San Francisco takes another shot at public banking

San Francisco wants to create the first city bank in the state, and one of the first in the nation, six years after a California law went into effect allowing cities, counties or special districts to authorize such financial institutions.

Supervisor Chyanne Chen introduced the charter amendment, which would establish a municipal financial corporation that ultimately would become a public bank, on Tuesday. A vote to place a measure on the November ballot is scheduled to take place in July.

The possibility of a public bank, which would include FDIC insurance and allow the city to finance affordable housing and small businesses, became an option after the state Legislature passed AB 857, the California Public Banking Act, in 2019.

Several California cities, including Los Angeles, have explored public banks but none has approved them. And legal observers say San Francisco's proposed bank faces several hurdles - from getting on the ballot, being approved by voters, and then passing muster with federal banking regulators.

San Francisco looked to a somewhat surprising inspiration for its proposal: North Dakota.

The Bank of North Dakota, established in 1919, has an impressive track record of success and makes a tidy profit, though it is not covered by the FDIC.

Misha Steier, spokesperson for the San Francisco Public Bank Coalition, said she viewed the North Dakota bank - despite its structural differences - as a model for the city to boost spending that isn't covered by the general fund.

"Public banks are particularly effective at counter-cyclical smoothing of economic cycles, as can be seen from North Dakota's anomalously successful recovery from the [Great Recession] and COVID crashes," she wrote in an email. "When the budgets are low, public banks provide lending for things that appropriations can't cover."

Steier said the proposed bank has no identified funding source, an issue she acknowledges will need to be addressed once a strong governing structure is established. She added that "the surest way for the people of San Francisco to guarantee the capitalization of our bank would be us deciding to make a local funding commitment."

Robert S. Chirinko, a business professor at the University of Illinois, Chicago who published a paper about the North Dakota bank and whether its success can be applied elsewhere, said funding is the pivotal issue.

While the proposal lists several sources of funding for the bank, Chirinko said most of them are not new and that one - philanthropic contributions - "is not a reliable source."

"If I was a professional banking guy and was being recruited to work there, if they started talking about philanthropy, I think my interview would be over," he said.

Some investments in green technology or affordable housing may not pay off right away for a private bank, but there are public benefits "that are not going to be captured by the marketplace."

"There could be a role there for government, but you have to recognize that you're not going to get your money back," Chirinko added.

Margaret E. Tahyar, a partner with Davis Polk & Wardwell LLP, said that this would be the first time the FDIC would evaluate whether to approve a public bank, assuming supervisors place the measure on the ballot, voters approve it, and the financial institution survives any legal challenges.

"The FDIC will look for a robust three-year business plan, high levels of capital, experienced and qualified management and strong risk management," she said. "In particular, the FDIC would want to be sure that there was not unusual risk to the deposit insurance fund which implies strong credit underwriting standards."

SpaceX IPO winners, losers

The Space Exploration Technologies Inc. S-1 statement, released Wednesday in advance of the company's plan to an initial public offering next month, revealed interesting information about Elon Musk's company.

Starlink is the revenue and profit center: No one previously knew exactly how much revenue the privately held company generated, but the S-1 made clear that Starlink, the satellite internet provider, provides 61% of SpaceX's revenue and is the only profitable operating segment within the company. While flashy photos of rocket launches and space highlight the SEC filing, it's Starlink - a satellite broadband company - that brings in the bulk of the cash.

Mandatory arbitration included: As expected, SpaceX is requiring shareholders to submit disputes to arbitration, as opposed to being able to sue in court. Musk famously reincorporated his company in 2024 from Delaware to Texas, which permits mandatory arbitration clauses for securities claims. Doru Gavril, a partner with Freshfields US LLP in Redwood City, disagrees with the consensus view that mandatory arbitration is not allowed in Delaware - but that is not an issue in Texas. Other companies may be inspired by SpaceX's high-profile example.

Passive bid support: Under an unusual arrangement, SpaceX will not have to wait three months to be added to the Nasdaq 100, a popular list of nonfinancial companies on the Nasdaq exchange. Instead, the company will have to wait just 15 days to join the index. That means passive investors and endowments will add SpaceX stock to their holdings automatically, an important way for the stock to get new buyers and a boost for company employees who cannot sell their shares right away.

The controversial change was made to accommodate large companies going public and should also help OpenAI Inc. and Anthropic PBC when they go public. The S&P 500, an even more important index, is considering dropping the waiting period from a year to six months. "Early investors and SpaceX employees are obvious winners," said Eric Talley, a professor at Columbia Law School. "For index investors, it's a much more complicated story," because there will be less time for stocks to find their natural value.

IPOs win, probably: SpaceX is one of several major companies that is due to go public this year, along with OpenAI and Anthropic, in what corporate lawyers have expected to be one of the largest IPO years ever. Some attorneys have worried that the mega-cap AI companies would suck all the oxygen out of the room, but that remains to be seen.

Popular companies may be in a hurry to go public before any possible market downturn. OpenAI is preparing to file to go public very soon, according to a report in the Wall Street Journal. Mergers and acquisitions, along with take-private transactions, have been favored over IPOs -- "but this may be your moment in the sun, so long as other macro-market conditions don't drag things down," Talley said.