Shocker,! Lending to poor people is a bad business

Politics and bad business a perfect partnership! --------------------------------------------------------- Have you been following this farce? ShoreBank is a $2.3 billion lender, established in 1973, whose main mission is to provide credit to inner-city businesses and consumers. From purely a social-utility perspective, there’s of course nothing the matter with that. Very high-minded. And inasmuch... [more]

Politics and bad business a perfect partnership! --------------------------------------------------------- Have you been following this farce? ShoreBank is a $2.3 billion lender, established in 1973, whose main mission is to provide credit to inner-city businesses and consumers. From purely a social-utility perspective, there’s of course nothing the matter with that. Very high-minded. And inasmuch as politicians can be expected to look favorably on any institution willing to offer credit to their credit-starved constituents, ShoreBank has no shortage of friends among Chicago politicians, and in the Obama White House, as well. But—surprise!—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. Profitability isn’t expected to return until 2013. A zombie, in other words. Earlier this year, the FDIC, seeing the zombie for what it is, ordered ShoreBank to raise $125 million in new capital by May 21 so it could qualify for another $75 million in TARP preferred. But by last week, the company’s capital-raising efforts had gone nowhere, and the bank seemed doomed. The FDIC was all set to step in, find a buyer if it could, and shut down the bank. But guess what happened instead? The politicians apparently got involved, and pushed their pals on Wall Street to come up with some cash. First, Lloyd Blankfein, eager to mend fences in D.C., miraculously entered the picture and started working the phones. Goldman itself was in for $20 million. Soon enough, Bank of America, Citigroup, and JPMorgan Chase were all on board, as well. Harris and Northern Trust signed on, too. On Tuesday, GE committed $20 million, and the bank had hit its goal. http://www.bankstocks.com/ArticleViewer.aspx?ArticleID=6123&ArticleTypeID=2 [less]