The Color of Money

by Mehrsa Baradaran

  Bank of America, formerly the Bank of Italy, was emblematic of the change. Hugh McColl, CEO of the conglomerate from 1983 until 2001, succinctly described the mantra of the age: “You’re either growing or dying. So we grew.”119 By mergers and acquisitions, the bank created a vast financial empire. It was not alone. Citibank, Wells Fargo, and JPMorgan Chase were doing the same thing. As part of the transformation, these banks closed branches in less profitable locations and moved operations to higher-yield markets. Community banks now had to compete with larger and far more efficient mammoth banks. This was the centripetal force the small rural bankers had been trying to fight during the New Deal and that Thomas Jefferson had feared. Now that the New Deal barriers were gone, a massive migration and conglomeration of money toward Wall Street was only natural. In this atmosphere, community banks either merged or died. Many died.120 More banks merged between 1980 and 1990 than in any preceding decade in U.S. history. In just ten years, from 1982 to 1992, 1,500 banks failed—three-quarters of all U.S. bank failures since the Great

  Depression.121 The least able to compete were banks in rural areas or inner-city ghettos.122

  The largest black bank to fail was Jackie Robinson’s Freedom National Bank of Harlem.123 The bank’s 1990 failure was a devastating blow to Harlem and sent a shock wave through the entire black banking industry, especially because there were cries of discrimination and a double standard by the federal regulators that administered its liquidation. The “kid gloves" that Jackie Robinson had complained about were off now in the new hypercompetitive banking world. Not only did the bank’s regulator, the FDIC, not follow the FIRREA mandate to preserve the minority bank; it did not even use its standard protocol in liquidating the bank, causing more hardship than necessary to the banks’ customers.

  Typically, when a bank fails, the FDIC steps in as a “receiver" and has several options for closing a bank: it can sell the failed bank and all of its accounts to another bank; it can just transfer the deposits to another bank while liquidating the bank’s assets; it can pay off insured depositors up to $100,000, the deposit insurance cap at the time; or it can manage the bank until it becomes profitable again. During the heavy merger era of the 1980s and 1990s, the FDIC almost always (90 percent of the time) chose the first route—selling the bank to another one, which assumed all the bank’s obligations. In other words, for most bank failures, all the depositors were made whole when the bank failed, even customers who had deposits exceeding the $100,000 insurance cap.124

  However, when Freedom National Bank of Harlem failed in 1990, the FDIC chose the unusual method of paying off insured depositors only up to the $100,000 maximum. In fact, the FDIC made the even more unusual decision to combine all accounts of a given depositor into one account and then applying the cap, which left many more depositors exposed to losses. Many depositors had purposefully opened several accounts in order to gain the protection of the FDIC, but the FDIC refused to insure those accounts, even though that had been their typical practice. This decision by the FDIC meant that the many churches and Harlem-based community groups that were Freedom Bank depositors lost their deposits.125 The FDIC was heavily criticized for its handling of the matter. After a year of push-back from the borrowers, a special act of Congress was required to force the FDIC to restore most of these deposits.126

  Observers saw discrimination in the bank’s treatment. According to Harlem clergyman and former bank leader Wyatt T. Walker, “Had this been a white bank of comparable size and circumstance, the decision to shut its doors would not have been made so pre-cipitously."127 In fact, at the same time regulators allowed the FNB to fail, Treasury funds were used to prop up another similarly situated failing bank, the Bank of New England. Scholars reviewing the failure noted that the disparity in treatment was unjustified and likely hastened Freedom Bank’s failure and caused more losses than it should have.128

  Some also criticized the FDIC for not doing more to save the bank, especially because the FDIC had explicit legislative authority to make an extra effort in certain circumstances. Not only did FIRREA require the FDIC to try to maintain minority banks, but the FDIC’s “essentiality doctrine" held that if a bank’s services are found to be essential in a community, the FDIC had the authority to prevent the bank’s failure.129 The FDIC had invoked this standard in saving other community banks, and as one of the few community banks in Harlem, there was a very good argument to be made that Freedom’s services were essential. However, columnist Murray Kempton suggested that the bank was likely too small to save. “Freedom National was enfeebled and small, and the regulators reserve their oxygen for the enfeebled and massive." This was a prescient statement considering the “too big to fail" bank bailouts of 2008. Summing up the dilemma ofjust about every black-owned bank, Kempton lamented, “The tragedy is not that Freedom National had forgotten to do much for the community it was designed to serve but that it did more than any other bank. Poor thing though it was, there is now available nothing even as good." The managers had felt this as well. Former president Sharnia Buford explained, “We had to be businesslike and our credit criteria couldn’t be different from banks downtown, but we also had a greater responsibility because we were chartered as a minority bank. We had to empathize with the customer."130 Jackie Robinson had lost sleep over this same dilemma two decades earlier.

  The Times reported the failure in November 1990 with the headline, “Freedom Bank’s Failure Hits Harlem Like a Death in the Family." By all accounts, the community’s loss was more than financial—it was psychological. The bank’s mission had been larger than just finance. Representative Charles B. Rangel, who was working with Mayor David Dinkins and a group of clergymen on a last-minute rescue effort for the bank, called the loss “devastating” to the community. “Symbolically, it’s a terrible blow, because this was a black bank formed by Jackie Robinson that was more sensitive to the businesses and people in this community.” Depositors, even those who recouped their entire investment, perceived the failure as a blow to the race. One depositor lamented that with the bank’s failure, “I lose and Harlem loses.” This mirrored the sentiment at the bank’s opening, when the Harlem community had called it “our bank.” Another customer reported to the Times, “It makes me feel helpless, like I’ve been robbed. . . . It’s a step backward for the empowerment of black people.” Referring to the FDIC notices on the windows, one depositor quipped, “Freedom Bank is now an enslaved bank.” The truth was that the bank was just under FDIC receivership, a process that all failed banks enter.131

  Black banks were not enslaved by their regulators, but even decades after the Civil Rights Acts, they were still stuck in the same economic trap. Across the board in the 1980s and 1990s, black banks continued to be fragile. Despite renewed focus on community capitalism and the minority banking provisions in legislation, economic studies of these banks continued to show that black banks made fewer loans, were undercapitalized, and had lower profits than other banks.132 After the deregulatory wave, all small banks struggled to remain competitive against the large bank conglomerates, but black banks also had to contend with the particular circumstances that had always been a particular challenge for them—with a few modern updates. Black banks were still overinvested in less-profitable government securities and were making too few loans. They held 46.5 percent of their total assets in highly liquid securities as opposed to white banks, which only held 29.5 percent on average.133 They overinvested in government securities because they had high loan losses and too much deposit volatility.134

  Black banks also had a new capital problem. Capital is the amount of the bank that is owned by investors. Capital is therefore linked to bank profitability in a circular fashion. The more profitable a bank, the more investors it can attract. Black banks had higher costs and higher risks, and therefore lower profits. This meant that they could not attract enough capital investment. Moreover, the legislation aimed at helping them, Section 308 of FIRREA, had created a specific problem for these b
anks in trying to raise capital. According to Section 308, in order to remain a black-owned bank, the bank had to be owned by a majority of black investors.135 In other words, they had to make sure that a majority of their shareholders were black. This limited their pool of potential investors and diminished their ability to attract capital. Those black investors who did support black banks were receiving lower profits on their investments—they were making a financial sacrifice in supporting black banks. Still, many did it as a matter of racial pride.

  There was also the old and familiar problem of extreme deposit volatility. Economists Timothy Bates and William Bradford conducted a regression analysis on black bank portfolios and determined that their depositors withdrew their deposits at a much higher rate than white banks and in an unpredictable manner, meaning that the banks’ inflow and outflow of cash could not be determined beforehand. These volatile deposits needed to be offset by safer assets than loans. Hence the overinvestment in government securities.136

  Though their customer deposits were highly variable, the government deposits were still the main cause of the bank’s deposit volatility, especially because of the regulatory requirement that government deposits exceeding the insured maximum of $100,000 had to be matched dollar for dollar with U.S. government securities. Every deposit dollar held in government securities was one less dollar available for community lending. Economist Lawrence Nash studied the effects of the deposit program on black banks in the 1990s and found that holding these government deposits, instead of aiding black firms, had instead resulted in reduced bank lending in minority communities.137 The analysis showed a direct correlation: the more government deposits a bank held, the smaller their loan portfolio. These findings challenged allegations that black banks had been lending less because they were just too risk-averse. In fact, their portfolios showed that the banks were making maximum profits given their circumstances. They simply had more hurdles to jump than other banks. Some of these hurdles had been created by the very programs designed to help, like the government deposits and capital bind created by FIREA.

  Black banks were still exporting funds from the ghetto. Their overinvestment in government securities meant that they were using their customer deposits to finance mortgages outside their communities. During the era of secondary mortgage markets, the outflow of deposit funds into other people’s mortgages was accelerated by the mortgage-backed security. Now, banks anywhere were investing in mortgages everywhere. For black banks, this process was a newer and less obvious way for them to serve as financial sieves—dispersing funds from the ghetto to the broader economy.

  The process whereby savings dollars from inner urban areas were being used to invest in assets in other regions was labeled “disinvestment" or “capital export" and was identified and measured in several cities. Economists Harriet Taggart and Kevin Smith measured disinvestment in Boston and found that the mortgage-to-deposit ratio (savings dollars deposited by residents of a neighborhood that are returned to that same neighborhood as mortgage dollars) in core urban areas ranged from 3 percent to 33 percent, but in the outermost suburbs, this ratio ranged from 108 percent to 543 percent.138 Only a fraction of the deposits invested in urban banks were being used in those areas. They were being deployed instead to multiply capital investments in the suburbs. Another study found that only 10 percent of savings invested in banks in the Bronx were used in the Bronx, with 30 percent being used elsewhere in New York state and the remaining 60 percent used across the country.140

  As one observer noted, “Given the chance, bankers would do for their business what they had already done for themselves—leave the city."139 The same could be said of their deposits and capital. To paint a complete picture, deposits from the urban ghetto where prime mortgages were sparse were being used to lend on mortgages in new housing communities across the country. Meanwhile, subprime lenders were sucking away wealth by lending into the black community and exporting the profits to the financial conglomerates on Wall Street. Black banks could not control or multiply the money in the ghetto. Yet policymakers continued to promote the industry while allowing Wall Street-funded loan sharks to plunder the community’s wealth.

  Even as the Jim Crow credit market and the ghetto economic trap continued, policymakers insisted that race was no longer an issue, that Martin Luther King’s dream had been realized, and an equal playing field had been established. Yet despite the rise of black stars in entertainment, sports, business, and the arts, multitudes of black men and women were born without a chance of ever prying themselves loose from the crime, prison, and poverty trap of the ghetto. With the firmly established myth that equality had finally been achieved, black poverty and crime could only be explained as a sign of moral failure, and the only acceptable response to the failure to rise out of the ghetto was tough love and forceful containment. While policymakers were celebrating the triumph of equality and capitalism, the invisible hand of the free market was actually pulling apart and increasing the opportunity and wealth gap between black and white.141

  The Color of Money Matters

  In 2004, the young senator from Illinois, Barack Obama, riveted the nation as he took center stage at the Democratic National Convention and promised, among other things, to bridge the racial divide. His message and his very identity seemed to be the end of the road—the capstone to two centuries of racial struggle, an outcome that could hardly have been dreamed of by Douglass, Washington, Du Bois, King, or Malcolm, a final rebuke to centuries of Jim Crow and outright hostility. “There’s not a black America and white America and Latino America and Asian America," he said, “there’s the United States of America." Here was the human bridge across the racial chasm. “Yes, we can," he promised, and the majority of the country fervently believed in Obama’s hope.1 And yet eight years could not uproot three centuries of racism that has sustained the social and economic segregation of African Americans.

  By 2015 43 percent of Republicans believed the president was a Muslim.2 Having entered politics by speculating that President Obama was actually a foreign-born African masquerading as an American and demanding that he produce his birth certificate, Donald Trump was elected president in 2016. Trump’s electoral upset was due to many factors, but undeniably, part of Trump’s appeal was rooted in a racist backlash to Obama’s presidency.3 After a long and painful recession, there were signs that blacks and other outsiders had once again become the scapegoats for the economic pressures affecting white Americans. White Americans expressed a feeling of having been betrayed by their government, believing that the government was helping blacks and other minorities at their expense. They blamed the “special status of blacks" as a “serious obstacle to their personal achievement."4 By 2016 almost half of whites surveyed believed that discrimination against whites was just as bad or an even bigger problem than discrimination against blacks.5 Once racial tribalism was used to justify political actions, it remained a potent political weapon.6

  Donald Trump’s campaign targeted this resentment in much the same way that Nixon’s campaign had done, using the same racial dog whistles as his predecessors. In President Trump’s first Black History Month address, he began by praising Martin Luther King as an “incredible example [who] is unique in American history” and then quickly shifted to his repeated campaign promise to strengthen law and order by increasing the presence of law enforcement in black communities.7 On the campaign trail, he outlined his “New Deal with Black America” at a Charlotte, North Carolina, rally. Trump recognized that black poverty had not abated due to years of failed policies and promised that through his plan, “the cycle of poverty can be broken.”8 He promised to do this by lowering taxes, providing “tax holidays for inner-city investments,” and rolling back financial regulations in order to “make it easier for young African-Americans to get credit to pursue their dreams in business and create jobs in their communities.” He said that he would pursue as a top priority “helping African-American businesses get the credit they need” and
vowed to “encourage small-business creation by allowing social welfare workers to convert poverty assistance into repayable but forgiveable micro-loans.” He also repeated his promise to increase law enforcement in black communities.9

  In fact, the tension between law enforcement and the black community had hit another boiling point. The city of Ferguson, Missouri, erupted after police killed Michael Brown, a black man, in 2014. This was one of the largest race riots the country had seen in recent memory, and it marked the genesis of the Black Lives Matter movement. Ferguson is a suburb of St. Louis, one of the most segregated cities in the United States.10 It was defined as a “resegregated” city, created by the exodus of black residents from the newly gentrified inner city of St. Louis.11 Ferguson’s population was two-thirds black and predominantly low-income, with more than one-fifth of the residents living below the poverty level.12 The subpar schools were almost completely segregated, and 26 percent of blacks there were unemployed compared to 6 percent of whites.13 Rioters destroyed white-owned commercial property. The National Guard was dispatched, and Americans watched as demonstrators burned cars and buildings; police in military gear descended on the city, imposed a curfew, and eventually quelled the protests. When Fox News interviewed one looter, he explained that the message the city had sent to its black residents was “we’re gonna eat and you guys are gonna starve." He replied, “It’s not gonna happen. Not in St. Louis.14

  The following year Baltimore exploded. A Harvard study found that Baltimore was the nation’s worst city with respect to childhood poverty and lack of economic opportunity.15 It was also one of the most segregated cities in the country, and the financial crisis had created an acute foreclosure crisis there.16 In 2015 Baltimore was the scene of another uprising after the funeral of Freddie Gray, who had died of spinal injuries while in police custody. What began as a peaceful protest turned violent when rioters looted a CVS and destroyed a police vehicle. Soon fires engulfed the downtown business area. “It’s regrettable, what’s happening now," the Reverend Jesse Jackson told the Baltimore Sun. “You’re looking at the actions of cynicism and hopelessness."17 Governor Larry Hogan declared a state of emergency, and about 5,000 state and national law enforcement officers descended on the city, quickly putting an end to the riots.