It’s a TARP! Community Bankers Edition

by Stephen Spruiell

Congress is back (cue the sound of thousands of Corner readers instinctively checking to see if their wallets are missing), and one of the Democrats’ top priorities is to pass a bill that would create a TARP-like program giving the Treasury Department the authority to “invest” up to $30 billion in community banks, ostensibly so that those banks can make more credit available to small businesses. 

If you want to know where this process is likely to lead, take a look at the recently failed community bank ShoreBank and you’ll come away with a pretty good idea:

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.

Read the rest here.


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