The Federal Deposit Insurance Corporation has a few rules it typically follows when it takes over a failed bank. One of these prohibits the failed bank’s old investors and old management team from having anything to do with the new bank, for obvious reasons. But ShoreBank, which the FDIC seized last month, was anything but typical. Founded in the 1970s to provide financial services to low-income communities on Chicago’s South Side, it used its politically attractive mission to gain powerful friends and become the largest community-development bank in the United States, with subsidiaries in Chicago, Cleveland, and Detroit, a number of non-profit arms, and a sister bank, ShoreBank Pacific, whose mission was to finance environmental projects and green jobs. At its height, ShoreBank could count among its many political patrons Bill and Hillary Clinton, Senate majority whip Dick Durbin, and Pres. Barack Obama. It was the Left’s favorite bank, which is why the FDIC’s atypical intervention is raising eyebrows on the right.
The FDIC relieved ShoreBank of its most toxic assets but left largely intact its management team — a highly unusual move. More important, it left intact the bank’s toxic business model, which used government-insured deposits and subsidies to pursue activities best left to non-profits: Think Fannie Mae and Freddie Mac on a smaller scale. The difference is that, while even former Frannie fans have acknowledged that their business model was fundamentally flawed, support for community banks is running in the opposite direction. Democrats and some Republicans are pushing for the creation of a $30 billion fund to subsidize them and encourage them to expand rapidly into new lines of business. The rise and fall of ShoreBank shows us why that would be a terrible idea.
It should come as no surprise that Obama became such a fan of ShoreBank: If he had been a little older, he might easily have been a founding partner. Like Obama, ShoreBank’s founders hailed from the ranks of idealistic academics and community organizers from the Hyde Park neighborhood on the South Side. By the early ’70s, various social forces had transformed large parts of that area into black ghettos. Racial discrimination certainly played its role: Fierce competition for jobs between blacks and ethnic whites had been a part of Chicago’s history since the first large-scale black migrations to the city in the early 1900s. Restrictive racial covenants kept most blacks confined to neighborhoods on the near west and south sides of the city until the Supreme Court in 1948 ruled such covenants unenforceable.
Things got worse in the 1950s and ’60s with the advent of a number of anti-poverty programs that unintentionally concentrated their targets into dismal projects and created perverse incentives that kept them poor. The rot radiated east and south from a swath of high-rise projects that went up between 1955 and 1962 along the Dan Ryan Expressway, just south of Chicago’s downtown, and rising crime rates prompted middle-class residents, white and black alike, to flee the South Side for the suburbs. In 1972, a neighborhood bank called South Shore National tried to follow them, but a group of Hyde Park community activists opposed the move and successfully pressured federal regulators to deny the bank permission to relocate.
Unwilling to stay in the deteriorating community, South Shore National put itself up for sale, and the Hyde Park activists, led by a man named Ronald Grzywinski, decided to raise the money to buy it. In the late 1960s, Grzywinski had served as president of the Hyde Park Bank, where, according to Richard Taub’s history of ShoreBank, Community Capitalism
, he embraced the neighborhood’s “milieu of fervid activism” and “plunged into organizational life himself.” By the time South Shore National was ready to flee, Grzywinski had already made up his mind to get more involved: He left Hyde Park Bank for the University of Chicago, where, working with like-minded activists, he came up with the idea of a “double bottom line” bank, defined as one that puts its social mission on an equal footing with its profitability.