Thoughts & Comments
A Bad-News Bailout
The deal to save ShoreBank is Chicago-style politics-as-usual

Thomas Brown  ( about me )
Posted 05/21/2010
bankstocks.com
tbrown@bankstocks.com

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!


  Add your comment

 

 

W. Brewster Posted On 5/21/2010 12:11:26 PM

You need to go deeper on this Tom.....look at the major owners, and their political relationships and the board of directors.....it gets better and the story deepens..... W. Brewster Boston

J.F. from IL Posted On 5/21/2010 12:45:11 PM

By now, we know that none of this should surprise us. What was the quid pro quo for the big boys (and us taxpayers via TARP funds) lending all the cash? Did the FDIC demand some change at the top or at the board level? Or, is it business as usual with the same band of incompetents that allowed this bank to make its past mistakes?

Erich Riesenberg Posted On 5/21/2010 12:47:59 PM

I only slightly recall you even acknowledging the bailouts from 2008 - 2009. You missed the bubble, missed the crash, missed the bailout. Everything but this. Hope you got some good sleep.

chris Posted On 5/21/2010 12:51:15 PM

Excellent points all, Tom. I just hope people can see through this facade. But, they won't. They'll go protest the JP Morgan Annual Meeting in order to see themselves on the Internet instead. But certainly don't let JP Morgan cut that credit line to someone who doesn't pay on time and has no job!

Jim W. Posted On 5/21/2010 1:11:56 PM

Even though they got themselves in trouble like many other banks, including the Tier 1 banks that are trying to help them, ShoreBank is one of the few banks that should receive some consideration for their lending practices and the results from that effort. Without banks like ShoreBank, blighted neighborhoods and the minorities and non-minorities that live there, own businesses and work there, have no chance of recovery. If you took the time to meet with the founders of that bank, you would agree that there is no finer and more ethical group of bankers in the USA. They have provided an invaluable service to neighborhoods across the country. The GOP should find something better to do than to harrass these fine folks from Chicago.

J.F. from IL Posted On 5/21/2010 1:29:39 PM

By now, we know that none of this should surprise us. What was the quid pro quo for the big boys (and us taxpayers via TARP funds) lending all the cash? Did the FDIC demand some change at the top or at the board level? Or, is it business as usual with the same band of incompetents that allowed this bank to make its past mistakes?

DLB Posted On 5/21/2010 1:41:15 PM

Shore Bank should be allowed to fail. Of couse so should Citi, Bankamerica, and any other bank that's insolvent. But that won't happen in the crony capitalist system we've now developed. Failure is good. It provides valuable information to people and moves assets from the greedy and stupid into the hands of the prudent and wise.

Jim Wells Posted On 5/21/2010 2:11:57 PM

The Shore Bank bailout is also an insult to every other struggling CDFI in the country which lacks the type of obscene political clout displayed over the last 2 weeks.

greg Posted On 5/21/2010 2:51:45 PM

This is amazing, they get bailed out, but a real community bank in our town doesn't get anything. While not a CDFI, in our county everything is in reality as we are designated as disadvantaged county. 16% plus unemployment and being the ONLY community bank in town. We reflect our community and are in bad shape but we will struggle through. Sure wish we had the power of hometown and numbers behind us.

ACEMAN Posted On 5/21/2010 3:03:32 PM

Y'all are on the right track and on the right train with this one. Whether it is crony-capitalism (and where are the regulators) or financial shenanigans of the bank itself (what about its REAL assets= liabilities + capital, i.e., where has all the capital gone?) How is it that the regulators may have found that the bank is nearly insolvent, detected accounting gimmicks and possible fraud and possibily maintained unreal financial reports, and yet politicians don't want this whale to fail? I'm remineded, that in 1933 the way y'all knew that you were bankrupt was when in Alabama, Mississippi and Oklahoma, you drove your Model T tot he bank to get an extension of your credit based on your crop and the front door of the Bank was locked with a big chain and a sign in the window that said "failed." Politicians didn't come from DC to bail out the hundreds of thousands of farmers, feed lot owners, and carry trade folks to re-open the banks with new capital. It didn't happen.

Ole Holsti Posted On 5/21/2010 3:04:38 PM

OK, so you don't like this and it gives you a shot at Obama. What about e-mail shills who appear to be involved in classic "pump and dump" operations. What say you now about your one-time favorite, First Marblehead? Have you, at last, no shame sir?

J. Worthington Moneybags III Posted On 5/21/2010 3:14:09 PM

Damned Lucky Duckies!!

bill cridland Posted On 5/21/2010 3:51:19 PM

Hey Tom, Lighten up. For a mere $20 mil bribe, Goldman et al got rid of the Volker rule!

curmudgeonly troll Posted On 5/21/2010 4:05:43 PM

The only reason most of the banks are still in business because of the Wall Street bailout and crony capitalism. A Democrat is someone who says, hey, if the rich can get away with it, why not the masses? I would be more sympathetic if you had been decrying the excesses of Wall Street before the crisis, instead of decrying regulation that might have helped avoid it, and cheerleading the worst excesses like student loan marketers that took the government and borrowers to the cleaners.

marty Posted On 5/21/2010 4:08:06 PM

proof before you post

Verinder Posted On 5/21/2010 4:31:47 PM

This is legalized corruption and even worse. The press is a cheerleader and the voices of ethics and common sense are few and far between. This country is losing its bearings, its compass. This level of open corruption makes the Chicago model seem picayune in comparison.

OURFREEDOMFIRST Posted On 5/21/2010 4:45:23 PM

You are sooo right, this is appalling and I wonder where the rest of the national media is on reporting this Obama administration blackmail scheme. FOX's Glenn Beck has been exposing this for a week, along with the shennanigans of the Chicago Carbon Exchange calling it CRIME, INC. Please give some coverage to that financial web of deciet and fraud as well. It is journalists like you who will save America from this debacle...unmask the crooks for their real agenda.

Skeptical Posted On 5/21/2010 4:48:42 PM

...ShoreBank's loan files. Which transactions doesn't the White House want the public to see? ...if the credit memos and loan documents even still exist.

Barack Obama Posted On 5/21/2010 6:27:17 PM

All you who disagree with me are racists.

Jeff Posted On 5/21/2010 6:31:18 PM

Tom - come on. I agree with your main point completely, the bank should have been failed, but let's not go the easy route and paint this as a Democrat position. Cronyism comes in all shapes, sizes and political parties.

Paul J. Gambka Posted On 5/22/2010 11:10:50 AM

Just another example of Crook County Politics. What kind of country would electe B.O. and put this regime in power? God help us all.

Ralph Posted On 5/22/2010 1:01:07 PM

You are absolutely correct. One reason for the meltdown was Barney and Chris insisting that Fannie and Freddie make more money available for folks that could not afford the homes they were buying. Also look at what they did with CRA lending. As every banker knows, you can't get a new branch approved or a merger done unless you have done your share of CRA + some. Good luck because the real reform we need is term limits to get some of these folks out of DC.

KB in Chicago Posted On 5/22/2010 3:34:59 PM

This is another of the hundreds of examples of the abject lack of leadership in this country. There are no adults in D.C. let alone Chicago politics.

bkj Posted On 5/22/2010 6:19:49 PM

Hi Tom,, Thanks for stepping up on this topic. The kleptocrates ( which I define as a combination of the big business and poliitical class axis of evil) are out of control. There will be a backlash. Its like a market correction in a bubble, as I donlt know when it will happen, but it will be swift and ugly.

Ann T. Posted On 5/23/2010 12:35:04 AM

This is really scary. Thank you Tom for saying this. People must know what's going on in real world of politics.

Buzz Posted On 5/23/2010 8:36:14 AM

People better wake up soon. You won't hear this story any where on the mainstream media. Doubt if even Fox News will carry this story.

Jim C Posted On 5/24/2010 9:09:29 AM

Tom: I agree wholeheartedly wiht your assessment. The only positive is that Shorebank will have a new Chairman, David Vitale. He's a no nonsence guy who will have his work cut out for him.

Jim C Posted On 5/24/2010 9:36:15 AM

Tom: I agree wholeheartedly wiht your assessment. The only positive is that Shorebank will have a new Chairman, David Vitale. He's a no nonsence guy who will have his work cut out for him.

Jim C Posted On 5/24/2010 10:13:32 AM

Tom: I agree wholeheartedly wiht your assessment. The only positive is that Shorebank will have a new Chairman, David Vitale. He's a no nonsence guy who will have his work cut out for him.

erb4h9@umkc.edu Posted On 5/24/2010 11:14:26 AM

I hope somebody investigates this travesty. I bet First National Bank of Anthony would have appreciated this kind of political intervention, but they obviously have the wrong political connections.

Barringtonmilo Posted On 5/26/2010 11:13:14 AM

this is just another example of wealth distibution that our ignorant ,arrogant representatives in Washington force down our throuts. Hope America wakes up before it is too late and we are ruled by ADOLPH OBAMA. I know where my vote goes in November we have to stop these Washington idiots.

Bob G. Posted On 5/29/2010 4:25:56 PM

You have been totally misinformed. For one thing, each major bank in Chicago earns their CRA credits by investing in Shore Bank. Without that investment, those bank would have to have a separate division to handle the types of loans Shore Bank has made since 1973 basically in minority neigborhoods and obth the south side and west side of Chicago. Without Shore Bank the neigborhood from 63rd Street to 95th Street would have been area of the city that very might have been leveled years ago. Chicago politics had nothing to do with it. Yes, I assume their were some politicians who were responcible but not the ones you claim. It is better to get the facts before writing opinions.

fed up and disgusted Posted On 6/21/2010 4:17:12 PM

more reason to vote republican.when the hell is the media going to start doing their job?

bogey1941 Posted On 7/15/2010 8:33:37 PM

Subject: Fw: Shorebank scam Subject: Fw: Shorebank scam Those who continue to deny the criminal intent and connections in the Obama administration after reading this, are incapable of independent thought.......The schlock science involved in "carbon trading" and the false claims of climate alarmists only serve to further enrich these thieves. *************************************************************** This bank is in Chicago ; of course, no surprise there. It is legal and ethical to make a profit and huge sums of money by selling ice-cream or computers, but when you sell the American public - or force upon us - a socialistic bill, and taxes which are founded in make-believe data re: global warming, carbon footprints, polar bear extinction, etc., then, that is downright fraud/greed! You (or someone out there in computer land) voted this man and all of his bandit cronies into and around the White House, and I leave it up to you to vote these crooks out of office - Democrats and Republicans alike. This is an interesting story put together from various articles and TV shows by the British Times paper. It shows what Obama and his friends are really all about. It's not hope and change, it is money. I warn you, the first part is a little boring, but stick with it. The second part connects all the dots for you (it will open your eyes). The end explains how Obama and all his cronies will end up as multi-billionaires. (It's definitely worth the read. You will not be disappointed). A small bank in Chicago called SHOREBANK almost went bankrupt during the recession. The bank made a profit on its foreign micro-loans (see below) but had lost money in sub-prime mortgages in the US . It was facing likely closure by federal regulators. However, because the bank's executives were well connected with members of the Obama Administration, a private rescue bailout was arranged. The bank's employees had donated money to Obama's Senate campaign. In other word

bogey1941 part2 Posted On 7/15/2010 8:35:46 PM

ShoreBank survived and invested in many "green" businesses such as solar panel manufacturing. In fact, the bank was mentioned in one of Obama's speeches during his election campaign because it subjected new business borrowers to eco-litmus tests. Prior to becoming President, Obama sat on the board of the JOYCE FOUNDATION, a liberal charity. This foundation was originally established by Joyce Kean's family which had accumulated millions of dollars in the lumber industry. It mostly gave funds to hospitals but after her death in 1972, the foundation was taken over by radical environmentalists and social justice extremists. This JOYCE FOUNDATION, which is rumored to have assets of 8 billion dollars, has now set up and funded, with a few partners, something called the CHICAGO CLIMATE EXCHANGE, known as CXX. It will be the exchange (like the Chicago Grain Futures Market for agriculture) where Environmental Carbon Credits are traded. Under Obama's new bill, businesses in the future will be assessed a tax on how much CO2 they produce (their Carbon Footprint) or in other words how much they add to global warming. If a company produces less CO2 than their allotted measured limit, they earn a Carbon Credit. This Carbon Credit can be traded on the CXX exchange. Another company, which has gone over their CO2 limit, can buy the Credit and "reduce" their footprint and tax liability. It will be like trading shares on Wall Street. Well, it was the same JOYCE FOUNDATION, along with some other private partners and Wall Street firms that funded the bailout of ShoreBank. The foundation is now one of the major shareholders. The bank has now been designated to be the "banking arm" of the CHICAGO CLIMATE EXCHANGE (CXX). In addition, Goldman Sachs has been contracted to run the investment trading floor of the exchange. So far so good; now the INTERESTING parts. One ShoreBank co-founder, named Jan Piercy, was a Wellesley College roommate of Hillary Clinton. Hillary and Bill Cli

bogey1941 part3 Posted On 7/15/2010 8:36:44 PM

Al Gore was one of the smaller partners to originally help fund the CHICAGO CLIMATE EXCHANGE. He also founded a company called Generation Investment Management (GIM) and registered it in London , England . GIM has close links to the UK-based Climate Exchange PLC, a holding company listed on the London Stock Exchange. This company trades Carbon Credits in Europe (just like CXX will do here) and its floor is run by Goldman Sachs. Along with Gore, the other co-founder of GIM is Hank Paulson, the former US Treasury Secretary and former CEO of Goldman Sachs. His wife, Wendy, graduated from and is presently a Trustee of Wellesley College. Yes, the same college that Hillary Clinton and Jan Piercy, a co-founder of Shorebank attended. (They are all friends). Interesting? And now the closing... Because many studies have been exposed as scientific nonsense, people are slowly realizing that man-made global warming is nothing more than a money-generating hoax. As a result, Obama is working feverishly to win the race. He aims to push a Cap-and-Trade Carbon Tax Bill through Congress and into law. Obama knows he must get this passed before he loses his majority in Congress in the November elections. Apart from Climate Change he will "sell" this bill to the public as generating tax revenue to reduce our debt. But, it will also make it impossible for US companies to compete in world markets and drastically increase unemployment. In addition, energy prices (home utility rates) will sky rocket. But, here's the KICKER (THE MONEY TRAIL). If the bill passes, it is estimated that over 10 TRILLION dollars each year will be traded on the CXX exchange. At a commission rate of only 4 percent, the exchange would earn close to 400 billion dollars to spit between its owners, all Obama cronies. At a 2 percent rate, Goldman Sachs would also rake in 200 billion dollars each year. But don't forget SHOREBANK. With 10 trillion dollars flowing though its accounts, the bank will earn close

bogey1941 part4 Posted On 7/15/2010 8:38:13 PM

40 billion dollars in interest each year for its owners (more Obama cronies), without even breaking a sweat. It is estimated Al Gore alone will probably rake in 15 billion dollars just in the first year. Of course, Obama's "commissions" will be held in trust for him at the Joyce Foundation. They are estimated to be over 8 billion dollars by the time he leaves office in 2013, if the bill passes this year. Of course, these commissions will continue to be paid for the rest of his life. Some financial experts think this will be the largest "scam" or "legal heist" in world history. Obama's cronies make the Mafia look like rank amateurs. They will make Bernie Madoff's fraud look like penny ante stuff.
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