CASH: : Fed Branch Is the Greenest Spot in L.A.
Eight currency counting and sorting machines the size of vintage Cadillacs churn and whirl 24 hours a day to keep up with Southern California’s voracious appetite for cash.
Every month, 198 million pieces of currency pass through the tightly secured basement vault at the downtown Los Angeles branch of the Federal Reserve Bank. Between January and June of this year, $16.4 billion flowed in to be inspected, counted, sorted--or destroyed if worn out or damaged.
Where does all the cash come from?
Five days a week, most of it flows in from 3,000 banks, thrifts, credit unions and other financial institutions on virtually every corner in Southern California, Arizona and Nevada. Billions flood in from banks serving busy hotels, clubs and casinos in Las Vegas.
Billions more are generated by the Southland’s thriving underground economy, including tons of cash collected by drug dealers and processed by money launderers. And every week, otherwise law-abiding folks pay millions of dollars in cash “off the books” to thousands of gardeners, housekeepers, day laborers and other workers.
“When you look at the employment numbers compared with the population figures, you get the general idea something is off,” said Jack Kyser, chief economist for the Los Angeles Area Chamber of Commerce. “There are elderly people on Social Security who do odd jobs for cash. There are also industries like the local apparel industry, which have a significant underground element.”
Kyser said as many 25,000 apparel workers may be paid in cash to work at home and elsewhere around Los Angeles. Although Kyser estimates Southern California’s underground economy at $10 billion a year, others in business and law enforcement place it as high as $50 billion.
The Southland’s cultural diversity contributes to the heavy use of cash. Undocumented workers who lack the necessary papers to apply for checking accounts need to be paid in cash. Many Latinos and Asians, following tradition, prefer to transact business in cash.
Meanwhile, Los Angeles has eclipsed Miami as the nation’s No. 1 laundromat for illicit drug profits, oaccording to Michael Zeldin, acting director of the U.S. Department of Justice’s money-laundering unit in Washington.
“In addition to drug money, there is flight capital from Hong Kong, South America and Mexico coming into Los Angeles,” he said.
In one ongoing federal money-laundering case, prosecutors estimate that close to $250 million passed through businesses in the downtown jewelry district. The case was one of several stemming from a lengthy, multi-agency investigation dubbed “Polar Cap.”
Two other laundering cases filed last year involved amounts of $180 million and $312 million.
Federal prosecutors said they would not be surprised if more than $1 billion was laundered through Los Angeles businesses.
Law enforcement sources said there is so much cash collected by Southland drug dealers that they have begun shipping it out of the country on the same planes and boats that smuggle drugs into the United States.
In 1989, Los Angeles police seized $33.5 million from drug dealers who were arrested, according to a department spokesman, Cmdr. William Booth. He said officers responsible for keeping track of drug money frequently use the secured vaults at the Fed to count the bills.
“It’s a hell of a job to count $10 million, even if it’s in $100 bills,” said Booth.
Monday through Friday, from 8 a.m. to 4:30 p.m., a parade of armored trucks arrives at the Fed to unload cash, coins and food coupons. Keeping pace with the relentless flow is taxing resources at the Los Angeles branch, according to bank executives.
“We are processing more currency than we should be,” said Charles Huffstetler, vice president of custody services and electronic payments. “A number of financial institutions are shirking their responsibility.”
Although banks and their branches are supposed to count and sort the currency before making deposits at the Fed, many do it improperly, creating more work for the government.
Although Huffstetler would not name the offending banks, he said the cash scofflaws are improperly sorting or inspecting bills before shipping them downtown.
“We don’t like to play hardball with them in the beginning,” said Huffstetler. “But we can reject the deposits outright or defer giving them credit, and that gets their attention.”
He said banks tend to take advantage of the Fed because there is no charge for counting, inspecting and processing the money. To keep pace with 7% to 9% annual increases in cash flow, the local branch is readying its ninth $400,000 cash-counting machine for service next spring.
Southern Californians’ obsession with automated teller machines adds to the Fed’s cash counting crush.
Most of California’s 11,000 ATMs are in Southern California. By comparison, there are only about 6,250 machines in all of New York state, according to David Robertson, vice president of the Nilson Report, a Santa Monica-based newsletter for executives in the credit card and electronic banking industry.
In the first six months of this year, the Fed’s New York bank took in $18.2 billion, compared to $16.4 billion processed by Los Angeles. Although the amounts are comparable, there was a big difference in how much the Fed branches paid out. The New York Fed disbursed $9 billion more than it collected, while the Los Angeles branch showed a cash surplus of $2.2 billion, according to Federal Reserve figures.
The cash surplus is believed to reflect Southern California’s thriving underground economy, including the drug money and flight capital from abroad. New York, on the other hand, functions as the nation’s sole supplier of U.S. currency to foreign banks, according to a Fed spokesman.
The casually dressed Fed employees who work in pairs in the quiet, temperature-controlled basement don’t concern themselves with where the money is coming from. Working in pairs and rotating through the cash-counting jobs, their motto is: “I watch you, and you watch me,” according to Mark Fishback, vice president of operations at the Los Angeles Fed.
Each day, workers process 8,200 bundles of notes, each 2.2-pound bundle containing 1,000 notes.
“There are so many checks and balances here, it gives you a true sense of security,” said Fishback. “There is a zero loss. We do not lose any money we handle.”
The vault, which spans about one-third of an acre, contains $4 billion to $7 billion in cash. Plexiglas cubes, the size of industrial washing machines, each contain up to $42 million.
About 30% of the money moving through the system is destroyed each day. Athough a $20 or $50 bill might remain in circulation for years, the average life span of a $1 bill is a mere 18 months.
Because the paper used to make currency cannot be recycled, old bills are shredded into a confetti-like material, compressed into briquettes similar in size to the charcoal used in a back-yard barbecue and trucked to landfills for disposal.
PERCENTAGE GROWTH IN FEDERAL RESERVE CASH SURPLUSES, 1985-1988 Miami: -24.5% Nashville: +20.7% Jacksonville: +57.1% San Antonio: +58.5% El Paso: +66.6% Denver: +88.7% Salt Lake City: +142.3% Helena: +179.4% New Orleans: +680.7% Los Angeles: +2,192.2% Source: Federal Reserve System
