L.A. should not play bank regulator

Even though it faces a budget gap of $200 million or more in the coming year, the L.A. City Council is considering a “responsible banking” ordinance that could raise its costs and reduce the income its investments generate. Why? Because some council members want to judge the banks and securities firms the city does business with in a new way — not by the value of the services they provide but by how well they perform on a series of poorly drawn tests of local service. Do we really have to say that’s not a good idea?

The idea comes from Councilman Richard Alarcon, who argued in the Huffington Post last year that cities should channel their “outrage” at the banks into a “cultural shift.” Rather than focusing on short-term gains, Alarcon wrote, local governments should try to produce more long-term growth “by investing our funds in economic growth opportunities that directly impact our communities.” His proposal languished for more than a year, but it gained new life this month as protesters aligned with Occupy Wall Street camped out on the City Hall lawn.

The ordinance the city is considering, however, isn’t so neatly targeted. It would have the city treasurer collect reams of data from the companies that provide or want to provide financial services to the city, then rate them according to their performance in four vaguely defined areas: residential loans, small-business loans, community reinvestment and charitable activities in Los Angeles. Local officials would have to consider those ratings before awarding any banking or securities contracts.

The measure seems to run afoul of state law, which says cities have a fiduciary duty to put their money in the banks that offer the best deal. It also would make it hard for smaller companies that don’t have budgets for local philanthropy to win bond underwriting contracts, potentially interfering with efforts to cut costs by increasing competition among underwriters.

The biggest problem with the proposal, though, is that it distracts local officials from the difficult economic tasks ahead. Alarcon’s idea sounds good, but his ordinance involves a trade-off. It pushes the city to accept a lower return on those investments and higher interest costs on its bonds in exchange for the satisfaction of doing business with banks and underwriters that grant more loans for affordable housing and support more local arts festivals. And it would provide no way to gauge how the measure benefited the city, let alone whether the benefits exceeded the cost.

It’s easy to understand why the tent-dwellers around City Hall resent the bailed-out banks that are foreclosing on thousands of California homeowners. But now is not the time to force the city treasurer to play bank regulator. City officials have enough trouble balancing the budget in this sluggish economy. They can’t afford to make that job even harder.