Allow me to dissent from the general high-fiving going on regarding this last-minute rescue of Chicago’s ShoreBank, and venture the view instead that the bank’s bailout is a travesty. It’s a blatant example of the political class engaging in arm-twisting in order to prop up a failing, but favored, institution. Which is to say, it’s a prime example of how bank regulation is not supposed to work.
Have you been following this farce? ShoreBank is a $2.3 billion lender, established in 1973, whose main mission is to provide credit to inner-city businesses and consumers. From purely a social-utility perspective, there’s of course nothing the matter with that. Very high-minded. And inasmuch as politicians can be expected to look favorably on any institution willing to offer credit to their credit-starved constituents, ShoreBank has no shortage of friends among Chicago politicians, and in the Obama White House, as well.
But—surprise!—recession hasn’t been kind to ShoreBank. Inner-city lending is an iffy proposition even in good times. Once the credit crackup started, the company hit the wall hard: at the end of the first quarter, non-performers accounted for 13.1% of assets, while its Tier 1 risk-based capital ratio came to -0.1%. That’s right, negative. ShoreBank lost $106 million in 2009, and projects it will lose a total of $100 million in 2010 and 2011. Profitability isn’t expected to return until 2013.
A zombie, in other words. Earlier this year, the FDIC, seeing the zombie for what it is, ordered ShoreBank to raise $125 million in new capital by May 21 so it could qualify for another $75 million in TARP preferred. But by last week, the company’s capital-raising efforts had gone nowhere, and the bank seemed doomed. The FDIC was all set to step in, find a buyer if it could, and shut down the bank.
But guess what happened instead? The politicians apparently got involved, and pushed their pals on Wall Street to come up with some cash. Lloyd Blankfein, eager to mend fences in D.C., entered the picture and started working the phones. Goldman itself was in for $20 million. Soon enough, Bank of America, Citigroup, and JPMorgan Chase were all on board, as well. Harris and Northern Trust signed on, too. On Tuesday, GE committed $20 million, and the bank had hit its goal.
So out of nowhere, the leading lights of American finance had emerged to move heaven and earth to ensure the survival of an institution that, last month, none of them had probably ever heard of. Now ShoreBank can apply for (and will no doubt receive) $75 million in TARP (that is, taxpayer) money.
If you think all this smells to high heaven, you’re right. ShoreBank, we now know, has a business model that is fundamentally flawed. Like the other banks with balance sheets that blew up this cycle and that were unable to attract new private capital, it needed to be put down by regulators. Instead, the nation’s biggest banks, goaded by the Obama administration, came together to hammer out a rescue package that makes no sense financially but that will pay political dividends for years to come. This is crony capitalism at its absolute worse.
Worse, the politicians go about it all with an air of self-righteous arrogance. Particularly annoying in this regard has been President Obama’s mouthpiece on the ground in Chicago, Rep. Jan Schakowsky, a Democrat whose district includes the wealthy North Side of Chicago as well as the suburbs of Skokie and Niles. “Shrill” doesn’t quite describe the tone of Schakowsky’s insistence ShoreBank be bailed out. (Of course, she doesn’t actually use the b-word, since it’s reserved for the large banks that she likes to demonize.)
On May 15, for example, Schakowsky put out this statement: “ShoreBank did not get into trouble until the recklessness of Wall Street caused the collapse of the economy and the housing market. The big Wall Street banks that caused this economic crisis received hundreds of billions of dollars in taxpayer bailouts. It would be a tragedy for Chicago neighborhoods if some of the chief beneficiaries with the greatest capacity to help end up riding off into the sunset while an institution that provides credit to underserved communities is allowed to collapse.”
What absolute nonsense. Here’s the core of the problem that Schakowsky refuses to admit: ShoreBank lent so much money to people who didn’t pay it bank that the bank’s entire capital has now vaporized. The bank is broke! Its business model and its execution failed. If ShoreBank gets more capital, it will almost certainly make more bad loans and go broke again. What exactly is the point? No one should have his arm twisted by the President, a Congressman, or any of their surrogates to “save” this institution.
Rep. Schakowsky, what did you do last year to help save the Bank of Lincolnwood, a bank that was actually in your district, before it failed? Nothing! What have you done to try to save any of the many Chicago-area banks that have failed over the past year? Nothing!
(As far as that goes, the last person who should be offering advice about banking is Jan Schakowsky, given that her husband spent five months in 2005 for check-kiting and tax-fraud. This is not a family that seems to rank financial prudence especially highly.)
But hold on, you are saying. ShoreBank lends to poor people! It provides a social good that most banks don’t, and so deserves a second chance.
No. There are reasons most banks don’t do the kind of lending ShoreBank does. To see why, take another look at those capital ratios and NPA numbers. If you want to set up an entity to make provide high-risk, socially enlightened finance, fine. Set up a nonprofit and fund it with voluntary contributions. That’s why God gave us the Ford Foundation. But given ShoreBank’s recent history, the notion that this institution should receive taxpayer money and continue to have the privilege of offering deposits backed by the full faith and credit of the federal government is ludicrous. The only reason it’s still in business is that it knows people in the right places, and those people have managed to wheedle out enough of your and my money to keep the bank propped up.
As I say, it’s a travesty. But it’s also, apparently, the standard way the Obama people do business.
What do you think? Let me know!