Monday, April 27, 2009

Creative Investment studies community development and minority-owned financial institutions for PG&E

Washington, D.C. — Creative Investment Research, Inc. announced that it has provided to Pacific Gas & Electric Company current, up to date social and financial credit ratings covering community development banks serving areas of high social need within PG&E’s service territory. PG&E has made FDIC-insured deposits in fifteen minority and community based institutions. The Community Investment Program (CIP) positively reflects the company’s values and has been undertaken as part of PG&E’s continuing effort to be responsive to the needs in communities it serves. The portfolio has a 90 day maturity. Performance data for the portfolio, relative to investing alternatives, is outlined above.

Wednesday, April 22, 2009

What happened. What now.

Commercial and investment banks used their size and money to make campaign contributions that allowed them to evade any meaningful effort to impose common sense and transparent risk controls in the public interest, known as regulation. One of the first regulations attacked dated from the Great Depression. This was the Glass-Steagall Banking Act, a law designed to separate commercial and industrial banking. Banks, commercial and industrial (the latter known as investment banks) could now combine operations to create products in fundamentally unstable ways.

Markets are ruled by two emotions: fear and greed, and these institutions got greedy, very greedy. They created financial products that served no real purpose, other than to generate profit for the bank. To keep customers (their only regulator) from understanding the bank’s true intent, they made these products horribly complicated. These products were, in part, simple bets. These bets were layered on top of each other until only the product designers had any hope of realistically estimating what little value actually existed in the products.

Commercial and investment banks came to act as if they understood that giving these products a veneer of social utility would help them hide their true motivation, so they tied a small fraction of these bets, now known as “derivatives,” to subprime lending and passed the bundle off as the invisible hand of the free market at work.

How Does This Impact Blacks

Financially, Blacks are worse off now than they were, on average, ten years ago. Subprime lending products allowed white banks to engage in highly negative and discriminatory practices. Such practices “intentionally assigned black customers subprime mortgages while giving whites better rates.” This leads to higher mortgage loan payments for black versus white borrowers. Given this reality, efforts by media outlets to blame the crisis on minority borrowers reveals a stunning level of racism. This negative campaign further fuels race-based resentment that will grow, as the economy continues to weaken, to a very dangerous level.

What to do now

We need to replace the elites that controlled the financial marketplace, both firms and people. This means a blanket prohibition covering the firms that created the crisis, and includes anyone working in a operational or senior level at any failed GSE, bank, insurance company or investment bank/brokerage house.

Relationship Map: Goldman Sachs and Treasury


Wednesday, April 15, 2009

Black-owned bank has few urban loans

We note today's article in the Boston Globe: "Black-owned bank has few urban loans: OneUnited sought aid as community 'beacon'." OneUnited Bank got $12 million from the US bank bailout fund.

We take issue with several items in the story. Below, we reproduce sections of the story we have difficulty with and note our reply.

"OneUnited's chief executive, Kevin Cohee, said the bank is helping the community in other ways - by focusing on loans to churches and developers of apartment buildings. He said the bank pulled back on home mortgages because he saw the housing market overheating. He said he didn't want to compete with the many mortgage brokers peddling subprime loans with unrealistic rates and terms, loans that borrowers ultimately would not be able to repay. 'We knew this bubble was developing in residential housing' as early as 2004, Cohee said in an interview. 'If we had participated in inner-city housing lending, . . . we would have been out of business.'

(Note: this is disingenuous at best, false at worst. If they knew the bubble was forming, they should have issued a warning. Keep in mind that Carver Federal, another Black owned bank, decided to attempt to help African Americans victimized by fraudulent subprime lending, something OneUnited failed to do. In addition, as cited below, the bank went from making 74 multifamily loans in 2006 to making only 2 in 2007. Such activity can only be explained in one of two ways: if they knew a crash was coming, they decided keep this information to themselves and make as many loans as they could as quickly as possible. They would have done so in order to maximize short term profit. This implies that these are not very good loans, and that you would sell them as soon as you can. If they did not know, then Mr. Cohee is lying when he says they did.)

Both Guscott and Grimes said they had been with the bank since 'the beginning,' 40 years ago, when it started as Unity Bank & Trust. Grimes, who has done business and mortgage banking with the institution, said the community needs OneUnited. 'We've been successful banking with them, and we've stuck with them,' he said.

(Note: Boston needs a black bank, and no one argues with OneUnited's "success", but if they are going to use service to low and moderate income communities as justification for $12 million in Federal aid, OneUnited should be required to prove that they are, in fact, lending in low and moderate income communities.)

But the recipients of these loans are a far cry from the sort of customers the bank referred to in its Sept. 6 letter to the US Treasury: 'Unlike majority banks, which principally focus on profit, the express mission of minority banks is to promote these underbanked, underprivileged communities,' the bank's chief counsel, Robert Cooper, wrote.

(Note: For most minority banks, true. Not so for OneUnited.)

At the time it first asked for federal help, though, OneUnited was in the midst of an ugly bank examination. It had invested more than $50 million in securities of mortgage giants Fannie Mae and Freddie Mac - investments that became worthless when the government took over the agencies last September. Cooper, writing on the letterhead of the National Bankers Association, a trade group of minority-owned banks for which he was incoming chairman, asked the government to buy the Fannie and Freddie securities from minority banks in order to save them: 'To put it bluntly, we are seeking Treasury action on this proposal this week.'

The Treasury did not act on that specific proposal, and the bank ultimately had no trouble raising the capital it needed from shareholders - $20 million, Cohee said.

(Note: Both Bear Stearns and Merrill Lynch raised funds in the months leading up to their failure.)

Regulators in October (2008) concluded in a cease-and-desist order that OneUnited also had poor standards for qualifying and documenting loans, and gave top executives excessive pay and perks. Two of the perks regulators targeted were a $6.4 million beachfront Santa Monica mansion Cohee used while in California and a Porsche SUV he drove on company business in Boston. As ordered by regulators, the car has been sold and the bank is no longer paying for the house, which Cohee said he is selling.

Cohee said the house and car were necessary for conducting business - and modest compared with the jets and fleets of vehicles that larger banks often have. 'This wasn't some excessive spending splurge thing. This was a calculated decision to provide housing for our executives when they would travel from Boston and Miami to L.A.,' Cohee said. 'We wanted the bank to have an image of stability in the community.'

(Note: This clearly was excessive spending. $6.4 million represents 1% of bank assets.)

Cohee's view of community lending has at times clashed with that of regulators and advocates for urban borrowers. Being a community bank, he said, is not 'just lending to poor people.'

(Note: We agree, but it does not involve NOT lending to poor people, either.)

OneUnited says it made more than $600 million in loans in the past five years to churches, affordable housing, office buildings, and retail stores, mostly in low- to moderate-income communities such as South Central Los Angeles and Roxbury.

(Note: $600 million is, most likely, an exaggeration.)

As we said in August, 2007,

"Major market institutions are now, as the troubled Bear Stearns reveals, feeling the negative effect of allowing these practices to flourish. Bear Stearns may be in real danger - it's stock decreased in value by 27% over the last month. We do not expect, but would not be surprised if the firm failed, another casualty of arrogance and greed."

We do not expect, but would not be surprised if OneUnited failed, another casualty of arrogance and greed.

Sunday, April 12, 2009

On the John Batchelor Show - Sunday 4/12/09 8:20pm

Listen in Sunday at 8:20pm:

NY - WABC-AM 770am
DC - WMAL-AM 630am
SF - KSFO-AM 560am
LA - KFI-AM 640am

What am I talking about?

"820P: William Cunningham, re the TARP related financial crisis and the pirates of the big banks who turned parasitic after 2002 and are now asked by Treasury to help the economy recover, re an exclusive conference call by FDIC re TARP to the 20 biggest players on April 9, 2009, that was not open to the public or to watchdogs. Who was on the call?"

Sunday, April 5, 2009

Adam Smith on the Current Financial Crisis

While there is much wrong with Mr. Smith's work, he did, in The Wealth of Nations, note the following:
"To promote the little interest of one little order of men in one country, it hurts the interest of all other orders of men in that country, and of all men in all other countries."

The result of policies favoring "one little order of men (Wall Street, in the current crisis)" gives rise to what Smith calls "a high rate of profit."
"But besides all the bad effects to the country in general, which have already been mentioned as necessarily resulting from a high rate of profit; there is one more fatal, perhaps, than all of these put together, but which, if we may judge from experience, is inseparably connected with it. The high rate of profit seems everywhere to destroy that parsimony which in other circumstances is natural to the character of the merchant. When profits are high, that sober virtue seems superfluous, and expensive luxury to suit better the affluence of his situation. But the owners of the great mercantile capitals are necessarily the leaders and conductors of the whole industry of every nation, and their example has a much greater influence upon the manner of the whole industrious part of it than that of any other order of men. If his employer is attentive and parsimonious, the workman is very likely to be so too; but if the master is dissolute and disorderly, the servant who shapes his work according to the pattern which his master prescribes to him, will shape his life too according to the example which he sets him.

It is thus that the single advantage which the monopoly procures to a single order of men, is in many different ways hurtful to the general interests of the country."