Adventures in Nationalization with the Central Bank of North Dakota

Crony Capitalist tendencies do not discriminate with respect to "side of the aisle."  The left has been as busily handing out delicious treats to its favored students as the right.  Tacking on a reverse bill of attainder cleverly (or not so cleverly) disguised in prose designed to deter key word searches and in order to slip cash to a friend of a friend is as American as reality shows.  Accordingly, the somber faces of Zero Hedge readers should register exactly no surprise whatsoever on learning that the Health Care Swill harbors a series of such glory hole surprises.

Consider this gem:

(a) DEFINITION OF ELIGIBLE LENDER.—In this section, the term ‘eligible lender’ means a lender that, on July 1, 2009, was and continues to be—
(1) a bank, the deposits of which are guaranteed by a State;
(2) owned by the State in which the lender is located;
(3) under the control of a board of directors that includes the Governor of the State; and
(4) an originator or holder of loans made under the program under part B, as such part was in effect on July 1, 2009.

(1) IN GENERAL.—At the request of a State in which an eligible lender is located, the Secretary shall enter into an agreement with the eligible lender under which—'
(A) the eligible lender agrees to provide student loans to borrowers in accordance with this section; and

(B) the Secretary agrees to provide Federal loan insurance on the student loans made under this section by that eligible lender....

The Rules Committee summary characterizes this lyrical prose thus:

Section 2213.  Agreements with State-Owned Banks.   This section amends Part D of Title IV to direct the Secretary to enter into an agreement with an eligible lender for the purpose of providing Federal loan insurance on student loans made by state-owned banks.

Of course, the reality is a bit more complex.  In fact, other than the Puerto Rico Government Development Bank, the only "state" owned bank in the United States is the Bank of North Dakota.  Since it is somewhat difficult to squeeze the PRGDB into the definition "a bank, the deposits of which are guaranteed by a State," it is pretty clear that this provision is tailor made to apply only to the state owned bank that was a state owned bank on July 1, 2009.  In other words, the Bank of North Dakota.

How to Nationalize an Industry Without Nationalizing an Industry

Taking a step back, the Obama administration has long desired to nationalize the student loan business.  Nationalizing it outright would require legislation somehow forbidding private lenders from issuing loans to students, or forbidding schools from accepting the proceeds of such loans.  This approach, obviously, would require an absurdly tortured constitutional construction and would be highly unlikely to survive even the most rudimentary challenge.  However, distorting the market via price fixing accomplishes the goal nicely.  Specifically, limiting generous federal guarantees to "eligible lenders" places those entities in a vastly superior position competitively.  The risk of default is shifted directly to the taxpayer and the "eligible lender" is able to out-price all comers when it comes to rates.  This effectively means that the taxpayers are being used to price-fix private lenders out of the student loan business.  Congratulations taxpayers!

The Bank of North Dakota is a curious beast.  All state agencies and appendages are required to deposits their funds at the bank, giving it a captive depositor base.  All tax collections and fees are also deposited with the bank, which amounts to an interest free loan to the bank by taxpayers in the amount of any pending refunds.  The state treasury can adjust this dial at will by modifying the amount of withholding.  Of course, taxpayers will be pleased to learn that profits on their interest free loans to the state are funneled back into the general fund to increase the amount North Dakota spends on... well, whatever it wants.  In addition, the bank makes loans to state agencies and appendages authorized (read: mandated) by statute, permitting a rather recursive bit of factoring by the entire state government without even a hint of underwriting diligence.  The bank itself was created in a near populist uprising in 1919 by farmers tired of eastern whipper-snappers and their underwriting standards and played a central part of a then byzantine foreclosure process that effectively made it impossible to foreclose on a farm in North Dakota.  No foreclosure means no loans in most circumstances, unless you have a captive bank mandated by statute to be the lender of only resort, that is.

As one might easily guess, the bank also lends based on the political dictates of North Dakota and plays a key role in permitting the state government to command and control the local economy via selective lending.  Obscured as it may be, the bank is actually just another tax on North Dakota citizens, and is just a dividend to the general fund away from supplementing the state budget with bailout money when things start to go south.  Of course, it also helps when you are running as a wholesale bank and processing most of the payments through and in North Dakota for those private sector banks that service the state and acting as a market maker in the secondary market for residential loans.

No surprise at all then that the somewhat parasitic Bank of North Dakota would find friends in a democratic congress to throw it a particular bone, hidden, as it were, in the thick syrup of the Health Care Morass.  Less surprise still when you notice that Senator Kent Conrad (D-ND) is Chairman of the Committee on Budget.

In our view there is no stronger argument against permitting centralized control of industries, particularly finance, than the dynamic aptly demonstrated by the Bank of North Dakota gambit.  So long as government, state or otherwise, is permitted to translate political desire into market manipulation this sort of cronyism threatens.  This bit of shabby dealing is only possible because the United States has permitted the federal government to distort student loan pricing for decades and, not satisfied with guarantee programs, is now moving to be the exclusive provider of student loans in the country.  (Oh, except for the Bank of North Dakota).  Likewise, it only becomes possible to trample more than a century of bankruptcy priority jurisprudence when the government has 70-80% of the major creditors in, say, Chrysler by the short hairs via TARP.  Look no further than the fact that credit default swaps on mortgage backed securities (favored by the regulators to boost the housing market) permitted banks to half their reserve requirement on those assets to understand why credit default swaps were allowed to garner nearly unlimited leverage.  Likewise, one can only continue to inflate a dangerous real estate bubble when the instrumentalities required to price fix $3 trillion in mortgage loans are in the hands of the Barney Franks of the world.  (And, by the way, if FNM and FRE didn't cause the first bubble, why is the current administration convinced it can used them and the FHA to inflate this one?)

In the end capturing lending sectors that represent over 40% of the nation's economy accomplishes two things:

First, the ability to disregard underwriting in favor of loans to this week's favored political class or pet project.

Second, the creation of a significant body of subjects (to be distinguished from Citizens) beholden to the state.  Is it any wonder that health care, insurance and energy are next on the list?

We don't really wonder what will be de facto nationalized next.  We wonder what is actually going to be left to nationalize.  The latter seems quickly becoming the smaller list.