The Shorebank rescue

By Felix Salmon
May 21, 2010
rescue of Chicago's ShoreBank by Goldman Sachs, Citigroup, JP Morgan, Bank of America, and General Electric. The founder of the bank is BFF with BHO, and Chicago politics being what it is, everybody is assuming that the banks involved are expecting some kind of political quid pro quo down the road, for rescuing one of Chicago's most-loved financial institutions.

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There’s a lot of conspiracy-theorizing going on around the high-level rescue of Chicago’s ShoreBank by Goldman Sachs, Citigroup, JP Morgan, Bank of America, and General Electric. The founder of the bank is BFF with BHO, and Chicago politics being what it is, everybody is assuming that the banks involved are expecting some kind of political quid pro quo down the road, for rescuing one of Chicago’s most-loved financial institutions.

I daresay they are. But on the other hand, it’s not nearly as implausible as everybody seems to think that America’s largest banks would step in to rescue ShoreBank. And to see why, it’s worth looking at what one of ShoreBank’s biggest critics, Tom Brown, has written on the subject.

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 is 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…

ShoreBank, we now know, has a business model that is fundamentally flawed…

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…

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.

I don’t know where Brown is getting his figures, but I went to the FDIC’s website (it’s not easy to navigate, I’m warning you, but this link might be a good starting point), and got a bunch of numbers for ShoreBank for the 12 months ending March 31, 2010. Here’s the balance sheet, the performance and condition ratios, and the income statement; if you want the full 69-page call report, it’s here. The numbers are certainly bad. Noncurrent assets and REO accounts for 14.6% of total assets, but the Tier 1 capital ratio is at least positive, at 2.05%, with the bank having $26.2 million in Tier 1 capital remaining. And the total loss for the most recent fiscal year was $17 million, not $106 million.

Certainly, with hindsight, a lot of loans have gone bad. But it took them a while to go bad: it didn’t happen immediately “once the credit crackup started”, as Brown would have you think. Indeed, Dan Gross, in November 2008, held up Shorebank as a great example of a bank where the loans were not going bad — along with Lower East Side People’s, where I’m on the board, and where we’re doing fine without any kind of bailout at all. Not all community development financial institutions are financially dubious things which should only be funded by non-profits like the Ford Foundation, and America’s largest bankers agree that the underbanked deserve non-predatory financial services, rather than the check cashers, payday lenders, and similar institutions which lend only at usurious rates.

This, I think, is the real reason why the biggest banks in the US are stepping up to rescue ShoreBank. If someone pointed to LES People’s as an example of successfully serving the underbanked, that would carry only a certain amount of weight: our total assets are a fraction of what Lloyd Blankfein got paid in 2007 alone, and we’re in a unique situation, in Manhattan, which doesn’t apply to similar institutions nationwide.

ShoreBank, by contrast, is about 100 times larger than LESPFCU, and if the big banks can make it work, can stand as real-world proof that community lending really is a viable business model, and can scale successfully into becoming a profitable multi-billion-dollar institution. In the best-case scenario, the investors will help to turn ShoreBank around, will learn how to do what it does, and will then themselves become much friendlier towards their low-income customers, because they’ll know how to make money from them the good way — by helping them improve their finances and ultimately to become higher-income customers — rather than the bad way, which is to bleed them dry in a predatory manner.

All of the investors in ShoreBank will get a lot of CRA credit for their investment, which makes it very low-cost for them. By rescuing this storied institution they will help a lot of Chicagoans who need all the help they can get; they will learn how to improve their own products for lower-income customers; and they will help to transition the underbanked part of the US population into becoming banked, which is ultimately good for everybody. So while the cynical take on the deal is understandable, I’m not jumping to any conclusions quite yet.


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Hope springs eternal.

BTW, what’s with the “REinvestment” part of CRA? The low volume of deposits in targeted communities would seem to necessitate the importation of capital.

I also wonder if the demographics of LESPFCU’s membership are anything like that of ShoreBank’s customer base.

Posted by Mega | Report as abusive

So the banksters are going to abandon their predatory business model, and ShoreBank is going to show them the way?

Big story, if true, and I’ll be looking for it, front-paged.

But I think if that were going to happen, it would already have happened.

Posted by lambertstrether | Report as abusive

This is from the LaRouche site on the conspiracy theory you mentioned, but did not delve into. See for yourself:
After three Congressmen, Issa, Biggert, and Bachus, sent letters to the White House inquiring as to the White House role in the decision of Goldman Sachs, JPMorgan Chase, Citigroup, and GE Capital to invest nearly $150 million in the Chicago-based ShoreBank in order to prevent it from being seized by the FDIC, new facts have emerged which suggest that there is no way in the world that the White House was not involved. Consider the following connections of the ShoreBank to Barack Obama:

* The bank and its employees contributed $12,000 to Obama’s 2008 run for the Presidency;

* One of the big shareholders in the bank is the Joyce Foundation, of which Obama was a board member for about a decade. He was replaced by Presidential advisor and controller Valerie Jarrett, who still serves on the board;

* Bob Nash, the former executive vice president of the bank was part of the Obama-Biden transition team;

* Howard Stanback, a board member of the bank, is a former board chairman of the Woods Foundation. Both Obama and Bill Ayers, formerly a Weatherman, were on the board as well. Stanback was also employed at New Kenwood, LLC, a real estate develoment company co-owned by Obama’s patron, convicted felon, Tony Rezko;

* Adele Simmons, another board member of the bank served with Valerie Jarret on the board of Chicago Metropolis 2020;

* Mary Houghton, one of the co-founders of the bank is an expert in mico-financing and used to give advice to Obama’s mother when she worked at the Ford Foundation with Timothy Geithner’s father;

* Jeremiah Wright, Obama’s former pastor, has a $10 million line of credit for his business and his retirement home from ShoreBank;

* ShoreBank has received $35 million in stimulus funds from the Obama Administration; and

* The ShoreBank’s website featurs a video of Obama in Kenya championing ShoreBank microlending projects overseas.

Posted by Thingumbob | Report as abusive

Not jumping to conclusions here either but, as with so many other ongoing high-finance scenarios, there’d be no need to if a timely and proper public investigation might reasonably be expected to occur. Sic transit spes mundi.

Meanwhile it’s not too much of a hop and a skip for some to suspect this as being a case of Spreading The Evil, lest anybody with authority to investigate dimensionally more damaging issues remain untainted. If that were the case, like the virtual U.S. economy, it would seem to be working.

Posted by HBC | Report as abusive

Mega, yes, the demographics are very similar.

Posted by FelixSalmon | Report as abusive