Of Big Banks and ShoreBank

The Obama Administration's treatment of its current majority ownership
of bailed out General Motors and its standoffishness toward the
pioneering but troubled ShoreBank, a community bank based in Chicago,
are lessons in how the Big/Bad fare in Washington, D.C., as compared
with the Good/Small.

The Obama Administration's treatment of its current majority ownership
of bailed out General Motors and its standoffishness toward the
pioneering but troubled ShoreBank, a community bank based in Chicago,
are lessons in how the Big/Bad fare in Washington, D.C., as compared
with the Good/Small.

shed its bad assets and abandoned its common shareholders, the new GM
emerged from bankruptcy in 2009 with a clean balance sheet and lots of
taxpayer cash. For the first two quarters of 2010, it has signaled a
comeback by reporting over $2 billion in profits.

In return for a federal infusion of well over $50 billion, the
government took a 61 percent ownership stake. The Canadian government
received 10 percent ownership for its financial assistance, and the
United Auto Workers received 17.5 percent ownership in return for major
concessions and a two-tier salary scale starting at $14 an hour.

The Obama administration exercises its trust duties on behalf of the
taxpayers by repeatedly saying it would not use any powers of majority
ownership at all. The Obama administration is urging GM to issue stock
sooner than later so that the government can sell its stock and get out
of the company completely.

GM's CEO Edward E. Whitacre Jr., former CEO of AT&T, agrees. In
recent weeks, he has been telling the press that GM is losing sales
because of its moniker "Government Motors." Not known for his
graciousness, he did not add that without the government a bankrupt
General Motors would not have any sales at all.

There are serious consequences for Obama's absentee management style.
First, he did not prohibit GM from lobbying, as was required for the
bailouts of Fannie Mae and Freddie Mac. As a major member of the
Alliance of Automobile Manufacturers, GM has been part of a lobbying
force that seeks to weaken auto safety legislation now moving through
the House and the Senate. Historically, GM has been the most strident in
its opposition to mandatory pollution control, fuel efficiency and
safety standards. The company's strategy for decades has been to defeat,
delay or weaken efforts to clean your air, safeguard your motor vehicle
and get you more miles per gallon of gasoline.

Now, when the government, as a majority owner, can at last tell GM to
support long established national policies in these three areas, Obama
is hands off. The new GM is free to return to its old obstructive ways.

Moreover, GM's recovery is just beginning. It has cut its costs very
significantly so that its breakeven mark is at a low production volume
by historical standards. Starting from nearly rock bottom sales volume,
GM is making money in the U.S. and booming in China. So why would Obama
want to sell the government's share so early when waiting a couple of
years will make a nice profit for the taxpayers and, in the meantime,
restrain GM's opposition to innovation-driven regulations for the
health, safety and economic well-being of consumers?

Now, consider ShoreBank's predicament. This bank broke ground since its
founding in 1973 by providing loans for lower-income homebuyers,
apartment building owners and small businesses. Year after year, this
community bank proved it could make money by opening up markets that the
big banks chose to red-line in Chicago and later in Detroit and
Cleveland. Hundreds of articles and news reports heralded its success.

Then the Wall Street-produced recession struck the country. Through
little fault of its own, many of its hard-pressed lower-income debtors
began to miss or default on their loans. ShoreBank started to register
losses--$119 million in 2009. Unlike the big banks, ShoreBank did not
deal in risky speculative derivatives--like credit default swaps,
collaterized debt obligations or subprime mortgage lending.

Washington is drawn irresistibly to bail out the big banks' wildly
speculative, toxic paper investments with no redeeming social value.
George W. Bush took the taxpayers to levels of corporate welfare beyond
the dreams of corporate avarice.

Neil M. Barofsky, the valiant special inspector general for the Treasury
Department's Troubled Asset Relief Program (TARP) reported that the
giant AIG bailout ($182 billion) gave its trading partners--bonus-rich
Goldman Sachs, Merrill Lynch, Societe Generale and other banks--100 cents
on the dollar for their notorious credit default swaps. Had AIG
defaulted, it would have been a fraction of that sum.

Barofsky's report denounced the Federal Reserve for not negotiating
strongly with the banks. Incredibly, the Fed gave the banks $27 billion in taxpayer cash and let them keep $35 billion more
in collateral already posted by AIG. Barofsky declared that these
vastly overpaid sums were way "above [these contracts'] market value at
the time."

Compare these amounts to what ShoreBank needs in additional investment
to provide liquidity and adequate capital reserves to ride out the
recession. It projects losses of about $200 million before returning to black ink and another $300 million or so to support future operations.

The community bank has raised $150 million in pledges from several Wall
Street firms--a little p.r. redemption here--and it needs $75 million in
TARP funds from the Obama administration.

At this writing, Washington is balking and the Bank, willing to shink down further, finds its hopes dimming.

The Chicago Tribune editorial "Still Worth Saving" put it well:
"ShoreBank, for many years, showed that operating honorably in
low-income neighborhoods could pay off for everybody. One way or
another, we can't let its shining example disappear."

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