come december thirty first so there's a lot we've been very very active i've been very active on the hill in

a variety of places trying to promote to the f.d.i.c. and to congress although this is a tough time to be promoting anything to congress on banking but how important it is for us to get the program extended and again the economy is going to be driven by small loans and those small loans are going to be made by small community banks and that's the consistency that we have to have we can't take the philosophy that one but one size fits all whether you're a large bank or a small bank it just doesn't exist when you're talking about those loans that are going to be made by small banks i want to talk about lending standards i want to play a little bit of what ben bernanke you said about them to a group of community bankers let's take a listen. supervisors must insist on high standards for lending risk management and governance. so he was talking about how loose lending standards led to the financial crisis how to avoid this happening he was talking to community bankers there but were loose lending standards by community banks the problem that

really led to the financial crisis and made it worse or was it the big guys like bank of america and wells fargo i think that absolutely was talking to the big banks i think that if statistically you looked at the loss ratio on the community banks it wasn't a community banking world that had those loose lending again you go back to the basics you have community banks that are run by community people so these are the people that understand the market these are the people that are making loans down the street but making their loans right around the corner in their community bank so i truly believe that it is the bank americas and others that that would just doing foolish they were responsible type lending as an example in the residential mortgage division you're making loans to people that couldn't afford their homes that's a very very different business model think community banking so i'm firmly convinced i think statistics would prove as an example we've done in excess of three billion dollars with a real estate lending and of loss less than three million dollars over the past

twelve years so statistically you look at the real estate being such a bad word in the lending world that's really not accurate i think it was that way in the large banks and through the c.m. vs market through wall street ok so then going up to the financial crisis and after it you're saying large banks made the mistake but guess what everyone has to pay new regulations dodd frank impact everybody and you don't have to be a genius to know that it's going to be more difficult for a small bank to comply with a bunch of new regulations than it will be for a large bank who not only has a lot more money to comply with them but also has the benefit of having major lobbying presences in washington and being able to impact those regulations so is a one size fits all approach to regulation fair no i really don't think so i think . no different than any business that's out there every business has a different type of regulations that should be consistent within that level of the size of the business when you look at a community bank community bank is total different priorities as an example to

spend time on derivatives at a community bank through the dodd frank act is is a waste of time to waste of money albeit still a significant amount of reporting that we have to do on those type of items when you go back to sarbanes oxley so obvious actually was driven and should have been focused on more of the commute of the larger banks than the community banks nonetheless the community banks had to fulfill those obligations on the reporting side and spend hundreds and hundreds of thousands of dollars for a community bank that's a lot of money for these big banks it's not the same and when we go back i want to talk more about this two tiered kind of system where where where small banks are disadvantaged big banks have the advantage and something like regulations makes that even more pronounced so i want to talk more specifics when we get back or a break we'll have more with a ronald de paul chairman and c.e.o. of eagle bank. also still ahead in the midst of the local debt crises affecting cities and states across the country a suburb in georgia has adopted

a different model of government no long term debt no pension obligations either well look at the privatization of their city hall but first your closing market numbers. well. it's technology innovation all the latest developments around russia we've got the future covered.

thank you. all right welcome back so we're talking about small banks community banks what the advantages are putting your money in them but how they're being so hurt by regulations that the too big to fail banks can handle but then they get to go speculate and do all the bad stuff we want to avoid so regulations we know they always come at a cost but what cost will this graph shows the increased spending on technology alone to keep up with regulations and you don't have to be einstein to know that because community banks are smaller that cost is going to take a proportionally bigger cut out of their profit margin so let's talk about how this actually plays out in a real community bank ron paul is the c.e.o. of one so tell us how in really tangible terms have compliance costs changed for you say since dodd frank over the last few years i would say as you say it would

sort of means actually that you don't think within probably two years of sort of these actually probably spent the next a seven hundred thousand dollars more than they did two or two years previously before sarbanes oxley one has to remember that especially in the community banking level the regulations are so severe the regulators are in on an annual basis so the piling on that took place by now having sarbanes oxley and dodd frank coming in on top of regulators to me is a we over kill we have camels rating which is a valuation of how your bank is doing in if probably looked at by the regulators that's looking at all the different categories of the bank and to me that is for in excess of what's needed never mind the addition of that on dodd frank and sarbanes oxley ok so this is a disadvantage for a small banks what kind of it's an advantage for big banks they don't have to spend as much relative to how much money they have to comply what about the other benefits that too big to fail banks have that you do not what privileges do they

have that have nothing to do with competitive reasons but which allow them more access or easier access to credit or capital well as an example we go bad. the positive side if you're a deposit or and you're going to deposit in a big bank by definition we know too big to fail so you're not to worry about your deposits because that bank will always be around converse lee if you take your money and decide to put into a community bank that's a very different concern that was the purpose in two thousand and eight of having the program so that's one of the disadvantages of being a community bank and truly a big advantage of being the too big to fail bank because you know that that money's safe because the government's never going to let that happen and fail the implicit bailout guarantee let's look at what's happened to small banks in the meantime i just want to bring up a chart showing a very small banks where they've gone they've declined they're going away these are banks that have less than one hundred million dollars in assets so where are these banks going with all the issues we're talking about compliance costs regulations

zero or are they different pairing are they going under or are they merging are they being consolidated well as you mentioned we talk about the cost of the regulation we talk about the competitive risk these hundred million dollars smaller banks or merging with other smaller banks they don't have a choice one hundred million dollars bank can't support the costs associated with sarbanes oxley and dodd frank nor can they really make the size of loans that have the impact in our economy that needs to be made we've been able to grow our loan portfolio by twenty four percent year over year which is an extraordinary number compared to the country but it's three billion dollars we can do a forty million dollars or we could do one hundred thousand dollars on that one hundred million dollars bank and smaller really can only do those small sized loans and then not getting paid for it in terms of the risk and the costs associated with it so all those small banks or clearly there were only eleven charters that were granted in all of two thousand and eleven only eleven that compares to one hundred

ninety one that we're done six years earlier so it gives you some perspective of how the local business persons recognizing community banking is. not the way to store it because of all these regulations ok so what squeezing out the small guys doesn't seem fair that this is the impact of trying to regulate the too big to fail guys that got us into this mess in the first place but i appreciate you being here to spell out the reality of pleasure that was drawn paul chairman and c.e.o. of eagle bank. all right now switching gears a little bit but staying to kind of the local community level we know state and local governments in the u.s. are a reported three trillion dollars in debt their government so stockton the great example today it's on track to be the nation's largest city to seek bankruptcy protection under the u.s. bankruptcy code they're set to do that now add this to the list a growing list thirteen cities counties and other government entities filed for bankruptcy last year this is the highest annual level in nearly two decades now the

story of these different governments varies but similar threads seem to go through all of them too much debt and overspending during the boom too much debt to be repaid after the downturn soaring pension costs now in ought to be the nation's largest city to see federal bankruptcy protection stopped and took a rare financial step of last resort after struggling with the all of these factors that we're talking about soaring pension costs for employees that can't be paid so is there an alternative model for doing business for cities to save money avoid massive debt and the promises of generous benefits and pensions made to employees that in the end local governments just can't pay well let's go to sandy springs georgia ok city hall has seven employees on the public payroll at least the rest are private employees who work for private companies through contracts to do all the local government functions the cops and fire department are exceptions it's been a city since two thousand and five i spoke to the mayor. as mayor of sandy springs

georgia she's been a resident for five decades she led the charge to incorporate the city i asked her about the motivation behind pioneering and adopting this model for a city where most of the government functions are privatized. i have been reading about experiments in this direction across the united states some of them were just for individual departments but there was a lot of shows thing in california that i was aware of and then we became aware of a new civilian florida where storm that was there all of its functions and so we contacted newman from there up that it was working well and decided it would be the most efficient model for us to go where and now you also interestingly have a background you are retired economist you had a specialization in urban finance and also in labor economics which i think is an

interesting background they are coming from to my question in between sandy springs and also your professional background as an economist what have you found about how the private sector can be used to make government more efficient. in the primary function of the private sector to provide service so what is the city it's a compilation of various services so it made sense to me that we would go with the private sector because it provided services and we know that competition is what keeps prices home so i knew that coast the government would be complained mine clue to competition model and i know that reportedly the city has no long term debt no huge pension liabilities do you see both of these factors as a function of this privatisation model that you have and what else have been the major benefits for the city really

a able to run the city more efficiently by having these private companies that compete for the work. and this kind of official means but we can do it alone with a smaller work force the mom including the private employees all together we now have fewer employee use including the privates and then the city to the north of us where the same population so that gives us more money to put aside for capital improvements and we're able to do better with the current version without having to morrow as far as exporting your model to other cities in the us what would be required are there specific things that a city needs in order for this to work specific demographics or a certain threshold of revenue or a certain idea about what residents want as a city to provide. i think that the senators are pretty much the same kind of services mostly to use have to provide public works they have to

provide zoning permits garbage pickup i mean most cities have to provide pretty much the same services it is easier to put this model in place for an existing city if they do it one department of time i think trying to outsource the whole sort of government one cam like we did is difficult where you have the vested interests of existing employees and maybe union contracts so i would always advise where you have ministers of some own surprise do it one department of time now we do have an interesting visit from folks in japan because when we have cities they were wiped out by the tsunami they're starting from scratch so starting from scratch you can put it in the whole model like we did it but if you're trying to

change an existing city mayor of balances do it one department of the time how come we've seen disaster stories in some other cities that have tried to privatized functions for example in chicago they did this with the meter that reportedly got a fifty million dollar bill for loss of revenue because of disability placards and there's a city in california that says and they've had to go private they have seen services decline and it's been more expensive for them so what has sandy springs done differently to where this has been at that benefit. i think. the real secret to this success is writing a good contract and you've got a very very specific in what it is the company is going to give the level and you've got to be very specific that if the service is not delivered and all the conditions are not met by by company. and then i also want to ask just in terms of the kind of city sandy springs is do you provide

all of the services all of the public services that any city does the difference is just that you hire private workers to do this it isn't that you get rid of these services it's just who you hire and how you hire people to do it your career we all have the same. municipal dues. and. these deployments the various services oh room by private companies. it's an interesting alternative as we see so many cities and states so financially strapped and it's not just international visitors from japan going to check out sandy springs visitors from turkey ireland finland and china have all come out to check out how that city is model works according to the mayor's office also cities around sandy springs new ones have adopted a version of the model no cure for bad management though they remind me that and

that's all we have time for thank you so much for watching and be sure to come back tomorrow and in the meantime you know you can follow me on twitter at lauren lyster give us feedback on any of the shows or any missed at youtube dot com slash capital account check us out in h d on hulu hulu dot com slash capital dash account ever and here thanks for watching and have a great night.