Friday, April 30, 2010

Real Financial Reform, Part II | The Shawmut Redemption

The Shawmut Redemption...

Reforms that need reform...

Compiled by: Larry Walker, Jr. -

On November 16, 1993, the New York Times reported the following:

In a move showing banking regulators' increased emphasis on ending loan discrimination, the Federal Reserve Board has, for the first time, blocked a large bank merger because of concern over possible bias against minority groups in mortgage lending.

By a 3-to-3 vote, with one abstention, the Fed declined to approve the Shawmut National Corporation's acquisition of the New Dartmouth Bank of Manchester, N.H., because of concern that Shawmut, based in Hartford, may not have complied with fair-lending laws.

The Justice Department is investigating a Shawmut subsidiary, the Shawmut Mortgage Company, for possible lending bias…

"Obviously we're disappointed with the decision," said Brent Di Giorgio, a spokesman for Shawmut, which has $27 billion in assets. "Notwithstanding the decision, Shawmut is proud of its lending record to minorities."

Over the last year Shawmut has begun several programs to increase lending to low-income Americans and minority groups that some community activists say have made Shawmut a leader in the industry.

These programs include establishing mortgages with down payments of as little as 2.5 percent that use more flexible income criteria, hiring more minority mortgage staff workers and sending around home buyers from minority groups to check that Shawmut employees are not discriminating.

"The Fed is sending a strong signal to the banking industry that they're going to be looking at banks' lending practices," said Joseph Duwan, a banking analyst with Keefe, Bruyette & Woods. "Clearly Shawmut is being made a little bit of scapegoat."

http://www.nytimes.com/1993/11/17/business/fed-stops-bank-merger-cites-lending-concerns.html

The End of Shawmut National

So what happened to Shawmut National Corporation? Two years after being extorted by the Federal government, in conjunction with various social justice organizations, the bank ceased to exist. Let’s follow the trail from the end of Shawmut, to the $700 billion dollar Federal Bank Bailout:

1995 – Fleet Financial Group, Inc. acquires Shawmut National Corp.

1996 – Fleet Financial Group Inc. acquires Westminster Bancorp

1999 – Fleet Financial Corp. acquires BostonBank Corp. and becomes FleetBoston Financial Corp.

2001 – FleetBoston Financial Corp. acquires Summit Bancorp.

2004 – Bank of America Corp. acquires FleetBoston Financial Corp. for $47 billion.

2005 – Bank of America acquires MBNA Corporation and becomes Bank of America Card Services for $35 billion.

2007 – Bank of America acquires LaSalle Bank for $21 billion.

2007 – Bank of America acquires US Trust and becomes Bank of America Private Wealth Management

2008 – Bank of America acquires Countrywide Financial for $4.1 billion and Merrill Lynch for $50 billion as part of the Bailout deal.

2009 – The Federal Government invests $45 billion of taxpayer’s money in Bank of America through the Troubled Asset Relief Program (TARP). Bank of America’s pays back the $45 billion along with $4.5 billion in dividends and fees.

http://en.wikipedia.org/wiki/List_of_bank_mergers_in_the_United_States

http://seekingalpha.com/article/60966-bofa-s-countrywide-acquisition-dumb-and-dumber

The Bailout

The Federal government’s solution was of course to create new agencies, more regulations, and to spend more borrowed money with the excuse that this time it will be different. Although it claims that it could make money as did off of Bank of America, so far, the US Treasury, Office of Financial Stability’s $700 billion bailout has, through 4/30/10, disbursed $517.1 billion, been repaid $186.9 billion, and is owed a balance of $330.2 billion.

http://bailout.propublica.org/main/list/index

1993 to 1995

So what happened in-between Shawmut National’s reprimand, the denial by the Fed to acquire other banks, and it’s ultimate demise?

William A. Niskanen, in his May/June 1995 Cato Policy Report, got it right when he stated that, “Redistributive rules among or between buyers and sellers, however, usually lead one or more parties to leave the market.” His reasoning was correct. His prediction was dead on. The arguments he posed way back then are worthy of repeating.

He said, “A market is where people come to make exchanges. Every market has its own rules, and markets thrive or wither, in part, depending on the choice of those rules. Clear rules for payment; the penalties for nonpayment, fraud, and nonperformance; and the rules for resolving disputes, for example, usually induce growth of the market, increasing the expected net benefit to each party. Redistributive rules among or between buyers and sellers, however, usually lead one or more parties to leave the market. U.S. financial markets today face several major new policy threats. Most of the new threats have a common pattern: the government is using existing regulatory authority or proposing new authority to aid some parties in the market at the expense of others.”

Mr. Niskanen continued, “Federal bank regulators and the Department of Justice have increasingly reinterpreted their authority under existing law to develop an extensive system of credit allocation. The four statutes under which bank regulations are issued are the Fair Housing Act of 1968, the Equal Credit Opportunity Act of 1974, the Home Mortgage Disclosure Act of 1975, and, most important, the Community Reinvestment Act of 1977. The common objective of those four laws was to reduce the alleged discrimination in bank lending to minorities. I say "alleged" because the premise that banks discriminate is both implausible and unsupported.”

With regard to Shawmut National Corporation, he continued, “In summary, there is no consistent evidence that banks discriminate among loan applicants by race, either consciously or inadvertently. In Washington, however, no good deed goes unpunished. Two major banks with records of outreach to minority borrowers have been subjected by the Department of Justice to what is best described as extortion. In a major 1993 case, following actions against three small banks, the Federal Reserve held up approval of several proposed acquisitions by Shawmut National Corporation pending resolution of a discrimination suit brought by Justice against Shawmut's mortgage company subsidiary. The facts of the case are clear. During the period when the alleged discrimination occurred, Shawmut had an aggressive program to increase mortgage lending to minority applicants. Shawmut relaxed its normal lending criteria, substantially reduced the rejection rate on loan applications by minorities, and doubled the amount of new mortgage lending to minorities. Although no private person filed a discrimination complaint, the Department of Justice charged Shawmut with discrimination, based on findings that some of the loan officers had not been as aggressive as others in approving loans to minority applicants and that Shawmut had no internal review procedure to ensure that all the loan officers used the same lending criteria. In order to remove the barrier to approval of its proposed acquisitions, Shawmut agreed to settle that absurd case, set aside $1 million as a settlement fee, and worked with Justice to find some "victims" of the alleged discrimination to share the fee.”

http://www.cato.org/pubs/policy_report/pr-mj-ni.html

My Conclusion:

The chickens have come home to roost. The Progressives got what they wanted. Loans were made to people who should not have gotten them, who could not afford them, and who were bad credit risks in order to satisfy unreasonable government policies. In other words, the banks came up with whatever programs were necessary to ensure that anyone who applied for a loan got one. That took care of there ever being any question that a loan was denied based on racial discrimination. The banks used Option ARMs, no-doc, stated income or whatever it took to comply with the extortion. And what happened? The buck got passed. Banks were sold and acquired. Loans were packaged, sold and re-sold until they finally came back to their source, right smack in the government’s lap. The entire banking system nearly collapsed, and the Federal government came close to taking out the entire global economy. And it’s not over yet.

Have progressive politicians learned their lesson? Apparently not, as we see today, the progressives are trying to blame the crisis on those who simply carried out their warped policies. They are demonizing bank executives, Wall Street, Corporations, stock traders, and any and everyone who carried out their wishes. But it doesn’t take a degree from Harvard to figure out who’s really to blame. All one needs to do is look at how a progressive government manages itself. It is $13 trillion dollars in debt. Its trusted reserves of Social Security and Medicare have been emptied and left with IOU’s. And now it is heading towards $22 trillion of debt by the year 2020.

Obama had one thing right though, we do need to fundamentally transform the USA. However, that’s the only thing he got right. Policy-wise, he’s on the wrong track. He only offers to make a bad situation worse. Community organizers like Obama are part of the problem, not the solution. You cannot fix a problem when you are the problem. What America needs is a radical return to its founding principles of limited government, and free enterprise. We'll know that we're on the right track when every culpable progressive dimwit has been placed behind bars.

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