Marilyn Writes

Marilyn MacGruder Barnewall began her career as a journalist with the Wyoming Eagle in Cheyenne. During her 20 year banking career, she wrote extensively for The American Banker, Bank Marketing Magazine, Trust Marketing Magazine, and other major industry publications. The American Bankers Association (ABA) published Barnewall’s Profitable Private Banking: the Complete Blueprint, in 1987. She taught private banking at Colorado University for the ABA and trained private bankers in Singapore.

Tuesday, September 10, 2013


By Marilyn MacGruder Barnewall
President, The MacGruder Agency, Inc. (Retired)


A state bank is owned by the public and is not a private corporation.  It is, thus, a public bank. 

The banks that do business with the public are owned by private investors, just as they are now.  They are not owned by the state and though they are affiliated with the State Bank, they are not part of it.  A system of state-owned banks on Main Street would be a socialist or communist system and state banks represent quite the opposite.

A state bank is an administrator.  It grants charters to independent banks that do business with the public and acts as a correspondent bank for them.

At the current time, money center banks act as correspondent banks for the independently-owned banks on Main Street.  A correspondent bank receives loan requests from smaller banks – banks too small to make a large loan when a client or prospective client requests one.  This “loan sharing” concept is good… until the large banks become endangered by marketplace forces and their own greed or stupidity.  Under the current correspondent banking system, if one bank at the top fails, it has a spin-off effect on all of those banks for which it has acted as a correspondent bank over the years.  In a failure situation, the big bank must call its loans… including those loan participations it has made jointly with smaller banks while acting in a correspondent – or, a joint lending – capacity. Thus, it puts the smaller banks at risk of failure, too… it puts the entire system at risk of failure.  That is why such banks are called “too big to fail” – or, “too big to jail.”

In a state that has its own state bank, nationally-chartered banks (banks chartered by the Comptroller of the Currency) are still invited to do business.  The primary difference for them in the new environment is that the state bank now acts as the correspondent bank for the independent banks doing business with the public, not the nationally-chartered bank.


1.                 Implement a state bank similar to the system in place for 94 years in the State of North Dakota.

2.                  The State of North Dakota:

A.         Has enjoyed an unemployment rate as of July 2011 of 3.3%.

National                                  9.1%
North Dakota                         3.1%
B.         With a population of about 650,000, the Bank of North Dakota has, during the past ten years, paid the State Treasurer more than $325 million from bank profits.

C.         In 2010, the worse economy in recent history, the State of North Dakota had its largest financial surplus in history.   Other states were over budget and were bleeding because of lost tax revenues.

D.         North Dakota tops the list of state economies, year after year.

E.         In 2011, North Dakotans will see almost $500 million of their money returned to them in the form of income and property tax cuts.  Combined 2009 and 2011 tax reductions, the average North Dakotan will enjoy a 30 percent drop in personal tax liability.  The Legislature also funded $342 million in property tax relief.  The owner of a $150,000 home will enjoy a tax reduction of $506.

             $341.79 million in property tax relief;
             $120 million reduction in income tax rates (17.9%)
             $25 million reduction, corporation taxes (19.5%)
             $2.125 million tax reduction, financial institutions (a drop from 7               percent to 6.5 percent).

F.         Enjoys population growth of 6% per year;

G.         No bank failures during the past ten years; the lowest home foreclosure rate in the nation; the lowest credit card default rate, too.
Specifically, what does a state bank do that causes such immediate and positive results for a state’s economy?

In states other than North Dakota, the billions of dollars received from taxes and fees are deposited in large commercial banks – just like those that are borrowing trillions of dollars from the Federal Reserve System… from taxpayers.  In North Dakota, these deposits become “captive.”  They stay in the state.   The corporate headquarters of Bank of America (Charlotte, NC), Citigroup (New York City), Wells Fargo (San Francisco) decide what they will do with those deposits.  They are famous for… what?  Their history says they invest in mortgage-backed derivatives, for one thing.  Or, the too big to fail/jail banks lend your tax dollars that your state deposits in them to businesses in their home states, not in your state.  Or the Federal Reserve secretly lends the money to Wall Street or foreign banks and businesses.  Your tax dollars leave the state, in other words.  In North Dakota – or in any state with a state bank – the tax dollars paid by the citizens of the state remain in the state and are used to promote the economic well-being of those citizens (rather than being used to buy votes).

Every state takes in taxes and fees every year.  In North Dakota, these revenues are deposited in the state bank which, in turn, makes sure a large percentage of the money gets invested in the state’s economy.  And, the state bank gives a portion of its earnings back to the State Treasury. 

A July 18, 2011 Associated Press newspaper article reports jobs in North Dakota increased by 61,000 since 2000.  That doesn’t sound like a lot of jobs, but remember, this state has a population of less than 700,000.   Of those jobs, 17,000 were created between 2008 and 2010 – a time when most states watched their unemployment rates climb higher and higher. 


The Federal Reserve System, a non-government private corporation has since 1913 been determining monetary policy for the United States.  A good case has been made by highly recognized, eminent economists around the world who say America’s monetary policy is destroying our economy.  A recent partial audit of the Federal Reserve shows this private corporation loaned $16 trillion in near zero interest secret loans to American and foreign banks AND businesses.  This debt, if left unpaid, falls on the shoulders of American taxpayers.

The usual culprits – Citigroup received $2.5 trillion; Morgan Stanley received $2.04 trillion, Merrill Lynch got $1.9 trillion and Bank of America got $1.3 trillion (since Bank of America and Merrill Lynch are the same corporation, B of A Inc. got the most money:  $3.2 trillion).

But it wasn’t just American bankers that got nearly interest-free loans.  About $3.08 trillion went to foreign financial institutions and private businesses all over Europe and Asia.

The point is, while the Fed was making the low interest rate secret loans (for which U.S. taxpayers are on the line), 6.5 million American homeowners were suffering through delinquent and foreclosed mortgages.  Why are they in foreclosure?  Because the monetary policies of the Federal Reserve System caused a real estate bubble that resulted in the loss of hundreds of billions – perhaps more than a trillion – dollars in primary residential real estate values.  They are in foreclosure or behind in house payments because Federal Reserve monetary policies have resulted in a rotten economy.  They are in foreclosure because the Federal Reserve System didn't do its regulatory job in preventing the mortgage-backed derivative scam that has severely damaged the world's economy.

Citizens in all states question the wisdom of the Fed’s monetary policies and the taxation of future generations of American children required to pay for the monetization of United States debt.  Citizens of the states have expressed concern that the Federal Reserve System is using their tax dollars to prevent the failure of banks in foreign countries while their American financial services system is being compromised by what Congress has chosen to call “too big to fail” banks.  They complain that they are being “fed to the wolves” or “thrown to the four winds of fate” by the policies of the Federal Reserve System.

Because the Federal Reserve System refuses to allow a complete audit of the trillions of American taxpayer dollars it uses for debt monetization purposes, it is impossible to evaluate precisely how that private corporation is spending America into debt.  The Federal Reserve System is a private corporation, not a part of the United States Government, and is referred to by many banking experts as a “cartel,” (as OPEC is a cartel).  The Federal Reserve System generates private corporate profits by collecting interest on the debt it is also responsible for generating… a clear “conflict of interest” because when the nation is in debt, the Federal Reserve earns profits on the interest paid on that debt.  The Federal Reserve System profits when America’s debt is high.  When debt is low, it does not.  Obviously, the Federal Reserve has a vested interest in keeping America in debt.

In response to citizen concerns about what the people perceive as a federal financial system run amok, the State of Texas has approved that state’s right to print its own currency.  The State of Utah has approved the use of gold and silver coins in everyday commerce and business.  The State of Georgia has approved the right of bank clients to open deposit accounts using gold and silver coins.  In South Carolina, State Senator Lee Bright has introduced legislation that backs the creation of a new state currency to “protect the financial stability of the Palmetto State in the event of a breakdown of the Federal Reserve System.”

"If folks lose faith in the dollar, we need to have some kind of backup," North Carolina State Sen. Bright told the Spartanburg Herald Journal's Stephen Largen.

As of March 2010, there were twelve new declarations of State Sovereignty in progress in state legislatures around America.  They include Alabama, Nebraska, Rhode Island, Wyoming, Washington, Indiana, Kentucky, Georgia, Kansas, Missouri, Mississippi and Maryland.  Obviously, state legislators see potential problems.

Legislators responsible for the reforms required to best protect the citizens they are sworn to serve must choose carefully from a broad range of reforms.  Among those reforms must be a means by which bank lending to independent businesses can be stimulated.  A vast majority of taxpayers are employed by independent businesses which have been the hardest hit by the credit freeze caused by the reckless behavior of Wall Street banks and Federal Reserve policies.

As of March 2011, there were state-owned banking bills pending in eight states to either form or do feasibility studies to assist in forming legislation.  This year, bills have been introduced in Oregon, Washington, Massachusetts, and Maryland.  Bills from 2010 are pending in Illinois, Virginia, Hawaii, and Louisiana.  The Center for State Innovation in Madison, Wisconsin, was commissioned by Washington and Oregon to analyze the impact of a state bank in those two states.  The conclusion:  State-owned banks in Washington and Oregon would, CSI said, have a positive impact of substance on employment, new lending, and state and local government revenues.  In September 2011, the California State legislature passed state banking legislation and it is awaiting Governor Brown’s signature.

I began writing in my columns several years ago about how a simpler, more direct and less confrontational alternative than declaring sovereignty or legislating the state’s right to create its own currency exists for state legislators to take appropriate and immediate action to protect the citizens of their state from the clearly potential failure of the federal monetary system. 

I was the first banker and journalist to write about the need for state banks.  When I was a consultant (1979-1993), my daily rate was $2,000.  I was paid for my opinion.  In 2011 dollars, that amount would probably have increased to somewhere between $5,000 and $10,000 per day.  This is a no cost opinion:  I believe the establishment of a state bank offers the most important alternative state legislators can find to establish an economic survival mode to replace a failing federal system.  It is a way to protect a state’s sovereignty without declaring it, and a state bank makes it possible for a state to issue its own currency (should it become necessary) without actually issuing it.  A state currency without a state monetary distribution system is like an impotent bull:  Unable to perform.  More important, legislation declaring state sovereignty or the need for a state currency may further debilitate what little confidence remains in the federal system whereas the establishment of a state bank does not.

For example, currently the only way to clear checks written on deposits in federally-chartered (or state-chartered) banks is to utilize the check clearing system at the Federal Reserve System.  The Bank of North Dakota clears its own checks.  The independent banks in North Dakota, abiding by federal law, clear their checks through the Federal Reserve.  If a state declares sovereignty (as several have said is their right), it must be done both de jure ("according to law") and de facto – or, "in reality."  A state may say it is sovereign, but sovereignty must also be accepted by other nations and states.  For said declarations to hold legal weight and to be taken seriously nationally and internationally, the declaring (de jure) state must, according to international law, have a definable territory, it must have a governing body, and it must be able to exercise and control its own monetary power (de facto).  Any state can comply with the first two requirements (definable territory and and governing body).  Logic dictates that no state can exercise monetary power when tied to a failing federal system of finance and Federal Reserve Notes that may – or may not – maintain value.

That is the basis of the people’s concern for their economic well being.

One thing is absolutely certain.  Without a state bank, states have no alternatives should the federal system collapse.  The state system will collapse with the federal system.  We all hope that doesn’t happen, but the economy is not improving.  It gets consistently worse.  With a state bank, both state sovereignty and currency creation are possible.  What legislators need to think about is this:  Without a currency distribution system independent of the federal system currently in place, states have no alternatives but financial chaos available to them – and that is what they will get should the system fail.

In one of my editorials in News With Views (an Internet news service with a million weekly readers), I said:  “As of June 30, 2009, the Federal Reserve Bank of St. Louis said there were 6,898 commercial banks in the United States – but as of June 30, 1984, there were 14,369 commercial banks? In 1994, that number was pared down to 10,623. Now we have less than 6,898.”

Since local banks are a key to the ongoing economic stability and are often the sole source of independent business growth for communities, statistics indicate it is time for our legislators to look at lawful alternatives available to the state that can stimulate economic growth and taxpayer confidence.  Historic results over a period of 93 years at the Bank of North Dakota proves the value of state banks.

Following are links to the online sites of the 12 states that currently have state bank legislation under consideration:

Of all the alternatives available, one fact stands out as identifiable truth:  States must be prepared to quickly come to the economic rescue of their citizens should the need arise.  The financial services industry currently creates an unsafe economic environment in which all alternatives must be kept open to states that want to serve the people they represent.  As it relates to the economic well-being of any state’s citizens, a state bank offers the least offensive alternative to the dangers of what may be a failing federal financial system while concurrently supporting all potential alternatives required to save citizens from extremely painful economic failure at the federal level.

As long as a State is tied to the federal system of finance, it is impossible to declare sovereignty or create a state currency because no monetary distribution system is available.

The United States is $17 trillion in debt.  We are spending $1.50 for every $1 in revenue we take in.  That is unsustainable.  Before any new dollar or Federal Reserve Note is printed, it is 46 cents in debt – and thus, it is not “a dollar” nor what the Federal Reserve purports a Federal Reserve Note worth $1.00.   I’m not a lawyer and don’t know the lawful implications of that, but I do know that if I turned a piece of paper into something and represented it has having the value of $1.00, I’d be arrested for counterfeiting.

Our problem in America today is too much centralized power.  The best way to solve that problem in the economic sector is to implement state banks… a system that de-centralizes the power of the Federal Reserve System.

In short, without access to a state-owned system of banking similar to the only such system in the country – North Dakota – it is impossible to be properly prepared to protect any state’s citizens against the devastation that can result from a failure of the federal financial system.  Equally, at this time there is no legal reason barring any state from implementing a state bank similar to that 93-year old system in the state of North Dakota.


A state bank is owned by the public and is not a private corporation.  The banks that do business with the public are privately owned, just as they are now.  The state bank acts as an administrator, granting charters to banks and acting as a correspondent bank for them.

Banks doing business with loan, deposit and trust customers in any state would, under a properly-structured state bank system, continue to be privately owned.  The banks are privately owned but are chartered by the state rather than the Comptroller of the Currency in Washington, D.C.  That is the primary change that occurs when a state owns its own banking system:  The state, rather than the federal government, charters the state banks doing business in the state and the state establishes the qualifications private investor banks must meet to provide banking and other financial services to citizens.  The state establishes and/or approves acceptable loan policies at banks it charters.  The state bank becomes the correspondent bank for independently owned banks it charters.

Some states may try to structure a state bank for political or other purposes.  If a state bank is structured like a political toy rather than as a state bank, it will fail.  The mistakes made at the federal level that caused systemic failure must be eliminated from the state system.  They include:

1.           Fractional-reserve banking has played a huge role in creating too much currency from thin air; that, in turn, results in the inflation that has debased our currency. The only logical outcome to fractional-reserve banking is inflation.

2.           Fiat currency -- paper currency that has nothing backing it.  Though nothing can be done about this as long as the independent banks must, by law, function under the auspices of the Federal Reserve System and the Comptroller of the Currency and the FDIC, when the federal system fails each state will be enabled to create its own currency.  Such a currency should be backed by commodities in which each state has a strong economic interest... uranium, coal, oil, natural gas, timber, etc. 

              Inflation is not the result of an increase in the cost of good as much as it reflects a decrease in the value of the currency.  

I recommend a return to the lending policies in place during the 1970s and 1980s.  In the good old days, bank growth was dependent on bringing new deposits into the bank.  A bank could lend a percentage of its deposit base.  That percentage was sometimes determined by bank regulators… usually up to 70 percent of the deposit base, depending upon overall bank loan quality.  Banks make money on loans (loan interest) and lose money on deposits (they pay interest to depositors).  Forcing bank growth to occur on the basis of deposit growth is good… it means there is business development and new jobs in the community.  If those things aren’t there, bank growth through new deposits is not possible because new deposit accounts don’t appear when jobs aren’t being created.

Fractional-reserve banking makes bank growth dependent upon the extension of credit.  If a bank makes a million dollar loan, the Federal Reserve System makes it possible for the bank to lend $900,000; ten percent of the million dollar loan goes into the Federal Reserve System.  Thus, the name “fractional-reserve” banking.   In other words, because the bank made a million dollar loan, $900,000 of new currency has been created by the Federal Reserve fractional-reserve policies.  Creating money out of thin air results in reduced currency value and that, in turn, causes prices to rise… purchasing products with a currency that’s losing value requires more of the failing currency to purchase it.

The system of fractional-reserve banking must be kept out of the state bank system.  It is a major reason for the failure of the federal system and should not be brought to the state level.  It will, in the long run, cause them to fail, too.

A state bank administers the granting of state bank charters on the basis of the requirements established by the Advisory Boards created by the state legislature. 

A state bank is not, as many people think when they hear the words “state bank,” equivalent to “state-chartered banks” (which have been in existence for many years in most states but which are tied to the federal system of banking).

A state owned bank operates its own system of banking for the state deposits is holds and for the bank services it provides to its independent member banks.  It grants member charters to independent banks (much like the Comptroller of the Currency grants national banking charters to national banks).  Though a state bank must comply with federal banking laws, the state bank, not the Federal Reserve System, establishes monetary policy for the financial institutions it charters.  A state bank may perform all functions currently performed for member banks of the Federal Reserve (such as check clearing) and the Federal Deposit Insurance Corporation (such as insuring customer deposits).  The Bank of North Dakota does both things for the state bank but its independent member banks must currently clear checks through the Federal Reserve Banks and deposits must be insured by the Federal Deposit Insurance Corporation (FDIC).  Should the federal system fail, both check clearing and deposit insurance could quickly be picked up by the State Bank. 

A state bank can (and does, in North Dakota) function as a correspondent bank for its member banks.  It can write mortgages… and, in the current real estate market, a state bank can help establish a floor under the ongoing, downward spiral of real estate values.  There has been one (1) bank foreclosure in North Dakota during the past ten years.  I recommend that state banks be prevented from selling real estate mortgages to Freddie Mac and Fannie Mae both of which sell mortgages to Wall Street banks where they are still, even after all of the trouble, included in mortgage-backed derivatives (which I term “worthless pieces of paper”).


A state bank is NOT the owner of state-chartered banks.  If it were, such a system of state-owned banks could be accurately called a “socialist banking system.” 

Properly structured state banks are not operated by politicians.  Rather, with a well-written legislative Act, the state requires the bank to be run by professional bankers under a well-controlled environment of positive regulation.  Since state bank employees are public servants, and since they are not directly involved in making loans to the public – that is done by the privately-owned independent banks serving the public – no bonuses, commissions or fees for loan generation are paid to state bank employees – or, to executive management of the bank.

State-owned banks, properly structured, do not compete with community banks.  Rather, they support them.  A state bank uses state funds (now kept in the state rather than being sent out-of-state to a “too big to fail” bank) to provide credit for local growth-based projects.  Currently, funds from state taxpayers leave the state and are leveraged for international investments.  This creates no jobs for state residents.

Neither does a properly structured state bank compete for consumer or commercial deposits.  The independently-owned banks chartered by the state handle those items – as they do now.  In North Dakota, less than 2 percent of BND deposits come from consumers.  Community banks have available to them municipal government deposits and can use the funds to create jobs locally because the BND provides letters of credit guaranteeing such loans.  As a properly-stated state bank Act reads:  “All state revenues must be deposited in the state bank.”

The Bank of North Dakota is a member of the Federal Reserve System.  It is a member because it chooses to use the convenience of Federal Reserve services available to it… not because it has no other alternative (like the other 49 states).  A state bank Act insures state bank deposits – the tax and fee dollars of the state’s taxpayers.

The Bank of North Dakota is run in a very fiscally conservative manner… it is not subject to outside interference by politicians with a special project they want to fund.  Credit policies chartered by state banks must be approved by a state bank advisory board.  Bank of North Dakota is not involved in speculative loans or derivatives and other risky ventures… nor should any state bank be.

State funds and tax monies are kept safe by a well-structured state bank.  Such banks should be self-funded.  Bank of North Dakota manages VA, FHA, and other federally-guaranteed loans that would otherwise go to large, out-of-state banks.

When local communities partner with a state bank, it allows independent banks to fund local projects which sustain economic development within the community.  The “too big to fail” banks have no interest in local communities.  Studies show that from 30 to 50 percent of public project costs are composed of loan interest paid.  Thus, the reduced cost of borrowing from a state bank can help fund infrastructure projects.

An interesting article from the Honolulu newspaper appeared on June 27, 2011.  It was a story about how the Hawaiian Bankers Association (the state association) opposes legislation being considered by that state’s legislature to implement a state bank.  The new banking system does bring down certain power structures – like the ties that exist between state banking associations and the American Bankers Association – and legislators need to be prepared for such resistance.  In North Dakota, their Bankers Association endorses the Bank of North Dakota.

It should be noted that North Dakota has the most local banks per capita and enjoys the lowest default rate on loans of any state in the nation.  Of the 93 banks doing business in North Dakota, 87 are state-chartered banks who have opted to become part of the new system – and who have prospered while other banks around the nation suffer lost profits of substance.  The other six banks are nationally chartered.

That is the ball on which everyone needs to stay focused:  The win-win situation that results from implementing a state bank – which is well worth the headaches of getting the job done (and done right).

Monday, September 09, 2013

How the Nation's Only State-Owned Bank Became the Envy of Wall Street

| Fri Mar. 27, 2009 6:33 PM PDT

The Bank of North Dakota is the only state-owned bank in America—what Republicans might call an idiosyncratic bastion of socialism. It also earned a record profit last year even as its private-sector corollaries lost billions. To be sure, it owes some of its unusual success to North Dakota’s well-insulated economy, which is heavy on agricultural staples and light on housing speculation. But that hasn’t stopped out-of-state politicos from beating a path to chilly Bismarck in search of advice. Could opening state-owned banks across America get us out of the financial crisis? It certainly might help, says Ellen Brown, author of the book, Web of Debt, who writes that the Bank of North Dakota, with its $4 billion under management, has avoided the credit freeze by “creating its own credit, leading the nation in establishing state economic sovereignty.” Mother Jones spoke with the Bank of North Dakota’s president, Eric Hardmeyer.

Mother Jones: How was the bank formed?

Eric Hardmeyer:
It was created 90 years ago, in 1919, as a populist movement swept the northern plains. Basically it was a very angry movement by a large group of the agrarian sector that was upset by decisions that were being made in the eastern markets, the money markets maybe in Minneapolis, New York, deciding who got credit and how to market their goods. So it swept the northern plains. In North Dakota the movement was called the Nonpartisan League, and they actually took control of the legislature and created what was called an industrial program, which created both the Bank of North Dakota as a financing arm and a state-owned mill and elevator to market and buy the grain from the farmer. And we’re both in existence today doing exactly what we were created for 90 years ago. Only we’ve morphed a little bit and found other niches and ways to promote the state of North Dakota.

What makes your bank unique today?

Our funding model, our deposit model is really what is unique as the engine that drives that bank. And that is we are the depository for all state tax collections and fees. And so we have a captive deposit base, we pay a competitive rate to the state treasurer. And I would bet that that would be one of the most difficult things to wrestle away from the private sector—those opportunities to bid on public funds. But that’s only one portion of it. We take those funds and then, really what separates us is that we plow those deposits back into the state of North Dakota in the form of loans. We invest back into the state in economic development type of activities. We grow our state through that mechanism.

Clearly other banks also invest their deposits. Is the difference that you are investing a larger portion of that money into the state’s own economy?

Yeah, absolutely. But we have specifically designed programs to spur certain elements of the economy. Whether it’s agriculture or economic development programs that are deemed necessary in the state or energy, which now seems to be a huge play in the state. And education—we do a lot of student loan financing. So that’s our model. We have a specific mission that was given to us when we were created 90 years ago and it guides us throughout our history.

Are there areas that you invest in that other banks avoid?

We made the first federally-insured student loan in the country back in 1967. So that’s been a big part of what we do. It’s become almost a mission-critical thing. I don’t know if you have been following the student loan industry lately, but it’s been very, very interesting as many have decided to leave. We will not though.

So you are able to invest in certain areas because they provide a public good.

Yeah, or a direction, whether it’s energy or primary sector type of businesses. We have specific loan programs that are designed at very low interest rates to encourage activity along certain lines. Here’s another thing: We’re gearing up for a significant flood in one of the communities here in North Dakota called Fargo. We’ve experienced one of those in another community about 12 years ago which prior to Katrina was the largest single evacuation of any community in the United States. And so the Bank of North Dakota, once the flood had receded and there were business needs, we developed a disaster loan program to assist businesses. So we can move quite quickly to aid with different types of scenarios. Whether it’s encouraging different economies to grow or dealing with a disaster.

What do private banks think of you?

The interesting thing about the bank is we understand that we walk a fine line between competing and partnering with the private sector. We were designed and set up to partner with them and not compete with them. So most of the lending that we do is participatory in nature. It’s originated by a local bank and we come in and participate in the loan and use some of our programs to share risk, buy down the interest rate. We even provide guarantees similar to SBA to encourage certain activity for entrepreneurial startups. Aside from that, we also act as a bankers’ bank or a wholesale bank. So we provide services to banks, whether it’s check clearing, liquidity, or bond accounting safekeeping. There’s probably 20 other bankers' banks across the country. So we act in that capacity as kind of a little mini-fed actually. And so we service 104 banks and provide liquidity to them and clear their checks and also we buy loans from them when they have a need to overline, whether it’s beyond their legal lending limit or they just want to share risk, we’ll do that. We’re a secondary market for residential loans, so we have a portfolio of $500 to $600 million of residential loans that we buy.

MJ: So what’s the advantage of a publicly owned “bankers’ bank” instead of a privately owned one?

EH: Our model is we use our deposit base to help [other banks] with funding their loans, even providing fed funds lines with our excess liquidity—we buy and sell fed funds and act as a clearinghouse for check clearing activity. That would be the benefit or different model. We’re a depository bank and can bring that to bear.

MJ: If other states had a bank like yours, do you think they would have been more insulated from the credit crisis?

EH: It all gets down the management and management philosophy. We’re a fairly conservative lot up here in the upper Midwest and we didn’t do any subprime lending and we have the ability to get into the derivatives markets and put on swaps and callers and caps and credit default swaps and just chose not to do it, really chose a Warren Buffett mentality—if we don’t understand it, we’re not going to jump into it. And so we’ve avoided all those pitfalls. That’s not to say that we’re completely immune to everything, certainly we’ve bought some mortgage-backed securities and we’re working through some of those issues, but nothing that would cause us to be concerned.

Would states with your model have any new tools to get out of the credit crisis?

Let me put it to you another way and tell you another thing that we do. We also provide a dividend back to the state. Probably this year we’ll make somewhere north of $60 million, and we will turn over about half of our profits back to the state general fund. And so over the last 10, 12 years, we’ve turned back a third of a billion dollars just to the general fund to offset taxes or to aid in funding public sector types of needs.

Not bad for a state with a population of 600,000.

Right. And here’s another thing: Back in 2001, 2002, when we went through the dot com bust, all the states suffered some sort of budget shortfall, including the state of North Dakota. At that time our budget shortfall was fairly insignificant--$40 some million. And so it was quite easy to overcome that. The governor just simply said alright, we’re going to turn back 1 percent of all general fund agencies, and the Bank of North Dakota, you will declare another dividend to make up the balance. And so we did that. Our capital was in a fine position to go ahead and do that. So in some cases we’ve acted as a rainy day fund.
MJ: And now the current downturn seems to have bypassed you.

The State of North Dakota does not have any funding issues at all. We in fact are dealing with the largest surplus we’ve ever had. So our concern is how do we spend it wisely and make sure we save it for the future.

It’s not a bad problem to have.

Yeah. We’re a little bit of an island here, and so we look around and we say boy that is unbelievable to see what is going on in the rest of the country and here we are completely countercyclical.

Are other states interested in your model?

In my stint here as president, which as been about 9 years now, I’ve had a lot of inquiries from other states about how this works, could it work for them. And my predecessor, who is now the governor of the state of North Dakota, has in fact testified at a couple of other state legislatures in terms of setting up the same model. Up until a year or two ago I would have bet that it would never happen.

It’s funny, because North Dakota is traditionally a red state and yet you have these institutions—some people might say they’re socialist.

Yeah, I’ve had that thrown at me many times.

But is seems like they are very popular in the state.

Yeah, and of course the socialism theme has become in vogue lately, been thrown about a bit.

Aside from political opposition from bank interests, do you think it could be viable for other states to implement your model?

So much of what is going on right now is a knee-jerk reaction to some things that have happened, where regulations and accounting practices weren’t where they should be. So my advice is everybody take a deep breath and we’re going to get through this and we are going to exit this as a stronger industry than when we went into it, with controls in places that are absolutely necessary, with banks understanding the risks they are taking. For all states to look at North Dakota’s model and say this would be the panacea to all those things, I don’t see that happening.

It’s clearly not the only solution, but I’m curious whether it could be part of it.

Possibly. It just depends on what they want to do with it. We’re using this to spur economic growth for our state, to provide niches where others aren’t comfortable, whether it’s in-state financing of residential loans or making student loans. Every state has their own particular needs. We’ve carved out a pretty good niche here and I think are well-respected by our peers in the banking industry. They look at us as partners and not competitors. That would be the key if you were to do this in any other state is to replicate that part of our model. That’s where you really open yourself up for criticism, is state-owned businesses competing with the private sector.

Could a bank like yours be set up without sucking deposits out of private banks in the short term?

I imagine you could do some sort of bond issue where you would use that as your funding source.

After seeing the credit crisis unfold, has it changed your opinion of what you do?

It just reinforced what we do, and that is you stick to what you understand, you do it well, you know your customers. We’ve never been a bank that tries to hit home runs. That’s not what we’re all about. We have a specific mission which is more important. Most corporations and banks, their top priority is to maximize shareholder return. And that is a nice byproduct for us because we do have a nice return—an NROA [return on net operating assets] of 2, a ROE [return on equity] of 25, 26 percent. But really where we take the most satisfaction is making sure we meet the needs of the state and finance those types of things that make our state go forward.

Josh Harkinson is a staff reporter at Mother Jones.