Unsurprisingly, the minority banks were not relying on their regulators for help. The GAO reported that only 30 percent of minority banks had used the technical assistance offered by regulators.116 Moreover, no agency had ever assessed whether its “assistance" was actually helping these banks. The GAO revealed that the agencies had “not undertaken the more difficult and time-consuming, but ultimately much more important, task of truly understanding the unique challenges these institutions face” or of trying to tailor their “regulations, supervision and examinations” to help black banks to “survive and prosper.”117 Less than one-third thought the regulators were doing a “very good” or “good” job.118 Robert Cooper, representing the National Bankers Association, the main trade group for black-owned banks, put it bluntly. “To be honest,” said Cooper, “we have not seen much benefit from FIRREA Section 308.” Regulators had not applied “any different rules or approaches to minority institutions than majority institutions.” Regulators were doing the bare minimum required by law, which amounted to “technical assistance,” and had “steadfastly refused” to make use of their available power to benefit minority banks.119 The regulatory support was a fagade, but then again, so was the premise underlying the entire framework.
Even before the financial crisis virtually wiped out the industry, several government studies showed that black banks were lagging significantly behind their peers in profitability. According to Standard & Poor’s data, the average median return on equity in 2016 was 8.04 percent for the banking industry as a whole. For black-owned banks, the median was just 1.19 percent.120 The reasons black banks remained unprofitable had not changed after almost a century of operation. Cooper told Congress that the biggest struggles black banks faced were (1) the economically depressed communities they operated in, (2) their need to keep high reserves for losses, (3) higher general expenses than other banks, and (4) higher transaction costs because they dealt with a higher proportion of retail customers on a face-to-face basis.121 Black banks were still hamstrung by their reliance on small, high-activity deposits, and they made fewer and smaller loans than white banks, which reduced their profitability. They had lower non-interest-based income—19.5 percent compared to 42.7 percent for nonminority banks—because they sold fewer fee-based products to their less wealthy customers.122 The CEO of Liberty Bank, one of the largest and most successful black-owned banks, described his bank’s struggle: “my expenses are twice as much because I have to do more counseling to my borrower. I may have to have guard service because I am in a high crime area. My deposits are much smaller.”123
While regulators were offering education and training programs to help black banks, it was clear that the black banks knew exactly what their problems were, and it was not a lack of technical knowledge. However, just as it is unfair to place the burden of the black wealth gap on black banks, it is unfair to blame bank regulators for not helping enough. The regulators’ sole focus is to manage bank risks; they do not have the tools, mandate, or even the education to understand and fix the unique bind in which black banks find themselves.
Perhaps recognizing this limitation, black bank advocates did not ask for more help from regulators during the congressional hearing. What they wanted was meaningful regulatory and legislative action. Specifically, NBA President Cooper asked that banking regulators consider how their broad policies might affect minority banks, and consider changing them so as not to unduly burden the banks. For example, recent regulatory changes had added another obstacle for black banks in raising capital. Most banks in need of capital can issue “common stock," but minority banks cannot sell shares in their banks in this way because it threatens their minority status. In order to maintain minority ownership, they issue preferred stock. However, banking capital rules, specifically the Basel I guidelines put into effect in 2004, discounted preferred stock and favored common stock, which gave black banks a weaker capital profile than majority banks.124
Kim Saunders, president of Mechanics and Farmers, explained that black banks are “at a significant disadvantage regardless of our stature of profitability in our abilities to raise capital."125 Saunders proposed that the existing CDFI fund, which offered tax breaks to banks in underserved communities, reserve some of those benefits for minority banks. According to Representative Maxine Waters, out of $16 billion in tax credits available through the New Markets Tax Credit program, only one black bank had received a grant.126 Instead, large banks such as Capital One, Wachovia, Bank of America, and others had received tax credits for development projects in the inner city. According to Saunders, mainstream banks had recently and “suddenly found those unserved or underserved markets to be a worthwhile place for a bank branch," but according to Saunders, they were not there for the benefit of the community.127 Black bankers had always seen their mission as being larger than profitability.
If the economic milieu in which black banks found themselves had not changed significantly in the preceding century, neither had their noneconomic appeal. NBA President Robert Cooper explained that “these institutions aren’t just providers of financial products and services. They truly are beacons of hope for the community."128 Maxine Waters admitted during the 2007 congressional hearings that she had investments in several of the black banks being discussed. In the black community, according to Waters, “the test of your commitment to economic expansion and development and support for business is whether or not you put your money where your mouth is . . . you will find that most black professionals belong to, participate with, their minority banks in their community. It is expected of us. We should do it. And it is a true test of our commitment."129
Before the legislators could resolve any of the issues presented at the hearing, the 2008 financial crisis rocked the country, especially the established banking regulatory framework. Congress responded with the 2010 Dodd-Frank Act. Dodd-Frank did contain specific provisions dealing with minority banks, but they were far from robust. The act ignored most of the recommendations that came up during the hearings. The only change to the regulatory framework consisted of Section 367(4)(A) of the act, which amended FIRREA Section 308 to apply to all the banking agencies instead of just the OTS and the FDIC, which was due in part to the act’s termination of the OTS altogether.130 Section 342 of Dodd-Frank also required each banking agency to establish an Office of Minority and Women Inclusion (OMWI), which is required to increase the diversity of agency staff and to offer assistance to minority- and women-controlled banks. Now all the agencies offer technical assistance, but still no tax breaks, no help with capital, and no structural reforms.
Yet regulators continue to celebrate black banks relying on myths that bear little resemblance to actual history. Comptroller of the Currency Tim Curry said at the National Bankers Association meeting in 2013, “As in the early years after the Civil War, when the Freedmen’s Bank provided a secure place for savings and a source of credit to encourage economic growth, minority institutions today can be a catalyst to ensure the vitality of low-income communities."131 In fact, the Freedmen’s Bank was not a secure place for savings and it provided no credit. Likewise, minority institutions have been unable to “catalyze vitality."
The black banking industry has ebbed and flowed since the 1860s, with several peaks in the 1920s, 1960s, and 1980s that correlated with peaks in the economy, racial unrest, and sometimes increased segregation. By 2016 the industry was in a decade-long decline. Mechanics and Farmers of Durham, North Carolina, announced in June 2015 that it was “revamping its business model" to become a community bank and not a black-owned bank. The bank changed its name to M&F, and CEO James Sills explained that the bank will be trying to “reach new customers, to attract younger customers, and diversify [their] customer base."132 This is a historic shift for the largest, oldest, and strongest of the black-owned banks, one of a handful that have withstood the Depression and every other recession since 1907. In the last decade, the black-owned banking industry has shrunk by more than half, from fifty-
one banks in 2000 to twenty today.133 The struggles of the largest black-owned banks reveal some of the ongoing tensions in this sector.
The poster child of community capitalism, ShoreBank, failed in 2010. The bank’s failure was not due to anything remarkable or unusual—the bank failed because inner-city Chicago was financially devastated after the 2008 financial crisis. The bank had not made subprime loans, but it was still affected by the widespread fallout.134 Some criticized the bank’s overzealousness and wondered whether the bank failed because it was “too much into the social welfare thing."135 Although the failure was unremarkable, what happened afterward was.
ShoreBank’s application for $70 million in TARP bailout funds created a media firestorm and a rage disproportionate not only to the funds requested, but completely disconnected from the scale of the total bank bailout.136 The unprecedented scrutiny and attention over ShoreBank’s failure matched the hubbub over its founding—the press couldn’t resist reporting on the demise of Clinton and Obama’s favorite bank and calling out “political favoritism." Representative Judy Biggert (R-IL) demanded information from the White House, suggesting that “the government was rescuing a politically connected bank while letting hundreds of others fail."137 President Obama had no connection to the bank except that they were both in Chicago at the same time. Even though the president played no role in allocating TARP funds, conservative conspiracy theories abounded about special treatment.138 Glenn Beck used his famous chalkboard to weave a ludicrous conspiracy theory that connected ShoreBank to all of his favorite enemies, including President Obama, ACORN, Bill Ayers, and Hillary Clinton.139
The bank did not receive a bailout and failed, causing losses to inner-city Chicago residents and bank investors. Alter the failure, the bank’s assets were taken over by Urban Partnership Bank, which was a consortium of top Wall Street banks and investors, including Goldman Sachs, American Express, Citigroup, Bank of America, JPMorgan Chase, GE Capital, Morgan Stanley, and Wells Fargo.140 All of these politically connected banks had received not millions, but billions in TARP bailout funds. The bank is now a certified CDFI, and all of the investor banks receive CRA credit for their investment.141
Harlem’s bank also failed, but with a slightly different result. After its main competitor, Freedom National Bank, failed in 1990, Carver remained as the only black-owned bank in New York and one of the largest in the country.142 As is often the case, Harlem was hit especially hard during the financial crisis, and Carver suffered more than $60 million in loan losses. The bank held very few subprime loans (only 2 percent of its portfolio), but the domino effect of the financial crisis could not be avoided.143 For a bank that had seen only $20 million in total earnings since it went public in 1994, the loss was substantial.144 On the brink of collapse, the bank had to turn to the behemoths downtown for salvation. Carver received help from Treasury and a $55 million cash injection from a consortium of Wall Street banks, including Goldman Sachs, Morgan Stanley, Prudential Financial, and Citigroup. After the bailout, the U.S Treasury owned 25 percent of the bank, with the Wall Street consortium controlling another 73 percent.145 Thus, the original shareholders were left with just 2 percent of the shares of their bank. The purchase helped Goldman secure an “outstanding” CRA rating after its purchase.146
The purchase saved the bank but wiped out its shareholders, many of whom were Harlem residents and longtime investors in the community institution. The bank is now listed as black-controlled instead of black-owned.147 The country’s largest black-owned bank had ceased to be owned by blacks, but is owned by the same few banks that own virtually every other bank in the country. In announcing the deal to shareholders, Carver CEO Deborah Wright announced, “I understand the optics, but there was no alternative. The amount of capital we needed wasn’t available locally.”148
The “optics" are indeed bad, especially when one considers what happened when Citigroup and Goldman Sachs, key actors responsible for the financial crisis, were exposed to severe losses during the 2008 financial crisis: the government bailout restored 100 percent of their shareholder value. Their shareholders lost nothing. The same Wall Street banks that were enriched by pushing black families into subprime loans now owned one of the few remaining black banks that were working to serve rather than exploit the community. And the reason they now owned the bank was that they survived the crisis they helped create through a taxpayer bailout, while Carver did not. Goldman was saved because it was deemed too big (in reality, too important) to fail. Carver was not.
The transformation of Carver from a struggling black bank to a Wall Street-owned bank mirrors exactly the transformation of the neighborhood it serves. Indeed, Harlem is experiencing something of a real estate renaissance, which looks more like a transformation. Instead of a smattering of small-scale businesses, Harlem now has large retail outlets, hotels, and businesses that have followed the wave of more prosperous residents. Many black residents are being priced out of Harlem as Manhattan’s booming population begins to overflow uptown. Carver is also being priced out of the new Harlem. When the largest new residential property, a twenty-eight-story condominium, was built in Harlem, large banks downtown did all the financing. Carver sat out the monumental transformation of Harlem because it did not have enough capital to participate.
The bank’s current management remains committed to helping the black community with their distinctive business needs. In 2015, Carver’s CEO Michael Pugh, a Detroit native who worked as a bank teller in college and became a Capital One executive, outlined a plan for meeting Harlem’s small business needs. Pugh proposed offering the community loans of $10,000 or less, which most banks consider too small to be worthwhile. Pugh explains, “If a person who’s running a kiosk on 125th Street came looking for a loan, another bank might offer him a credit card—or nothing. We’re going to provide something better." The bank is starting to turn a profit, but has a very small margin.149 Carver is being told to carry on with a commitment to the community. In a recent meeting at Carver’s headquarters, the head of the U.S. Small Business Administration, Maria Contreras-Sweet, praised the bank for its history of creating opportunities for the community. “We need more like you," she told the Carver management. “Thank you for being here. I know it hasn’t been easy." Pugh responded, “No argument there."150
Another pillar of the black banking industry, OneUnited, has faced struggles of its own. OneUnited Bank is the new name for Unity bank, which formed in Boston in 1968 as the “bank with a purpose;" the purpose being to demonstrate “constructive black power." The bank has since grown into a nationwide operation and defines its mission today as helping the black community by focusing on “financial literacy" as well as “originating and purchasing mortgage loans—with a focus on urban and low-to-moderate income communities."151
The bank was on the brink of failure during the financial crisis when it was revived by bailout funds. The bank received $12 million out of the $700 billion TARP bailout as a result of a specific addendum sponsored by Barney Frank and Maxine Waters in December 2008.152 The special provision was necessary because TARP bailout funds were reserved for healthy banks, and OneUnited would not have qualified. The bailout sparked outrage in the press, with the Washington Post calling it “special treatment" of a bank that was too weak to deserve a bailout. Waters was charged with ethics violations for her intervention—charges that have since been dropped.153 The denunciations in some quarters were much more vitriolic for this $12 million bailout than they had been for the billions of bailout dollars that had been directed at Wall Street, demonstrating yet again the aversion to government funds being directed toward the black community. The National Review called Maxine Waters a corrupt “swamp queen," a “corporate-welfare fixer," and proclaimed that “Mad Maxine Waters’s cronyism of color can’t be whitewashed."154
The bailout also became a point of controversy within the black community, though through a different lens. OneUnited was caught in one of the oldest struggles facing black
banks—the tension between their mission and their bottom line. The clash occurred publicly when St. Charles Street AME Church, a two-hundred-year-old church and Boston’s most prominent black institution, defaulted on a loan.155 The AME Church was founded in 1818 and was a hub for the early abolition movement, connected to leaders such as William Lloyd Garrison, Frederick Douglass, and Sojourner Truth. It had been a haven on the “freedom trail" and a leading voice against the 1850
Fugitive Slave Act. OneUnited had been the church’s primary lender, and in 2006 it made a $3.6 million construction loan to the church to build the Roxbury Renaissance Center. The church fell on hard times during the financial crisis, and by 2012 it began to miss loan payments. The loan was backed by the church building, and OneUnited decided to foreclose on the property. The result was akin to an ugly public divorce—a heated and highly publicized clash between two of the pillars of the community. The auction was scheduled to occur on the steps of the church, a move the church’s pastor, Rev. Gregory G. Groove, said was “as mean-spirited and as godless as you can get."156
Predictably, in the post-crisis environment, the bank lost the PR battle. Cheryl J. Sanders, professor of Christian ethics at the Howard University School of Divinity, called the foreclosure a “callous disregard for people’s lives and livelihood." She urged the bank to have “compassion" and to “give people a break."157 The press, public, and community leaders joined forces to decry the bank and to persuade it not to foreclose. Hundreds organized in rallies against the bank and urged a national boycott. “We are calling on all black people to withdraw every dime they have in OneUnited if they don’t resolve this issue," said one minister. Mayor Thomas M. Menino said during a protest, “You’ve shown the whole country we’re not going to stand for this corporate, greedy individual to take away one of the bedrocks of the city of Boston."158
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