Too Small to Save: Did the Nation's Largest Community Bank Collapse Because of Its Social-Justice Mission-Or Its Financial Ambitions?

Article excerpt

Location is everything, especially in Chicago, where your neighborhood isn't just where you live but who you are. Rahm Emanuel, running for mayor, can't get any respect because he grew up in the suburbs. Barack Obama, Senate hopeful, won in part because he had liberal credibility from his home on the South Side and was able to raise money on the North Side. Politics and real estate can make an unsavory combination: More than one Chicago politician, including Obama, has found himself in hot water after accepting real-estate favors from politically interested friends.

But Chicago also has a tradition of attempting to ensure location isn't everything--at least when it comes to getting a loan or a job. The city's South Side was, until very recently, home to ShoreBank, the nation's largest community-development bank, with over $2 billion in assets. During the course of its 37-year existence, it invested millions in underserved, minority neighborhoods, with nearly 80 percent of its lending focused on low- and moderate-income communities. The bank was founded in the 1970s, when other banks fled its target market, poverty-ravaged South Side. ShoreBank measured success not only in profit but also in its ability to build wealth in low-income communities and invest in environmental sustainability. This triple-bottom-line mission demanded special standards: ShoreBank made loans to people that other banks would perceive as credit risks and emphasized financing green projects. The bank was more than a do-gooder--it was a profitable business. Its local knowledge gave it an advantage in evaluating borrowers other banks wouldn't give a second look.

ShoreBank became a symbol of community-development finance--politicians associated themselves with the bank, and other financial institutions modeled themselves after it. Federal legislation sought by progressives during the Clinton administration gave government support to organizations like ShoreBank. These Community Development Financial Institutions (CDFIs) must make a large percentage of their loans in underdeveloped low-income areas, and in return, receive tax breaks and access to special development funds.

The institution seemed to do the impossible, lending money at profit without exploiting low-income customers. That is, until Friday, Aug. 20, when officials from the Federal Deposit Insurance Corporation and the Illinois state government arrived at ShoreBank's headquarters on South Jeffrey Boulevard to seize the bank's assets and take over management. Regulators had determined that ShoreBank was losing too much money to remain solvent and stepped in to protect insured deposits after more than a year of warning the bank it was on the verge of failure. ShoreBank appeared to have collapsed under the weight of its triple-bottom-line mission.

For conservative critics, who saw government policies promoting community development and fair lending as nothing more than market distortions, the collapse was a fait accompli. "Social and environmental justice may make for good Volvo bumper stickers," crowed Michelle Malkin. "They do not, however, make for a good bottom line." But those who sympathized with the bank's mission blamed the broader carnage of the recession. "The fact is that ShoreBank was enormously important symbolically, it was very important historically, it was very important to the communities it served," says Cliff Rosenthal, who leads a national federation of community credit unions. "But we've been hit by an economic tsunami in this country." Indeed, the financial crisis has washed away financial institutions of every stripe--307 of them since the beginning of 2008. The FDIC closed seven other banks on the same day it closed ShoreBank.

So which is to blame for the collapse of ShoreBank--its social-justice mission or the economic downturn? The competing explanations for its failure have made an abstract debate over community finance tangible, with pundits of all stripes citing ShoreBank as an example in recent debates over the government's role in the financial system. …